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HomeMy WebLinkAboutCity Council Packet 01-25-1993 SpecialCITY COUNCIL STUDY SESSION MONDAY, JANUARY 25, 1993 5:00 P.M. 5:00 P.M. - 5:15 P.M. Dinner 5:15 P.M. I. PLYMOUTH PORT AUTHORITY History Powers Actions to Re-establish 5:30 P.M. H. AVAILABLE TAX INCREMENT FINANCING STRATEGIES Fund Senior Citizen Housing Project Encourage Development in Existing TIF Districts To Benefit Development Throughout the City (Parcel by Parcel) To Direct Development of Downtown Plymouth 6:00 P.M. III. FINANCIAL IMPACTS 6:30 P.M. IV. DIRECTION CITY OF PLYMOUTH 3400 PLYMOUTH BOULEVARD, PLYMOUTH, MN 55447 DATE: January 22, 1993 TO: Mayor & City Council FROM: Frank Boyles, Acting City Managef\ 9 SUBJECT: JANUARY 25 CITY COUNCIL STUDY SESSION Attached is a memorandum from Community Development Director Chuck Dillerud which provides the City Council with information about the Plymouth Port Authority and outlines four potential strategies the City Council may wish to consider with respect to tax increment financing. I recommend that the City Council discuss the Port Authority issue,direct the staff on whether or not the Port Authority should be reestablished, the size of the authority, and who the Council would like to have serve on the Port Authority. The Council could decide to initiate a seven -person port authority and leave two positions vacant until these Councilmanic positions are filled. The Council should review four alternative tax increment uses and direct which, if any, it would like the staff to further evaluate. The next step would be to more thoroughly review the project cost and timing against cash needs established by these various strategies and report back to the Council on financial parameters which will guide these projects in the future. The study session should conclude by 6:30 p.m. in order that the Plymouth Forum can be conducted prior to the City Council meeting. FB:keb CITY COUNCIL STUDY SESSION MONDAY, JANUARY 25, 1993 5:00 P.M. 5:00 P.M. - 5:15 P.M. Dinner 5:15 P.M. I. PLYMOUTH PORT AUTHORITY History Powers Actions to Re-establish 5:30 P.M. H. AVAILABLE TAX INCREMENT FINANCING STRATEGIES A. Fund Senior Citizen Housing Project B. Encourage Development in Existing TIF Districts C. To Benefit Development Throughout the City (Parcel by Parcel) D. To Direct Development of Downtown Plymouth 6:00 P.M. III. DIRECTION MEMO CITY OF PLYMOUTH 3400 PLYMOUTH BOULEVARD, PLYMOUTH, MINNESOTA 55447 DATE: January 20, 1993 T0: Frank B le Ac ing City Manager FROM: Chuck ill Community Development Director SUBJECT: DISCUSS TOPICS FOR THE JANUARY 25, 1993 CITY COUNCIL STUDY SESSION The Council has reserved the evening of January 25 to study several topics that have been touched on over the past several months regarding development/redevelopment and related financing. While I have addressed these topics individually from time to time, it may be beneficial for the purposes of the forthcoming discussion to briefly address each of the topics and to provide possible advantages or disadvantages of the strategies as applied to Plymouth. I have discussed each of these strategies or concepts with both the City Attorney's office (principally Dan Nelson) and with representatives of Springstead, the City's financial consultants. Generally it has been found by our consultants that each of these proposed strategies or actions may be accomplished within the purview of existing statutes, under certain conditions. I. Plymouth Port Authority The Minnesota legislature, in 1984, adopted special legislation creating the Plymouth Port Authority. The City Council, on June 18, 1984, officially established the Port Authority and named Mayor David Davenport, Councilmember David Crain, and O.J. Heinitz as the initial three commissioners with terms expiring in 1986, 1988, and 1989. The organizational meeting of the Port Authority was held on November 29, 1984. At that time the Port Authority Commission adopted bylaws, elected officers, and generally took care of housekeeping matters. From my reading of the memorandums and organizational materials from that period it appears that one of the primary purposes for requesting the legislature to authorize a Port Authority and then later doing so was the resulting eligibility for the City to participate in a foreign trade zone venture that was then underway statewide. Evidently the only organizations authorized to participate in a foreign trade zone were Port Authorities. Since no foreign trade zone was ever established I am left to assume that the opportunity was lost for some reason. I- I have been advised by the City Attorney's office the Port Authorities in Minnesota retain certain powers and capabilities not available to cities through the other economic development provisions of State Statute. It is clear to me that the ability of a community to assemble "marginal" property for redevelopment purposes is broader under the Port Authority law than it is under related statutes available to cities in general. It is also my understanding that Port Authorities have a broader ability to assist in construction of buildings than would cities under other economic development statutes. While the City of Plymouth may have many of the same powers and capabilities for economic development purposes under other State Statutes I believe it would be prudent for the City to reestablish its Port Authority and focus its development and redevelopment efforts through the Port Authority for the following reasons: 1. Economic development and redevelopment is sufficiently complex to suggest the need for a body of "specialists" to focus strictly on that activity. While these specialists may also be elected officials and in all probability would be), when sitting as Port Commissioners their primary focus would be economic development and redevelopment. 