CITY OF HALLANDALE BEACH

MEMORANDUM

 

 

DATE:                        November 07, 2008                           

 

TO:                 D. Mike Good, City Manager

 

FROM:            Richard D. Cannone, Development Services Director

 

SUBJECT:     Consideration of Hallandale Beach Community Redevelopment Agency (CRA) Tax Increment Financing (TIF) investment for the Village at Gulfstream Park - CAD# 019/02

 

 


PURPOSE:

 

Village at Gulfstream Park LLC through their Community Development District (CDD) is seeking a TIF investment from the City/CRA to assist in paying back the bonds issued by the CDD for the Village at Gulfstream Park.  These bonds were issued in order to pay for the cost of infrastructure/open space of the development and other public improvements/mitigations required by the Development of Regional Impact (DRI).

 

BACKGROUND:

 

Community Redevelopment Area (CRA) & Tax Increment Financing (TIF)

The City of Hallandale Beach in 1996 designated the area generally bound by I-95, Pembroke Road, NE 14th Avenue and Broward/Miami-Dade border as a Community Redevelopment Area (CRA).  As part of this designation a CRA Plan was established.  In order to carry out the goals of the CRA Plan a funding mechanism was established in accordance with Florida Statutes Chapter 163.  The mechanism set in place for this funding was Tax Increment Financing (TIF).  

 

The practice of TIF is conceptually simple: an area that has been blighted or is otherwise in need of an economic boost is designated as a CRA. The taxable value of the CRA is then frozen to the value it was on the day of the declaration. The frozen value is usually called the base. All jurisdictions that had taxing authority over the TIF district still have taxing authority over the base. As the district develops, the incremental value of taxes that would have been collected by all of the taxing authorities is retained by the city to carry out the goals of the CRA Plan. This new value is generally called the increment.

 

Village at Gulfstream Park

The Village of Gulfstream Park is a multiphase development that qualifies as a Development of Regional Impact.  DRI’s in general classified as “any development which, because of its character, magnitude, or location would have a substantial effect upon the health, safety, or welfare of citizens of more than one county In addition, a Community Development District (CDD) was to provide an alternative method to finance and manage basic services for community development.  In order to pay for the improvements and mitigations amounts outlined in the Development Order and Development Agreement for Phase I,  Forest City through the CDD issued $60 million in tax exempt bonds financed over 30 years.

Although Staff and the City Commission were not supportive of utilizing TIF in the past for this development, it is Staff’s opinion that due to existing market conditions, the City’s desire to bring the “Town Center” concept to fruition and to provide for needed affordable housing, that the item should be revisited and discussed.

 

The City Commission at the June 30, 2008 meeting agreed to revisit this item and unanimously passed a motion “to prepare a draft policy for consideration of the City Commission/CRA Board of Directors for use of CRA TIF funds for public- private partnership projects and authorize the City Manager to bring back specific recommendations (based on the policy) pertaining to the request for CRA TIF funds from the Village at Gulfstream Park Community Development District (CDD).” As part of that motion the City Commission further directed the City Manager to incorporate the following items into the policy/analysis:

 

  1. CRA TIF contributions to the Village at Gulfstream Park CDD are not to exceed a maximum of 50% of the available CRA TIF funds, less the contributions from the South Broward Hospital District and the Children’s Services Council.  Maximum contributions for other projects are subject to negotiations.
  2. A full economic analysis shall be performed of the impact of the Village at Gulfstream Park (and for each other project, as applicable), on the surrounding area and how the revenue generated from the project will benefit the community.
  3. A full economic analysis shall be performed on the current and future CRA and City budgets if TIF funds are provided since the value within the CRA area can significantly increase over time and the City’s General Fund provides about 50% of the TIF dollars.
  4. The economic analysis must demonstrate the impact of current state legislation as well as proposed referendum requirements on City and CRA revenues and include a worst case scenario for City and CRA revenues.
  5. The economic analysis must also include the impact on the City/CRA if no TIF assistance is provided to a project and include a worst case scenario for the project and impact on surrounding areas.
  6. Consideration of whether CRA TIF allocations are related to the number and type of jobs to be created by a project (this consideration is applicable to the Village at Gulfstream Park CDD project).
  7. All entities financially or otherwise involved in a project must participate in the discussion and execution of any agreement pertaining to the use of CRA TIF dollars (for example, Magna Entertainment Corporation must join Forest City and the City in discussions concerning any agreement pertaining to TIF funds for the Village at Gulfstream Park CDD).
  8. The City Manager shall conduct other evaluations and analyses as deemed appropriate to ensure the City and the CRA are managed properly and the Community is protected 

