City Council Meeting Date: June 5, 2018
To: Mayor and City Council
City Administrator
From: Chris Heineman, Community Development Director
Janine Atchison, Housing Coordinator
Title
Consider Resolution of Support of Tax Increment Financing for Affordable Housing Spring Creek II Project in Southbridge Area
Body
Action Requested:
The Northfield City Council considers adopting the attached Resolution in support of Tax Increment Financing (TIF) for the Spring Creek II Affordable Housing project subject to the allocation of tax credits.
Summary Report:
One of the six strategic priorities included in the 2017 Northfield Strategic Plan is Affordable Housing, which includes the desired outcome of growing and maintaining affordable housing. One of the strategic initiatives to accomplish this target is to develop the Southbridge Property. This target refers to the 11.18 acres of HRA owned land in the Southbridge Subdivision. The HRA has been evaluating options for development of this area for the past 18-months, and is recommending an expansion of the Spring Creek Townhome project.
The original Spring Creek Townhome project included 28 townhome units developed in 2013. The proposed expansion project, Spring Creek II, will add 32 affordable housing units adjacent to the existing townhomes. The project aligns perfectly with the City’s strategic initiatives to provide affordable workforce housing in Northfield and is a key outcome in the strategic plan.
Businesses have identified the lack of the affordable housing as a key factor in attracting new employees to the area. Including the 28-units in the original Spring Creek Townhome project, only 36 townhome units have been developed in Northfield since the recession in 2008. This compares to 516 townhome units that were constructed between the years of 2001 and 2007. The proposed 32-unit expansion of Spring Creek Townhomes is one strategic initiative to address the shortage of affordable housing in Northfield.
In March of 2017, non-profit developer Three Rivers Community Action (TRCA) agreed to partner with the Northfield Housing & Redevelopment Authority (HRA) on a new project to increase the number of affordable rental housing units at Spring Creek Townhomes. The proposed project will be located on a portion of the 11.18 acres, Rice County Parcel 22 owned by the HRA in the Southbridge area.
The HRA land is part of a larger development site initially platted by Arcon Development as the Southbridge Subdivision. A final plat for the Southbridge 1st Addition was approved in 2003, and development proceeded until the recession in 2008. At that time, the remaining land was split between the HRA and the neighboring property owners (Vern & Joan Koester).
In 2017, staff met with TRCA and the Koesters and considered numerous concept plans involving a potential land swap. In December of 2017, the Koesters were concerned that the HRA timelines would slow down their project and decided to move ahead with their development project without swapping land with the HRA. The Koesters preliminary plan is to build four 4-plex buildings, 10 twin-homes and 61 single-family homes for a total of 97 dwelling units. The Northfield Planning Commission reviewed the subdivision application at their April 19, 2018 meeting and has recommended approval of the preliminary plat.
The HRA continued to move forward with development concepts for the HRA owned 11.18 parcel only. The development of the concept most favored by the HRA will be done in two or three phases. The 1st phase of the project utilizes approximately 4.3 acres for 32 townhomes and supporting infrastructure. The HRA agreed to a donation of up to 4.5 acres of HRA owned land, valued at approximately $180,000, to TRCA for the creation of affordable workforce housing in the Southbridge area for the 32-unit Spring Creek II townhome project.
TRCA will apply for Low Income Housing Tax Credits (LIHTC) in June 2018 as the primary source of financing for the project. LIHTC financing, administered by Minnesota Housing Finance Agency (MHFA), is very competitive. Most Minnesota Cities, outside the metropolitan area, must compete for this financing. Each application is scored based on several key factors, including local support for the project. Only a few of the highest scoring project applications are chosen for financing.