2. The Port Authority, by statutory definition, holds certain powers and abilities regarding land assembly and redevelopment not necessarily available to a community through the other economic development statutes. Without question, there is a reason why the legislature has established Port Authorities only by special legislation. Port Authorities are not generally available to any community in the state such as other economic development powers. As long as Plymouth already has that statutory authority it would seem wise to play every card" we have in our efforts toward economic development and redevelopment. 3. Truly broad based economic development efforts similar to that which I have described to the Council in an earlier memo regarding the national transportation concept require the ability to exercise economic development initiatives both within and outside of the physical limits of the City. Only a Port Authority has that ability in this state. All that would be required of the City Council to reestablish the Port Authority would be the adoption of a simple resolution appointing Port Authority Commissioners. The statute provides that the Port Authority may be made up of either 3 or 7 commissioners which may or may not be also members of the City Council. Wherein our original Port Authority was set up as a 3 commissioner organization there is no reason why it could not be enlarged to 7 commissioners concurrent with the appointment of those commissioners. I believe that at least initially the City Council should appoint the entire Port Commission from among its membership. 2 - II. Tax Increment Financin A. Tax Increment Financinq--Fund Senior Citizen Housinq Project I have attached a lengthy memorandum prepared by the City Attorney's office regarding this subject. In summary it says that the City Council could, under certain circumstances, either invest Tax Increment funds directly in the HRA's Senior Housing project; or, invest TIF fund balances in bonds that would be issued by the HRA to finance the construction of the Senior Housing project. As is the case with many of the topics that will follow, either application of TIF funds to the senior project will represent a radical departure from TIF philosophy that Plymouth has adhered to for the past 10 years. The concept of the direct application of TIF funds to the Senior project is quite simple. It amounts to the TIF fund "buying down" some portion of the construction costs for the Senior Housing Project now estimated in the 5 million to 6 million dollar range). The net effect would be to reduce the effective capital cost of the project which would lend additional economic feasibility. This would both aid in saleability of the bonds for the remaining debt on the project, and, potentially, contribute to reducing the rent necessary to service debt. The second approach to utilizing TIF funds to assist with the Senior Housing Project is unique in nature. Noting the rather sizeable TIF fund balances that have been regularly carried year-to-year the City, through its TIF fund, may wish to directly invest in HRA issued Senior Housing Essential Function Bonds --at least for a period of time sufficient for the senior project to establish a "track record" that will enhance its ability to be favorably financed on the open market. Even if we assume that all of the currently programmed TIF projects will ever happen, it is plain that, at the present time, there will still remain over 10 million dollars worth of TIF work that will not have been completed by the Year 1999 --according to the current Capital Improvement Program. With some adjustment to the Capital Improvement Program with respect to the years certain projects undertaken, it would not seem difficult to assure ourselves that sufficient TIF fund balance would annually exist to support the investment in all or most of the senior housing bonds that will be necessary to support the project now contemplated by the HRA. The rate that the City would receive on those bonds would equal or exceed the rates that would be available to the City for investment of those TIF funds anywhere else. The City Attorney advises us that the bonds would be required to have the G.O. guarantee of the City itself (City cosigning for the HRA, if you will) for the bonds to be of sufficient grade to be purchased by the City as an investment for the TIF fund. The advantages to either of the foregoing concepts would appear to be obvious. In either case the cost of the Senior Housing Project is certain to be reduced. In the first case the cost would be directly 3 - reduced as a result of a TIF grant. In the case of the acquisition of Senior Housing Bonds by the TIF account there will be 6 figure savings in bond discount fees to the HRA as well as a significant savings in the interest rate that will have to be paid by the HRA (as much as 2 percentage points) without any corresponding reduction in the interest rate received by the TIF fund investments. In that respect it would seem to be the ultimate "win/win" situation. There are however disadvantages to both senior housing/TIF strategies. They include at least the following: 1. The allocation (or reallocation) of direct TIF funds to the Senior Housing Project will represent a substantial change of direction for the Plymouth TIF plan. The type and magnitude of TIF plan amendment required to accommodate this change of strategy will depend entirely on whether such an amendment will result in an increase in the amount of total TIF funds to be spent or simply the reallocation of TIF funds already contained within the TIF plan. Expansion of the TIF plan (in terms of dollars to be expended) would prove to be politically more difficult than simply reallocating funds within the existing TIF plan and retention of the current maximum plan expenditure level. 