Update on financing of Metropolitan Market Place (new coop building)

Here is a memo from Doug Knott discussing the proposed city involvement with the Metropolitan Market Place project.  As I have said before, so long as I am a board member (and finance chair) of the Good Food Store Coop, I will continue to recuse myself from council discussion / votes even though I technically probably don’t need to since I don’t have a financial interest.

Here are some highlights:

  • City will sell Minnesota Energy site for $1.
  • City will offer $1.45 million in redevelopment TIF.
  • The project now includes the entire South end of the 500 block between 1st and 2nd Ave SW.
  • The building project is worth $15.3 million.
  • The coop space has grown to 27,000 sq. ft.
  • There are 62 market rate units planned above ground level.
  • I have sent a question as to that the building taxes will be, but it appears there will be a very fast payback for taxpayers.

Here are all the gory details from Doug Knott:

This memo is intended to provide the Council with background information on the Metropolitan Market Place project (MMP) prior to the public hearing for the creation of the Tax Increment Financing District and approval of Development Assistance Agreement that are scheduled for action on December 19th.

Background  The City entered into a purchase agreement for the former Minnesota Energy property in October of 2007 with the intent of holding the property for redevelopment.  In late 2010, the City issued a Request for Proposals to 40 developers, contractors and architects for a mixed use market rate housing project.  Five developers responded, four of which were interviewed. The Gerrard Companies was recommended for the project based on their experience, their adherence to the urban design guidelines, the scale of their project and the inclusion of a grocery store at the street level.  The Council approved an Exclusive Negotiation Agreement with Gerrard in May of 2011.  In September of 2011, that agreement was extended to December 19, 2011.

Redevelopment of the site, in the manner proposed by Gerrard, is consistent with the Downtown Master Plan goal of creating a pedestrian oriented “Main Street” on First Avenue running from the CBD to the future UMR campus.  During the past 8 months the Gerrard’s have been securing the additional properties needed for the project, refining the design and negotiating the terms of a redevelopment contract with the City.  A description of the project and the terms of the contract are outlined below.

Because the housing component of the project is market rate, the developer does not have access to the Low Income Housing Tax Credits and Greater Minnesota Housing Agency funds that have been critical to other residential projects.  The only sources of assistance for this project to help off-set the high land assembly and development costs are TIF and a write down of the land price for the City owned parcel.

The Project   A set of project plans, including a site plan, are attached to this memo. The initial Gerrard proposal included three parcels – the City owned former Minnesota Energy property, the Home Care Vacuum Center and ShredWerks.  Gerrard created a limited liability company to develop for the project, Metropolitan Market Place LLC. The LLC includes added partners.  MMP LLC secured purchase agreements for both of the non city owned parcels.

As tenant negotiations progressed, the grocery store wanted more space.  MMP LLC also determined there was a market for more residential units.  The ground floor went from 16,320 square feet in the initial proposal to 27,636 square feet and the number of residential units increased from 42 to 62.  This expansion led to a need for additional off-street parking.  MMP LLC obtained purchase agreements for three additional properties fronting on 2nd Avenue SW and 6th Street SW.  They are currently occupied by a small office building, a single family rental unit and a vacant lot.

The project now consists of a structure with a basement and four stories above grade.  The basement level contains parking for residents and is accessed from the alley.  The ground floor is occupied by the grocery/deli.  Public access to the store is from two main entrances – one at the corner of First and Sixth and one at the rear across from the parking lot.  A small amount of first floor space is allocated to two stair and elevator lobbies for the apartments.  A loading dock serves the building from the alley.

Floors 2 through 4 contain 62 apartment units.   In total there are 36 studio units, 12 1-BR units, 11 2-BR units and 3 3-BR units.  Some, but not all, of units have balconies.  While the units are market rate and available to anyone, the target market is young professionals, medical residents and upper level students.

Project Cost The total project cost including building, land, furnishings fixtures and equipment and soft costs is $15,376,000.

Parking, Zoning and Infrastructure    The project provides 46 parking stalls below the building and 70 spaces in the surface lot located west of the alley.  In addition to the off-street stalls, there are 22 on-street spaces along the 1st Avenue frontage, 8 spaces on the 6th Street frontage and 4 spaces along the 2nd Avenue SW frontage.  If desired by the grocery, the City would have the ability to lease spaces in the former KTTC lot to the project on an interim basis.

The project is located in the CDC Fringe zoning district.  The ordinance requires 140 off-street stalls for the grocery and 81 stalls for the apartments.   MMP LLC will apply for Restricted Development permit to address the deficiency.  If the project had been located in the CDC-CBD zoning district, there would be no off-street parking requirement.  A Downtown Master Plan sub-committee is working on recommendations for changes to the downtown parking requirements contained in the zoning ordinance.  If they are adopted prior to the issuance of a building permit for this project, it may be possible that the Restricted Development permit will not be needed.  A preliminary analysis indicates that the project appears to meet all other zoning requirements.