MHFA will announce which projects will be funded later this year in October or November. Even if LIHTC financing is approved for the Spring Creek II project, there will be a gap in the funding needed to complete the project. Staff is projecting that this project will also need to utilize Tax Increment Financing (TIF) to assist with infrastructure costs to be viable. A
The HRA will donate the land required for this project. In addition, the HRA plans to provide $20,000 from the HRA fund balance toward building permit or other fees. The HRA’s donation will help to leverage the LIHTC application. The land donation and an additional $20,000 in-kind contribution from the HRA will score an additional 2 points on the LIHTC application.
The HRA adopted a resolution on April 24, 2018, donating up to 4.5 acres of land to TRCA, contingent upon a successful Tax Credit application and other financing for the Spring Creek II project and supporting the use of pay-as-you-go Tax Increment Financing. The HRA resolution supporting the land donation will assist with strengthening the TRCA application for tax credits. The HRA adopted a separate resolution on May 22, 2018, donating $20,000 of in-kind support for the Spring Creek II project. The land and additional $20,000 in-kind donation will occur only if the tax credit application by TRCA is successful.
A resolution of support for Tax Increment Financing (TIF) from the Northfield City Council is also required to complete the LIHTC application. The application currently identifies a total tax increment of $851,365 that will be captured over the term of the TIF district which produces a net present value of $439,718. The net present value represents the difference between the present value of the future cash flow that will result from property tax payments over the term of the Housing TIF District. This is the amount that TRCA will use to secure a loan.
At the May 8, 2018 City Council Work Session, the HRA and TRCA indicated that they would be requesting TIF assistance in the amount of $375,000. Due to increasing project costs, TRCA is requesting the total available tax increment of $851,365 with a net present value of $439,718. The preliminary property tax estimate of $35,000 per year utilized the current property taxes on the existing Spring Creek Townhomes. The new property tax estimate received from Ehler’s, via the assessor’s office, is $53,199. This represents almost $20,000 annual increase in operating expenses, which has had a corresponding decrease in available financing. Ehler’s has been also providing a full pro-forma development cash flow review in order to determine whether the TIF and other incentives offered through the HRA are necessary and that “but for” the assistance the project would not be viable. Ehler’s has concluded this is the case and justified for purposes of the grant application at this time. A full future TIF approval process that includes a future public hearing, notices and Council approval will be necessary if the project is funded through MHFA and proceeds ahead as planned.
A resolution from the City Council supporting TIF financing adds 16 points to the LIHTC application score. The TIF commitment combined with the HRA donation of land and the additional in-kind contribution of $20,000 by the HRA will increase the overall LIHTC score from 85 points to a very strong 103 points. Staff recommends approval of the Resolution.
Alternative Options:
The City Council could choose not to adopt a resolution of support for TI Financing. The LIHTC application would score approximately 85 points and would likely not receive tax credits. Without this source of funding, the Spring Creek II project would not be viable.
Financial Impact:
Total HRA funding for the Spring Creek II project is estimated at $200,000, including the value of the land. The City Council is being asked to support a TIF contribution of $439,718 through a pay-as-you-go Housing Tax Increment Financing District. The total project cost is currently estimated at $9,275,000.
Tentative Timeline:
A preliminary timeline for the Spring Creek II project is as follows:
• March-April, 2018: Project design phase. Cost estimates, unit mix, concept layout, and request for site control from the HRA, Community Meeting to share concept plan.
• May 2018: Concept finalized for the tax credit application. Information shared with the City Council (cost, unit mix, layout, proposed design options, projected funding gap).
1) Syndicator review of project
2) Market Study completed
3) Ehlers estimate on the TIF capacity of the project completed
4) Letter of Intent to MHFA due on May 30th
• June 5th, 2018: Request City Council Resolution and Letter of Support for TI Financing
• June 14th, 2018: MHFA Low Income Housing Tax Credit (LIHTC) Application Deadline
• October/November, 2018: Funding award announcements
• December, 2018 - June, 2019: Closing process with MHFA and investor/other funders including HRA contributions to project and TIF related analysis, hearings, and Council approvals.
• August, 2019 - Anticipated construction start