2. The use of TIF fund balances to acquire Senior Housing Essential Function Bonds on a short/midterm basis could potentially expose the tax payers of Plymouth to ad valorem "rescue" of a senior housing project that was not successful. While the odds on this happening are very minimal since the HRA is approaching the senior housing project on a very fiscally conservative strategy, some risk always exists. If the HRA is to sell its senior housing bonds on the open market without the benefit of a G.O. guarantee from the City Council Plymouth taxpayers would not be exposed financial difficulties of the project in the future --the private bond holders would be. That is why, of course, bonds sold on that basis will command at least 2 points of additional interest, which, ironically, will lead to a need for a higher rent schedule and "narrow" the project feasibility. 3. Under the TIF bond purchase strategy there is the assumption that at some point in the not too distant future (perhaps 6 to 7 years) the TIF fund will need the funds that are invested in the Senior Housing Bonds, and it will be necessary for the HRA to seek substitute financing, or the TIF fund to find a buyer for the bonds to free up the money for TIF projects at that time. The risk certainly exists that the bond market at the time the TIF fund requires liquidating its position in the bonds will be "soft" and the bonds will not be saleable except at a deep discount, and/or alternative financing will not be available to the HRA for the senior project loan balance at near as favorable rates as available today. Perhaps a reserve fund of some sort could be created to cover this eventuality. B. Tax Increment Financinq--Encouraqe Development in Existinq TIF Districts I have previously reviewed with the City Council and staff the status of our current Tax Increment Finance Districts. We currently have several 4 - Tax Increment Finance Districts made up of one or an aggregation of parcels within the Industrial/Commercial areas of Plymouth. While there are individual lots or small aggregation of lots scattered throughout the industrial areas, three major concentrations of industrial property remaining within Tax Increment Finance Districts: 1. The Bass Creek Business Park, and the adjacent Astleford property at 169 and Bass Lake Road. 2. The Plymouth Business Center industrial property at 34th Avenue North and Annapolis Lane. 3. The Parkers Lake Corporate Center at 21st Avenue North and Niagara Lane. In all three cases substantial amounts of industrial property remains fully serviced, but undeveloped. It has been established that there are no assumptions with regard to development of this vacant property included in the revenue forecast for tax increments in the latest Capital Improvement Program. This means that the entire current Tax Increment Finance plan (as is reflected in the Capital Improvement Program plus the 10 million 1999 item) can be financed from development that has already taken place in other Tax Increment Districts. This means that any increments that would be generated from development on any of the vacant land I have referred to above in exiting TIF Districts would be over and above that necessary to accomplish the current TIF plan. It should also be understood that Tax Increment Financing Districts have a finite life. They do not run on forever, and this is only logical because the other taxing districts (besides the City) are "locked out" of any incremental increases in potential tax revenues during the entire time period the Tax Increment Financing District is in effect. Essentially, the type of Tax Increment Financing Districts that we have in Plymouth are available for 8 tax increment years. That is, 8 years in which tax increments are actually paid. Since most of these districts were created in the mid -1980's, most will be expiring within the next 2-4 years. As we all know the pace of industrial/commercial/office development has not accelerated in the same manner as has residential. Because of this there is a very real chance that a large portion of our existing Tax Increment Districts will not see development, and therefore will not realize any tax increments prior to the expiration of the district. Once a district has expired it can not be renewed or extended. With these facts in mind I have suggested that it may be prudent for the City of Plymouth to revisit its policy of the past 10 years with respect to the application of tax increment through the direct assistance to private development. Where the City of Plymouth are has been involved in complex land write-down strategies in two instances (Waterford Park Plaza and Rockford Road Plaza) we have never in the past, as a matter of policy, committed a portion of our tax increments to assistance with the private development that is going to create the increments. I am suggesting that since we are not counting on the increments from any new development to support the existing TIF plan of improvements, it may now be prudent for us to endeavor to