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HomeMy WebLinkAboutItem VII PLAN COMMISSION STAFF REPORT MAY 3, 2016 ITEM VII: PUBLIC HEARING ON PROPOSED CREATION OF TAX INCREMENT FINANCING DISTRICT #28 BEACH BUILDING REDEVELOPMENT; DESIGNATION OF BOUNDARIES AND APPROVAL OF PROJECT PLAN Prior to taking action on proposed Tax Increment District (TID) #28 and the designation of boundaries for said TID, the Plan Commission is to hold a public hearing and take comments concerning proposed creation of the TID #28. The public hearing is required as part of the formal review process the City must follow in the creation of any tax incremental financing district or amendment thereto. GENERAL INFORMATION Applicant: Chet Wesenberg Property Owner: 240 Algoma Blvd, LLC GENERAL DESCRIPTION/BACKGROUND TID #28 is being proposed to facilitate the adaptive reuse of the vacant Orville Beach Memorial Manual Training School office building at 240 Algoma Boulevard into a mixed-use modern commercial/residential apartment complex and retail/service business center including three commercial units on the first floor and 22 higher end apartments on the second and third floors complete with modern finishes, technology and amenities. The overall goal of the redevelopment project is to provide new active life and full-time residents within the Oshkosh center city, furthering downtown revitalization efforts. The anticipated project cost is estimated at $3.3 million with renovations being the most significant cost due to many years of vacancy and deferred maintenance that essentially require a complete gut and remodel of the interior to bring the facility back to a competitive new use for the residential component. In this case, TIF is intended to be used to offset the negative cash flow outcome from year 1 to year 5 thereby facilitating a rate of return on the investment to redevelopment and rehabilitate the Beach Building at 4.91% as opposed to the rate of return of 0.48% that would be realized without TIF paygo assistance. TID #28 is an overlay of TID #5 that was created in 1983 that was an adaptive reuse of an educational facility into an office facility. TID #5 was closed in 2001. The rationale behind the adaptive reuse to office usage was that there was a lack of Class A office space in the central city and that the redevelopment would fill that void at that time. The significant change that has occurred in the central downtown office environment, since the time of creation of TID #5, is the transformation of the 300,000 + square foot former Park Plaza Mall into the City Center office complex with 1,700+ jobs and impacted the downtown office market. The Project Plan includes a statement listing the kind, number, and location of proposed improvements. It contains an economic feasibility study, a detailed list of estimated project costs and timing of those costs as well as a method of financing. Item VII-Creation of TID #28-Beach Building Redevleopment Overall costs to implement this project plan are estimated at $3,294,714 with TIF contributing $292,831 of the project costs as pay-go based on improvement value. The development group is proposing to bring in approximately $1.5 million or 45% equity into the project and finance the remaining 55%. ANALYSIS In March 2016, a Market Study and Investment Analysis Report for the redevelopment of the Beach Building was prepared by Invista Analytics, LLC (IA) to provide a market study of the present rental availability in the near downtown neighborhood that may likely serve both the University of Wisconsin - Oshkosh and the young professional segment in downtown Oshkosh. This information was then utilized to create an operational proforma and investment analysis for the operation of a mixed-use renovation and re-use of the Orville Beach Memorial Manual Training School building located at 240 Algoma Blvd. in Oshkosh, Wisconsin. To evaluate the rental potential of the residential units, IA acquired the Apartment Data - 4 or more Units excel database from the City of Oshkosh Assessor’s File Downloads webpage. This data set was then limited to those properties that fell within a 1 mile driving distance of 240 Algoma Blvd. and that had been constructed since the year 2000, including the 100 N. Main Apartments and the Anthem Apartments. The data was then submitted to an econometric quantile regression model that used all of the covariates to predict rents. The resultant model parameters were then used along with the covariate data for the subject property units to arrive at an expected rent for the macro, one-bedroom, and two-bedroom units to be rented. The model resulted in estimates of $569, $704, and $802 per month respectively for the micro, one and two bedroom units. The developers plan, however, calls for much higher finish levels than many of the comparable units. Because of this the developers have chosen to start with monthly rents of $550, $700, and $900 respectively. Completed project valuation, a modified income approach was employed and the year 1 figures suggest a valuation of $1,245,000 upon completion of the project. The operational proforma with TIF assistance starts with a negative cash flow in the first year of $(22,531) in part due to the ramping up of occupancy in the first year and the lack of increment payment. The next several years still also show a negative cash flow up until the fifth year but by the tenth year, there is a positive cash flow of $27,239. The “without” TIF picture is much more bleak from a real estate development perspective. Under this scenario the developers do not see any positive cash flow until the ninth year, and even then the returns are modest at best being only approximately $3,225. Before the IRR can be calculated, an assumed reversion at the end of year ten must be calculated. To do this the NOI from year eleven is used and divided by a terminal cap rate. An 11% loaded cap rate is used and then subtract off the presumed mill rate of 2.45%, then rounding down (which provides more presumed value) a non-loaded cap rate of 8% is arrived at. This results in a valuation of $2.175 million in the TIF scenario. However after 10 years there would still be $1,088,099 left to pay off on the mortgage debt. Thus a net reversion of $1,087,155 is used in addition to the year 10 net cash flow. This leads to a 10 year Internal Rate of Return of 4.91% with TIF. A similar calculation without TIF leads to an IRR of 0.48%, which from a Item VII-Creation of TID #28-Beach Building Redevleopment development prospective is not financially feasible and a disincentive to move forward with redevelopment. The conclusion, and the reason why staff is supportive of the creation of this TID, is that a rate of return of less than 1% for a real estate development project typically doesn’t warrant a financial investment by a developer when there are other projects and vehicles that return higher rates of return. A rate of return of just under 5% with TIF would cause many to pause at this investment but being that this is a local development group that has other similar apartment developments in the area they benefit somewhat by having an economies of scale for their operations and management. The proposed TID and identified project activities are consistent with the goals and objectives of the City’s Comprehensive Plan (2005). Implementation of this Project Plan promotes orderly development through the renovation and preservation of a prominent, historical, building located near the downtown region of the City of Oshkosh. Redevelopment will reduce depreciation of the property while increasing revenue generated through property taxes. This project will provide new commercial space, employment opportunities, and address the public demand for more available housing in between the University of Wisconsin-Oshkosh campus and the downtown region of the city. Implementation of this project plan accurately reflects the opinion of the general public. According to public survey data collected in 2014 and 2015, over 75% of respondents listed “assisting businesses with economic development” and “increasing efforts to improve the quality of housing” as top priorities for the city to promote. Additionally, this project is supported in the Downtown Action plan, specifically, item 6.8 which outlined both long and short-term goals to increase residential and housing development opportunities in the downtown area. RECOMMENDATIONS/CONDITIONS Planning Services asks that the Plan Commission approve the boundaries of TID #28 and the TID #28 Project Plan, and recommend approval of the TID boundaries and Project Plan to the Common Council.