City Council Meeting Date: November 2, 2021
To: Mayor and City Council
City Administrator
From: Nate Carlson, Economic Development Coordinator
Mitzi Baker, Community Development Director
Title
A Public Hearing to Consider expanding the Southbridge Development District and establish a Tax Increment Financing District for housing development south of Lincoln, in an area being platted as Kraewood.
Body
Action Requested:
The Northfield City Council will hold a public hearing and consider a proposal to expand the Southbridge Development District, and establish a Tax Increment Financing (TIF) district on a portion of the site being platted as Kraewood subdivision. Establishing the TIF District relates to a request by Rebound Stencil Development, LLC for a Housing TIF District to accommodate the development of a 100-unit apartment complex.
Summary Report:
Rebound Stencil Development, LLC is requesting Tax Increment Financing (TIF) incentives from the City of Northfield to assist with a mixed-income housing development within the Kraewood Development. The project has the potential to increase affordable housing options in Northfield by assigning 40-percent of the units at 60-percent Area Median Income (AMI) for the duration of the TIF.
The developer has submitted an application for a Housing Development TIF District. The proposed “pay-as-you-go” TIF District requires the developer to pay all development costs with their own funds. The “pay as you go” reference is in relation to the owner taking on the full risk of future TIF increment payments annually to repay eligible up-front development costs. As the net tax capacity of the district increases, the increase in property taxes paid by the developer (tax increment) can be used to reimburse the developer for eligible costs such as land acquisition, site preparation, and public infrastructure.
Rebound Stencil Development has proposed a $17-18 million apartment project that will add 100 rental units to Northfield’s rental stock.
A Housing Development Tax Increment Finance District would facilitate incorporating affordable housing into this project and staff has been working with Ehlers, Inc. to review the TIF application. Nick Anhut, a public sector advisor from Ehlers, will provide an initial analysis of the TIF request and determine if the housing project could create more than sufficient tax increment over the statutory maximum 26-year term of a Housing Development TIF District. Additionally, the developer is amenable to abiding by the regulations of a Housing District.
Following the public hearing, the Council is requested to approve the TIF Plan and District boundaries only. A TIF Assistance Agreement will be drafted at a later date following additional review of the financials for the project.
HRA Review:
The HRA reviewed and discussed this proposed action on October 26, 2021. The HRA considered the proposal in the context of local housing needs, vacancy rates, rapid absorption of recent newly constructed multi-family units, and the City’s Strategic Plan. They also considered demographic shifts contributing to growth in single person households and households without children that influence demand for smaller footprint living. Materials considered at their meeting are attached for background and reference.
A motion was made by Gerdes, seconded by Hager Dee to recommend the City Council expand the Southbridge Development District and establish the TIF district. Gerdes added “important as we look at the strategic plan for the City and our own conversation on housing and affordability that we make the recommendation to the Council that they move forward and establish this TIF District”. Motion passed; four voting yes with one abstained and one recused.
Alternative Options:
N/A
Financial Impacts:
The developer for Kraewood intends to complete the project as 4d (tax) classification. The state of Minnesota has several different classification types for rental property; class 4d is “low-income rental property” under section 273.13, subdivision 25, of state law. Class 4d property is taxed at a rate of 0.75 for the first tier of valuation, or 40% less than other kinds of rental property. Properties qualify for 4d in a variety of ways, including if “the units are subject to rent and income restrictions under the terms of financial assistance provided to the rental housing property” by a local, state, or federal government, and assisted units are “occupied by residents whose household income at the time of initial occupancy does not exceed 60 percent of the greater of area or state median income, adjusted for family size.” This rate has been factored into the TIF analysis.
The estimated total possible increment is $5.1 million. The developer, Rebound Stencil Development, has requested $1.8 million in present value TIF assistance. An interest factor builds over the life of the district (i.e. 26 years). The total possible TIF generated over the entire life of the district is estimated to be $5.1 million, according to Ehlers. See Page 6 in the TIF Plan for more reference. That figure is for all local taxing jurisdictions (i.e. City, County and School Board). As it pertains to what is the “maximum forgone” in taxes over the life of the district, the final incentive could possibly be larger than the $1.8 million with interest as negotiations are ongoing and project details are not finalized. However it should be noted, the City is not the sole entity that shares the burden of TIF incentives. Tax Increment Financing captures all increment gained across local jurisdictions unlike tax abatement, which only captures City taxes. This incentive is set up as a “pay-as-you-go” financial system. The developer only receives this incentive so long as the development abides by the affordability requirements and other provisions. The payments are set up as annual reimbursements following the developers payment of all property taxes owed. In its current format, the developer will likely still pay a substantial amount of property taxes over the life of the district.
• TIF Amount Requested: 26 years of TIF (Amount to be determined)
• Type of TIF District: Housing Development District (26-year Maximum District Life)
• TIF Uses: Site improvements, construction and engineering and assistance with annual cash shortfall
• TIF Funding Structure: “Pay-as-you-go.” The Developer will incur all upfront costs and be reimbursed over time.
• TIF Request: $1,800,000
• TIF Requirements: 40% of the Units be dedicated to renters of 60% AMI; construct the building according to proposed City Sustainable Building Policy; complete underground parking
Tentative Timelines:
September 3 - Rice County and Northfield School District notified of draft TIF Plan
September 16 - Planning Commission reviews TIF conformance with City Plan
October 20 - Publication of notice of public hearing for TIF District
October 26 - HRA reviews TIF request
November 2 - Council holds public hearing on TIF District
November 2 - Council consideration of Resolution approving TIF Plan and District
TBD - Council approves TIF Agreement