provide an incentive for new development 5 - by pledging a portion of the increment that would be created by such development to assist in writing down the capital cost of that development at the "front end" While I am not necessarily advocating land write-down, the statutes will allow us to assist the project developer with site development such as grading, utilities installation, landscaping and parking lot improvements. We could commit a percentage of the precalculated increment that the project will generate to the payment of these easy to track front end improvements, thereby reducing the capital cost of the project to the developer and the ultimate project tenant. There would need to be a "program" established so that is assures equal treatment of all owners of land within existing Tax Increment Districts with respect to projects that are proposed. We would also have to decide upon the appropriate percentage of the TIF increment that we would commit to the private side of the development in advance. In doing this we should recognize the fact that in some cases very few years remain in which to collect the TIF, and that a project started in 1993 will not generate much of a TIF until 1994 or 1995. With this in mind it would not appear that a commitment of less than 50% of the increment would be of any real value in terms of encouraging development. I know the City Council has heard from several industrial developers that are holding land for development in Plymouth where all of the improvements have been made and paid for. Many of those developers hold land that is within one of the TIF Districts that currently exist. I know also that the Council has been encouraged to proceed with a more developer oriented TIF program, such as I have suggested above. If it is the Council's decision to modify our prior policy and proceed with a program regarding existing TIF Districts as I have outlined above we could be in a position to begin very soon --within weeks. The key will be to determine the percentage of TIF increment that we are prepared to commit to the private side of the endeavor. C. TIF to Benefit Development throuqhout the Citv (Parcel by Parcel I have assumed this topic heading to mean the application of TIF to properties where no Tax Increment District now exists, i.e., the creation of a new Tax Increment Financing Districts and the modification of our TIF overall plan. As I am sure the Council has heard through the various legislative lobbying organizations and elsewhere, the creation of new Tax Increment Financing Districts has been severely impacted by actions of the last Legislature. In effect, what the Legislature has done, is "penalize" cities that create new Tax Increment Financing Districts by reducing the amount of State aids received by that city by a percentage of the tax increment that will be "captured" by the new Tax Increment District. While there is a complex formula to determine how much penalty to State aids a city will realize as a result of capturing new tax increments, it is my understanding that it could amount to as much 30% of the captured increment. It is my understanding that some communities have, nevertheless, proceeded with creation of new Tax Increment Financing 6 - Districts, and covered the loss in State aids through creative charge back methods to the project. It is also my understanding that the Legislature will endeavor to plug those "loopholes" at this session. In addition to the foregoing, the concept of creating new Tax Increment Financing Districts to assist development in Plymouth on a private project -by -project basis will likely be of concern to the other taxing bodies (principally the school districts and the County). These other taxing entities have become increasingly critical of municipalities freezing out" increasingly scarce new tax base through the Tax Increment Financing strategy. Even considering the foregoing, the option does remain open for the City to modify its policies and practice with regard to the creation of new Tax Increment Financing Districts on a parcel -by -parcel basis to more directly assist individual project development. Many cities continue to offer this development incentive. For instance, I am told that Apple Valley currently commits 75% of the forecasted new increment to the private side of a new project, reserving but 25, for public. This, however, is done on a "pay as you go" basis, where the dollars are only available to the private side once the increment has actually been collected. D. TIF for Direct Development of Downtown Plymouth Recently we advised the City Council of a project by the City of Eden Prairie where Tax Increment funds have been used to acquire a 27 acre portion of "Downtown Eden Prairie" in raw land status. It is the intention of the City of Eden Prairie to solicit development of the parcel and resell the parcel to a single developer who presents a development proposal that is found to be in the best interests of the City of Eden Prairie, as it applies to its "Downtown" concept. I have not heard whether any land write down will result, but this certainly is a possibility to accomplish the public goal of an integrated downtown. I have previously suggested to the Council that this may be an approach Plymouth would wish to take for all or a portion of the area that we normally consider to be "Downtown Plymouth" (Highway 55 to Vicksburg Lane, to Rockford Road, to Plymouth Boulevard, and back to Highway 55). It would appear that the platting and planning of this general area was premature in relationship to the