 

DISCUSSION

 

In order to accomplish these tasks, Staff contracted with Lambert Advisory, LLC.  Lambert Advisory, LLC is based in South Florida and is a leading development advisory firm to municipalities throughout the United States.  Within South Florida, the firm is currently (or recently completed work as) an advisor to the City of Hollywood, City of Homestead, City of Fort Lauderdale and the City of Oakland Park assisting in negotiating the terms of specific TIF Investments.  Beyond South Florida, Lambert is currently advising on policies related to the use of TIF for two of the largest redevelopment districts in the City of Tampa and has worked with municipalities or quasi-governmental bodies related to economic development or tax increment investments in New Orleans, Florida, California, New York, Rhode island, Massachusetts, Texas, Alaska, Virginia, among others.  Lambert was recently selected to provide additional TIF Advisory services to the City of New Orleans. 

 

Policy Framework

In the past the City’s CRA has focused primarily on the neighborhoods and capital projects with the TIF revenue created since the CRA’s inception.  Many of these projects are funded annually and are identified in the CIP or are programmed as part of the CRA’s housing and small business assistance program or CRA Plan.  What is different with this request is to expand the City’s TIF expenditures to include an investment tool for large scale economic development projects in the city. 

 

Based upon staff experience and knowledge of national best practices Staff has developed the following as a policy guide that meets the aforementioned City Commission direction.  It is Staff’s intent to use these criteria in finalizing the policy but it serves as a basis to consider and evaluate a TIF investment for large-scale projects. 

 

A.            Need for Public Assistance – In all cases, it is required that the need for public assistance be demonstrated and documented by the developer to the satisfaction of the City. All such documentation, including development budgets, cash flow projections, market studies and other financial and market information, must be submitted by the developer along with an application for public financial assistance. If the request is based on financial gap considerations, the developer will demonstrate the profitability and feasibility of the project (i.e. gross profit, cash flow before taxes, cash-on-cash return, IRR, etc.), both with and without public assistance.

 

B.            Amount of Public Assistance versus Private Investment - All development proposals should seek to maximize the amount of private investment per dollar of public assistance. Public assistance as a percentage of total development costs will be determined for each project (or discrete portion of a project receiving a subsidy) and compared to other development projects or subprojects of similar scope and magnitude whenever possible.

 

C.           Term of Public Assistance –The term of the public assistance shall be kept to a minimum. The proposed term of any public assistance shall be fully documented and explained to the CRA Board of Directors/City Commission.

 

D.           Development Benefits and Costs – The direct and indirect benefits of the development proposal shall be determined and quantified to the degree possible. Benefits shall include, but are not limited to, employment benefits (number of jobs retained or created, percentage of jobs held by City residents, wage and salary information, etc.), tax base benefits (estimated market value of new development, new property taxes generated, etc.), housing benefits (number of new rental or ownership units, number of affordable units, etc.), and other benefits relating to transportation, parking, blight remediation, environmental cleanup and historic preservation.

 

Costs of the development proposal to the City shall also be identified to the degree possible. Such costs shall include, but are not limited to, additional required infrastructure, required local contributions by the City and the impact on the City’s General Fund of the fiscal disparity contribution election if tax increment financing is used. The timeframe used for these cost estimates should equal the timeframe of the project finance plan and should separately identify any projected recapture of public subsidy.

 

E.            Recapture of Public Subsidy – It is the City’s goal to recapture all, or a portion, of the public subsidy provided to the extent practical. Methods of recapture shall include, but are not limited to, long-term ground leases, subordinated loans, sale and/or refinancing provisions, and equity participation.