The 1st Avenue sanitary sewer relief line will have a major impact on MMP.  Originally scheduled for construction in 2011, this is a now a 2012 project.  New street and sidewalk construction will be done as part of the project. Coordination of the two projects is critical.  The total estimated special assessment to MMP for the 1st and 6th Street frontage is $240,000.  This amount does not include reconstruction of the alley. Alley reconstruction is a developer cost.  MMP LLC has expressed interest in burying the overhead electrical service in the alley at the rear of the property.  They will work with RPU regarding any costs for going underground.

Schedule  The proposed schedule is to establish a Tax Increment Financing District for the project and approve a Development Assistance Agreement at the December 19, 2011 City Council meeting. Construction is scheduled to start in March of 2012 with completion in May of 2013.

Tax Increment Assistance  This is a Pay As You Go TIF project.  MMP LLC will be reimbursed for TIF eligible expenditures as the increment is received over the life of the District (up to 25 yrs.).  MMP LLC only receives the increment if the taxes are paid in a timely manner and it is in compliance with the terms of the Development Agreement.   Only the building site is included in the TIF District – not the parking lot.  This is a Redevelopment TIF District which means it meets the statutory “blight” test.

Development Agreement Terms  The Development Agreement was prepared with assistance of the City Attorney’s Office and outside legal counsel.  The major obligations of the parties are out lined below.  The Agreement contains a standard set of representations and warranties.  Of note, the City represents that it will use its best efforts to coordinate infrastructure reconstruction with project construction.  MMP LLC acknowledges that this work will be on-going during their building project.  The City agrees to sell the former MN Energy parcel to MMP LLC for $1.00 and other good and valuable consideration.  That consideration includes the private acquisition of the other five parcels needed for the project, abatement and demolition, payment of all special assessments, SAC, WAC, PIF, building permit and other fees and charges and construction of the project.

Portions of the building encroach into the 1st Avenue right of way.  MMP LLC will make an application for a revocable permit for those encroachments sometime after approval of the Development Agreement.  Street level encroachments include signs, awnings and a small portion of the entrance stair.  At the upper levels, the “tower” elements at the north and south end of the building encroach approximately 5 to 8 feet into the right of way above the sidewalk.  Because this encroachment is at an elevation well above the street level, Public Works has no objection to it.  There are several precedents for this type of encroachment included the Mayo Healthy Living Center.

The Agreement obligates MMP LLC to construct the project in accordance with the attached plans.  Any design modifications of substance need to be submitted to the City for review and approval by staff.  The Agreement limits the use of the property to retail, commercial and rental housing uses.

MMP LLC waives the feasibility and assessment hearings for the special assessments and agrees not to appeal or object to the assessments.

The City agrees to provide $1,450,000 in TIF assistance to MMP LLC through the provision of a TIF note bearing an interest rate of 5.75 %.  While we work closely with the developer and the County Assessor’s Office in valuing the project and estimating the taxes and the increment, the City does not warrant that there will be sufficient increment to pay off the bond and bears no responsibility or obligation to do so.  If the project is successful and appreciates in value over time, the amount of increment should increase and the note will be paid off early and the increased taxes will flow back to the taxing jurisdictions.  The City has the right to retain 5% of the available increment to cover our administrative costs.

In the event of a default on the part of MMP LLC, the City may suspend its performance until the default is cured, with the ultimate ability to terminate the Agreement and the TIF Bond if the default cannot be cured.  In 30+ years of development, this has never happened.  Events of default include: failure to perform any obligation required by the Agreement; failure to pay property taxes or special assessments or similar obligations; failure to provide the City with evidence of a signed grocery store lease by 3/1/12 (we anticipate having a copy of the signed lease in early January); and, the filing of a bankruptcy petition by MMP LLC.

Prior to issuance of a Certificate of Completion by the City, MMP LLC cannot assign this agreement or the development property to a third party without the consent of the City, except as security for the purpose of obtaining financing.

MMP LLC is scheduled to close on the acquisition of the additional properties needed for the project in late December of 2011 and early January of 2012.  We are in the process of finalizing the Agreement language.  A copy of the full document is available upon request.  You may remember that when we became a City of the First Class, economic development projects now need to run through the Economic Development Authority.  At the Council meeting on the 19th, the EDA will take action to establish an Economic Development District and a TIF District and approve the TIF Plan and the Development Assistance Agreement.  The Council will then adopt a resolution approving the TIF District and Plan.

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