market, and perhaps faulty in terms of its lack of a central theme and the division into several two acre parcels. It strikes me that the City of Plymouth has perhaps even a better foundation to support use of TIF funding and Port Authority powers to secure the purchase and assembly of all or a portion of this area critical to the future of the City; secure a more focused and complete land planning program for the entire site as an integrated development; and, market the site to a single or small number of developers on the basis that the land and site planning will be closely adhered to. The degree to which the City would impose the prepared plans for the site may influence the amount of land write down that may be required to remarket the site to the development community. Any design for this site may impose certain constraints as to the marketability of the site which must be compensated for in a write down situation. Many communities consider 7 - this to be a highly appropriate application of public funds --to ensure the appropriate development of a highly public portion of the City. It is implied in the foregoing that there would be essentially two uses of TIF funds in a Downtown Plymouth application; 1. A relatively short term use to cash flow the assembly, acquisition and resale of all or a portion of the Downtown Plymouth area. 2. Permanent use of a smaller portion to accomplish the land/site planning in a greater level of detail than now is available; and, to write down the selling price of the land back to the private sector to reflect any constraints that are imposed by the land/site planning that has been mandated. With regard to the initial TIF application, the primary concern would be to, again, be sure that the TIF cash flow in future years would be sufficiently monitored to assure that the necessary amount of funds is available to support the acquisition and assembly of the Downtown Plymouth land. For the entire acreage remaining I can foresee the need for several million dollars of short term cash flow in support from the TIF fund. Incidentally, once the funds are expended for the acquisition of land within a city development district (such as Downtown Plymouth is in) any repayment of those funds results in resources that are no longer constrained as to their uses within existing development districts. The second application of TIF funds for Downtown Plymouth would require modification of the TIF plan, either to substitute a new use for one of the uses of TIF funds that is already programmed but not as yet expended; or, to add a use and a planned financial expenditure over and above elements of the TIF plan now in existence. Aside from the disadvantages of use of TIF funds in this manner thcat are implicit in the foregoing paragraph, a major impediment may be the philosophical concerns of the public sector for "short circuiting" the market place in the manner suggested. There are certain to be those that will question the advisability of the public either getting involved in the use of this power to assemble land for development and/or providing mandated land/site planning and offering incentive of land write down for accomplishment of that plan. pl/cd/tif.1-20) ROBERT L. CROSBY LEONARD M. ADDINGTON ROBERT R. BARTH N. WALTER GRAFF ALLEN D. BARNARD RICHARD A. PETERSON ROBERT J. CHRISTIANSON,JR FRANK J. HALZ FRANK VOGL IARINUS W. VAN PUTTEN, JTR DAVID B. MORSE JOHN A. BURTON, JR. JAMES C. DIRACLES ROBERT L. MELLER,JR• SCOTT D. ELLER BEST & FLANAGAN ATTORNEYS AT LA-tV CHARLES C.BERQUIST GEORGE O. LUDCKE E.JosEPH LAFAVE GREGORY D. SOULE CATHY E. GORLIN PATRICK B. HENNESSY TIMOTHY A. SULLIVAN TAMMY L. PUST BRIAN F. RICE TRACY J. SAN STEENBURGH DAVID J. ZUBRE STEVEN R.KRUGER JAMES P. MICHELS PAUL E. KAMINSKI 3500 IDS CENTER DANIEL R.W. NELSON 80 SOUTH 8TH ZINNEAPOLIS M1 TELEPHONE (612) TELECOPIER (012) Direct Dial: December 21, 1992 Mr. Chuck Dillerud Executive Director Plymouth Housing and Redevelopment Authority 3400 Plymouth Boulevard Plymouth, MN 55447 Ms. Kathy Aho Springsted, Incorporated 85 East 7th Place, Suite 100 St. Paul, MN 55101 OF COUNSEL JOHN R. CARROLL JAMES D. OLSON ROBERT M. SKARE ARCHIBALD SPENCER CHARLES S. BELLOWS WARD B. LEWIS JAMES I. BEST 1902-1988 ROBERT J. FLANAGAN 1898-1974 R E C-, VE0 DEC 22 1992 CITY OF PLYMOUTH COMMUNITY DEVELOPMENT DEPT. Re: Plymouth Housing and Redevelopment Authority Senior Apartments Project, Use of Accumulated Tax Increment Revenues Dear Chuck and Kathy: At our last meeting, we discussed the possibility of utilizing the accumulated tax increment revenues (the "Tax Increments") from the existing tax increment financing districts established by the City of Plymouth (the "City") to assist the proposed 100 -unit Senior Apartments Project (the "Development") to be constructed, owned and operated by the Plymouth Housing and Redevelopment Authority (the "Authority"). This assistance is available in either of two forms: First, directly through the expenditure of Tax Increments to pay the costs of the Development; or second, indirectly by making an investment in the Authority's bonds from the accumulated Tax Increments. These two alternatives are further discussed below. Minnesota Statutes, Sections 469.174 to 469.179 (the "Tax Increment Act") contain the provisions of Minnesota law pertaining CINDY J. LARSON STREET JOHN P. BOYLE ROSS C. FORMELL 55402-2113 CARYN SCHERB GLOVER SARAH S.GODFREY 339 - 7121 MARY E. SHEAREN CATHERINE J. COURTNEY 339-5897 KEITH J.NELSEN TRACY F. KOCHENDORFER JEAYNICE M-REDING SARAH CRIPPEN MADISON ROBERT D. MAHER 612-349-5649WILLIAM'JOHNSON