Village at Gulfstream Park Request

Phase I has commenced for The Village at Gulfstream Park and is scheduled to open in October 2009.  This Phase includes approximately 380,000 square feet of retail, 88,000 square feet of office, parking garages to accommodate approximately 1,000 vehicles, which also serves as the podium/foundation for a full service hotel and a multi-story residential structure, as well as associated infrastructure and street improvements.  Total development costs of the Phase I project are estimated to be approximately $250 million with $60.29 million of this amount (approximately $49 million after costs and accrued interest is available for capital cost) financed through Community Development Districts bonds which, while tax exempt, require repayment from project revenue.

 

The Village of Gulfstream Park is seeking a commitment of upwards of $2.0 million per year from the CRA for the life of the CRA (see Exhibit A).  The proposal to the CRA from Village at Gulfstream Park seeks a phasing of the commitment, with $900,000 committed concurrent with the completion of Phase I including that portion of the overall property currently under construction, an additional $600,000 per year upon completion of a subsequent retail/small cinema phase, and a final $500,000 (for a total of $2.0 million) upon completion of a third phase of development.

 

Financial Analysis

Staff would like to point out that all information related to this analysis is protected by Florida Statute 288.075.  This Statue provides confidentiality of records by a public economic development agency of a municipality, or the municipal employees assigned the duty to promote the general business or industrial interests of that municipality.  In conjunction, Forest City has submitted a written request that the information held by the economic development agency concerning plans, intentions, or interests remain confidential and exempt from Florida Statute 119.07 (Public Records Law).  This written request is valid for up to 24 months after the date the City receives a request for confidentiality or until the information is otherwise disclosed whichever occurs first. This provision allows the City to protect certain documents and contracts from public view prior to any final negotiations.  Due to concerns with confidentially Lambert Advisory and Staff conducted an “in-camera” review of all financial records needed to carry out the requirements set forth above.

Based upon the information reviewed “in-camera” Lambert Advisory issued the attached report (see attached report from Lambert Advisory dated August 27, 2008).  Due to tightening credit markets and fierce retail competition in the North Miami-Dade – South Broward markets Staff agreed with our consultant recommendation that an investment of TIF funds into this venture is warranted. 

 

In addition to the “quantitative analysis” Staff also looked at this investment from a “qualitative” perspective.  The Village at Gulfstream Park will be the first lifestyle center in the country built in conjunction with a state-of-the-art thoroughbred horse racing facility and casino. This development will feature unrivaled shopping, dining and entertainment experience for the residents and visitors of the City.  Since conception, The Village at Gulfstream Park has been modeled to become the preeminent leisure, fashion, entertainment and residential destination for South Florida. 

 

As with any investment there is a certain level of risk involved.  However, the risk involved would be rather than having a preeminent destination center in the City, the development could turn into an “ordinary” shopping center much like many of the existing retail strip centers throughout south Broward and North Miami-Dade Counties.  Given its prominence and scale, The Village of Gulfstream Park will clearly define future investments along Hallandale Beach Boulevard and US1 for the next decade and beyond.  For this reason alone, the City should consider a carefully structured dedication of increment, if in turn, it can obtain confidence that the quality of the project is significantly enhanced by such investment.

 

When looking at this type of investment from an economic development perspective it always involves a delicate balance of resources. The way this investment is being structured involves an investment of a percentage of the incremental value (as previously described) created by the Village at Gulfstream Park back into the development to ensure the development achieves its full potential.  While this investment will not “take away” tax dollars from the City what it will do is invest into the City’s future.  It is Staff’s opinion that the way this invest will be structure, as outlined in the policy framework, will better position the City to not only recapture that investment but realize other revenue from the generation of TIF dollars created from surrounding redevelopment activities that are a result of this developments success.

