Agenda - Economic Development Authority - 06/08/2017

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Patrick Brama Analysis of Request for Assistance — PSD, LLC June 1,2017 Page 2 Generally, this project meets the expectations of an industrial building as it relates to the total development costs, financing structure, projected revenues, and developer fee. Following are our findings relating to the analysis completed for the development: • The developer is proposing permanent financing for 76% of the project costs and will bring 19% in equity, or approximately $1.05 million. This financing structure is in line with typical industrial projects. • The total development costs for this project are approximately $5.5 million, or $92 per square foot. Based on our experience with industrial projects, this is slightly higher than expected. This increased cost is attributable to the architectural building enhancements, added infrastructure and site work necessary for the project. We have requested the bids received for the project to verify these costs are accurate. • The developer fee of $200,000 is 3.62% of total development costs. For a project of this nature, we would expect to see a developer fee between 3% and 5%. The fee is commensurate with typical industry standards. • Proposed rents are $6.25 per square foot. We would expect to see rents of between $7.00 and $10.00 per square foot for office space and $3.00 to $5.00 per square foot for warehouse space. As a blended rate, $6.25 per square foot is consistent with the surrounding market area. • The projected cash -on -cost return on investment (net cash flow / total project costs) in year three (3) is 6.6% without assistance and 7.3% with assistance. Industrial developers are typically seeking a cash -on -cost return of between 7% and 9%. With the requested assistance, this project falls at the low end of the typical industry threshold for returns on investment. Recommendations Based on our review of the developer's pro forma and current market conditions, the proposed development may not reasonably be expected to occur solely through private investment within the reasonably near future. Due to the cost of land acquisition, site and public improvements and utilities in conjunction with achievable lease rates in the market, this project is feasible only through assistance, in part, from City contributions. We conclude that providing a Pay -As -You -Go TIF note in the amount of $234,000 will help the developer secure its first mortgage financing and facilitate construction of the project in the near term, while ensuring the return on investment does not exceed typical industry standards. Pay -As -You -Go financing requires the developer to seek its own financing secured by the tax increments generated by the project. In this scenario, the City does not provide any funding up front, but enters into an agreement to provide tax increment payments from the project's increased taxes up to $234,000 over a 9-year period. If the tax increments are insufficient to repay the note, the City does not make up the shortfall. The developer has indicated that they are willing to move forward based upon the proposed TIF assistance. Please contact me at 651-697-8512 with any questions.