December 21, 1992 Mr. Chuck Dillerud Executive Director Plymouth Housing and Redevelopment Authority 3400 Plymouth Boulevard Plymouth, MN 55447 Ms. Kathy Aho Springsted, Incorporated 85 East 7th Place, Suite 100 St. Paul, MN 55101 OF COUNSEL JOHN R. CARROLL JAMES D. OLSON ROBERT M. SKARE ARCHIBALD SPENCER CHARLES S. BELLOWS WARD B. LEWIS JAMES I. BEST 1902-1988 ROBERT J. FLANAGAN 1898-1974 R E C-, VE0 DEC 22 1992 CITY OF PLYMOUTH COMMUNITY DEVELOPMENT DEPT. Re: Plymouth Housing and Redevelopment Authority Senior Apartments Project, Use of Accumulated Tax Increment Revenues Dear Chuck and Kathy: At our last meeting, we discussed the possibility of utilizing the accumulated tax increment revenues (the "Tax Increments") from the existing tax increment financing districts established by the City of Plymouth (the "City") to assist the proposed 100 -unit Senior Apartments Project (the "Development") to be constructed, owned and operated by the Plymouth Housing and Redevelopment Authority (the "Authority"). This assistance is available in either of two forms: First, directly through the expenditure of Tax Increments to pay the costs of the Development; or second, indirectly by making an investment in the Authority's bonds from the accumulated Tax Increments. These two alternatives are further discussed below. Minnesota Statutes, Sections 469.174 to 469.179 (the "Tax Increment Act") contain the provisions of Minnesota law pertaining Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 2 to tax increment financing and the use of tax increment revenues. Section 469.176 contains the following limitations: Subd. 4. Limitation on Use of Tax Increment; General Rule. All revenues derived from tax increment shall be used in accordance with the tax increment financing plan. The revenues shall be used solely for the following purposes: (1) to pay the principal and interest on bonds issued to finance a project; 2) . by a housing and redevelopment authority or economic development authority to finance or otherwise pay public redevelopment costs pursuant to Sections 469.001 to 469.047, The term "public redevelopment cost" is defined in Minnesota Statutes, Section 469.033, Subd. 1, as follows: 469.033. Public Redevelopment Cost; Proceeds; Financing. Subd. 1. Financing Plans Authorized. The entire cost of a project as defined in Section 469.002, Subd. 12, including administrative expense of the authority allocable to the project and debt charges and all other costs authorized to be incurred by the authority in Sections 469.001 to 469.047, shall be known as the public redevelopment cost. . . . The Development will constitute a "housing development project" within the meaning of Minnesota Statutes, Section 469.002, Subd. 15. A housing development project is also a project" within the meaning of Minnesota Statutes, Section 469.002, Subd. 12, which defines the term "project" to mean a housing project, a housing development project, a redevelopment project, or any combination of those projects. The term "project" also may be applied to all real and personal property, assets, cash, or other funds held or used in connection with the development or operation of the project. Because the Development will constitute a housing development project, it is a "project" within the meaning of Minnesota Statutes, Section 469, Subd. 12. As such, all costs incurred by Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 3 the Authority in acquiring, constructing, equipping and administration of the Project are public redevelopment costs, which can properly be paid from the City's Tax Increments pursuant to Minnesota Statutes, Section 469.176, Subd. 4. Alternatively, the City's Tax Increment could be used to pay the principal of and interest on bonds issued by the Authority to finance the Development since the Authority's bonds would finance a "project" for purposes of the Tax Increment Act. However, in both of these cases, the use of the existing Tax Increments for this kind of housing development project is not a use contemplated in the budgets for the City's existing tax increment financing plans (the "TIF Plans"). Although I only have summaries of the TIF Plans previously adopted by the City, it is clear that any new use of those existing Tax Increments would have to be authorized by a modification of those TIF Plans. Under Minnesota Statutes, Section 469.175, Subd. 4(a), such a modification to an existing plan could be adopted, but if that modification increases the total tax increment expenditures (e.g., the additional expenditures for the new Senior Apartments Development are not offset by the elimination of an equal amount of previously approved tax increment expenditures), the modification would have to be approved upon the notice and after the discussion, public hearing, and findings required for approval of the original plan. Although it is possible for the City and the Authority to go back through this notice and approval process for such a modification, the City would have to consider the political ramifications of exposing itself to criticism from the county and the respective school districts for altering the tax increment expenditures at this date, and for the size of the accumulations of Tax Increments which are now to be used for this Development. Additionally, certain modifications to preexisting TIF Plans would subject those TIF Plans to changes in the Tax Increment Act since the districts were originally created. If it is the City's intention to follow this alternative, we will provide you with a more complete analysis