 

In discussing the potential tenants mix with Forest City all of the major mid to high end national tenants require a certain level of concessions in the form of tenant improvements.  These tenant improvements are typically in the hundreds of thousands of dollars, if not millions.  Based upon the tenant list that Forest City is currently negotiating, a number of the major tenant would require that additional tenants co-locate with the which would push them to begin there Phase II of the development, further adding additional TIF dollars, jobs and improvements to the City.

 

Term Sheet

Attached for consideration is the Term Sheet dated November 10, 2008.  This Term Sheet was based upon the Policy Framework outlined as part of this memo and Financial Analysis prepared by Lambert Advisory.  This term sheet will form the basis of a more detailed development agreement which will be subject to negotiation between the City Manager and the Village at Gulfstream once the CRA Board authorizes the City Manager to negotiate and enter into such development agreement.  The proposed structure is aimed at enhancing the broad economic benefits which the Village project should generate in the City and CRA while at the same time provide the City with the ability to recapture its investment of increment should the project perform better than currently projected once market conditions improve. 

 

On an annual basis, and until such time as the CRA sunsets or 2026 whichever is sooner, the CRA will rebate to The Village at Gulfstream LLC the lesser of $900,000 or 50 percent of the total CRA increment collected from all tax districts and which has been generated within the LAC area.  The base year for calculation of increment shall be 2005.  To further the development of future phases of the LAC, the City Manager may authorize a rebate of additional increment.  However, at no time shall such rebate of increment exceed 50 percent of the total increment generated within the LAC. 

 

The primary measure for this will be a “Cash on Cost” return analysis.  Cash on Cost is the ratio of annual before tax and debt to the total private funded development cost. Following are examples of how the cash-on-cost would work:

 

Total revenue from the LAC minus day-to-day operating expenses minus a small reserve for future capital projects (such as roof repairs, painting, etc.) = The "Net Operating Income" which is the numerator for the calculation.

 

The denominator would be:  Total cost of the development in the LAC minus CDD funded/bonded amounts minus any financing secured by the CRA's Increment = "Net Project Cost" which includes only private financing and FC/Magna equity investment.

 

An example of the calculation on an annual basis would involve the following:

 

Where the "Net Project Cost" would equal $200,000,000 and the "Net Operating Income" equals 18,000,000:

 

$18 million/$200 million = 9% return (City provides no increment to the project but gets nothing back)

 

Where the "Net Project Cost" would equal $200,000,000 and the "Net Operating Income" equals $16,000,000:

 

$16 million/$200 million = 8% return (City provides $900,000 in increment which then brings the Villages return to 8.45% and the Villages project banks the equivalent of $1.1 million to recover in future years or 0.55% to get them to the 9% return threshold.

 

Where the "Net Project Cost" would equal $200,000,000 and the "Net Operating Income" equals $20,000,000.  Also assume that the CRA has made a rebate of $1.8 million in increment with interest to date and that Village has $500,000 in unrealized returns "banked" from past years:

 

$20 million/$200 million = 10% return (excess of $2.0 million of which Village first gets the $500,000 "banked" back, and Village and CRA split remaining $1.5 million; $750,000 to CRA and $750,000 to Village.  City's account at the end of this transaction has been reduced to $1.05 million).Included with this term sheet will be an economic analysis of the CRA and how future TIF revenue will relate to future General Fund revenues. 

Additionally, Lambert Advisory has also prepared the attached, “Tax Increment Analysis” dated November 10, 2008.  This analysis provides a full economic analysis of CRA (TIF) revenue versus non-TIF (ad valorem) revenue through 2026, the end of the CRA.

 

RECOMENDATION

 

  1. The City Commission approve the Term Sheet provided and direct the City Manager to enter into an appropriate agreement with Forest City to implement those terms for the TIF investment.
  2. Staff formulizes a TIF Investment Policy based upon the Policy Framework outlined in this memo with the understanding that each development is unique and must be analyzed on a case-by-case basis.  In addition, this policy should include size and/or investment thresholds for future request.

 

 

Reviewed:

 

  

_______________________________                                                          __________

D. Mike Good, City Manager                                                                           Date

 

 

_____Approved                _____Disapproved                _____Hold for Discussion