of the effect on existing Tax Increment Financing Districts of such a modification. The second alternative for the use of the City's Tax Increments would be structured as a purchase by the City of the Authority's governmental housing revenue bonds issued to provide financing for the Development. In essence, the Authority's bonds would merely be an alternative investment vehicle for the City to invest its accumulated Tax Increment funds. The essential question in this analysis is whether the Authority's bonds would constitute a legal investment for the City's funds. Minnesota Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 4 Statutes, Section 471.56 gives the general rule that funds of a municipality, from any source, may be deposited or invested in the manner and subject to the conditions provided in Section 475.66 for the deposit and investment of debt service funds. Minnesota Statutes, Section 475.66 provides in subdivision 3 as follows: Subd. 3. Subject to the provisions of any resolutions or other instruments securing obligations payable from a debt service fund, any balance in the fund may be invested. c) In any security which is (1) a general obligation of the State of Minnesota or any of its municipalities or a general obligation of another state or local government with taxing powers which is rated A or better by a national bond rating service, For purposes of Minnesota Statutes, Sections 475.51 to 475.75, the term "municipality" does not include a housing and redevelopment authority. However, the 1992 Legislature provided in Minnesota Statutes, Section 469.034, Subd. 2, for the backing of a housing and redevelopment authority's housing development project bonds by a municipality as follows: Subd. 2. General Obligation Revenue Bonds. (a) An authority may pledge the general obligation of the general jurisdiction governmental unit as additional security for bonds payable from income or revenues of the project for the authority. The authority must find that the pledged revenues will equal or exceed 110% of the principal and interest due on the bonds for each year. The proceeds of the bonds must be used for a qualified housing and development project or projects. The obligations must be issued and sold in the manner and following the procedures provided by Chapter 475, except the obligations are not subject to approval by the electors. The authority is the municipality for purposes of Chapter 475. Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 5 Thus, if the City of Plymouth agrees to back the Authority's bonds with the City's general obligation, the Authority's bonds would become a security which is "a general obligation" of a Minnesota municipality which is rated A or better by a national rating service. This would make the Authority's bonds a permitted investment vehicle for the City's accumulated Tax Increments. Minnesota Statutes, Section 469.034, Subd. 2, goes on to require that the principal amount of the Authority's bond issue must be approved by the governing body of the City after public hearings are held by both the Authority and the City at least 15 but not more than 120 days before the sale of the Authority's bonds. Paragraph (c) provides that the maximum amount of general obligation bonds which may be issued and outstanding in the City equals the greater of (1) one-half of one percent of the taxable market value of the City of Plymouth or (2) $3,000,000. Paragraph e) gives the following definition of the term "qualified housing development project": e) "Qualified housing development project" means a housing development project providing housing either for the elderly or for individuals of families with incomes not greater than 80 percent of median family income as estimated by the United Stated Department of Housing and Urban Development for the standard metropolitan statistical area or the nonmetropolitan county in which the project is located. A qualified housing development project may admit nonelderly individuals and families within higher incomes if, 1) three years have passed since initial occupancy. 2) the authority finds that the project is experiencing unanticipated vacancies resulting in insufficient revenues, because of changes in population or other unforeseen circumstances that occurred after the initial finding of adequate revenues; and 3) the authority finds a tax levy or payment from general assets of the general jurisdiction governmental unit would be necessary to pay debt service on the bonds if high income individuals or families are not admitted. [Emphasis added.] Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 6 Because the Development proposed by the Authority in the City of Plymouth will be exclusively an elderly housing facility, no income limits will be imposed on the Development as a result of requesting the general obligation backing from the City. In addition, if in the future the Development experiences difficulties in generating adequate revenues, the Authority would be permitted to admit nonelderly individuals and families with higher incomes if the three conditions specified above have occurred. Given the foregoing analysis, if the City of Plymouth is willing to support the Authority's bonds with the City's general obligation backing, then these bonds would be a permitted investment vehicle for the City's accumulated Tax Increments. Two additional analyses must be satisfied before the use of the City's accumulated Tax Increments is justified. First, as described in my earlier letter dated November 19, 1992, to Dale Hahn, a copy of which is attached to this letter, we must conclude that the accumulated Tax Increments do not constitute "excess tax increment" for purposes of Minnesota Statutes, Section 469.176, Subd. 2. Having already reached that conclusion due to the costs authorized in the City's existing TIF Plans, we also must conclude that the City's accumulated Tax Increments do not violate the Five -Year Rule" contained in Minnesota Statutes, Section 469.1763. This section was added to Minnesota law in 1990 to prohibit cities and housing and redevelopment authorities from avoiding certain tax increment limitations by pooling their districts. Subdivision 4 of this Section requires that, beginning in the sixth year following certification of the district, 75 percent of the revenues derived from tax increments paid by properties in the district that remain after the expenditures permitted in Subdivison 3 must be used only to pay outstanding bonds, contracts to third parties or certain credit enhanced bonds. Otherwise the tax increment revenues must be returned to the various taxing jurisdictions and the district must be decertified. Subdivision 3 provides that revenues derived from tax increments are considered to have been expended on an activity within the district only if one of the following occurs: (1) before or within five years after certification of the district, revenues are actually paid to a third party; (2) bonds used to finance an allowable activity are issued and sold to a third party before or within five years after certification and the revenues are spent to repay the bonds; (3) binding contracts with a third party are entered into within five years and the revenues are spent under these contracts, or (4) costs with respect to the activity are paid before or within five years after certification of the district and the revenues are spent to reimburse a party for payment of the costs, including interest on unreimbursed costs. Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 7 The limitations of Minnesota Statutes, Section 469.1763, Subds. 3 and 4 are applicable only to districts for which certification was requested after May 1, 1988. Based on my understanding of the City of Plymouth Tax Increment Districts, only the TIF Plan for Economic Development District No. 7-1 was certified after the effective date of Minnesota Statutes, Section 469.1763. With respect to the Tax Increments allocable to all of the other City Tax Increment Districts, the Five -Year Rule will not apply and the City can proceed as it has before with respect to those Tax Increments. With respect to District No. 7-1, we will have to comply with the foregoing requirements, but we are still within the initial five year period after certification of that District so we would be able to enter into the necessary contracts or incur the necessary costs if we have not already done so in order to avoid any claim that the City has not expended its Tax Increments on a permissible activity within District No. 7-1. Based upon the foregoing analysis, if the City is willing to pledge its general obligation behind the Authority's bonds to finance the Development, the City would be able to invest its accumulated Tax Increments in the Authority's bonds as a permitted investment for City funds. Without such a pledge by the City, however, the Authority's bonds would not on their own be a legal investment for the City's Tax Increments. It is ironic, however, to conclude that the City, as investor (the holder of the accumulated Tax Increments), would be required to rely upon the general obligation backing of the City, as general obligation guarantor, of the Authority's bonds. Such a general obligation guaranty would only be called upon if necessary to pay principal and interest on the Authority's bond issue, while the City as holder of these bonds would have little incentive to ever make such a call on its general obligation backing. Such a situation should make the argument for granting the City's general obligation pledge much easier than if the Authority's bonds were held by an outside third party. Finally, in connection with the placement of the Authority's bonds with the City, it has been proposed that the Bonds be renegotiated, refinanced, or sold at a future date to a new third party bondholder after the Project shows an operating history sufficient to support debt service and ongoing operating expenses. One potential problem with the City as bondholder is that the City cannot rely upon the Authority to return to the City any principal of its investment earlier than such a refinancing, and the principal amount of the City's investment would be locked up for an initial period of presumably four to seven years. If Mr. Chuck Dillerud Ms. Kathy Aho December 21, 1992 Page 8 the City's capital expenditure needs for its TIF Plans show that this amount will not be required during this four to seven year period, and if the City is willing to run the risk that it may have a difficult time refinancing these Bonds unless the City keeps its general obligation backing behind them, this structure could seriously restrict the liquidity of the City's investment of its accumulated Tax Increments. Please feel free to contact me after you have had a chance to review this letter. I am sure that a number of issues raised in this letter will have to be discussed among the various City representatives and outside consultants and I look forward to working with you in the near future toward the final structuring of this issue. Very truly yps, r; Daniel R. W. Nelson DRN:rsr:0857v Enclosure