City Council Minutes 2019 11 04 - Laserfiche WebLink

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City Council Meeting Minutes November 4, 2019 Page 4 of 20 Tim Morzel, with EPS, provided Council with an overview of the market and financial analysis of the request for TIF submitted by Terraces on Main. Key Project Attributes: • Existing Use: General Office • Proposed Use: Retail/restaurant space on ground floor and office space on second floor • Area: 4,736 sf retail/restaurant space and 10,686 sf office space • Rental rate: Project is estimated to be able to achieve an average rental rate of $29/sf for the ground floor retail space and $27.50/sf for the second floor office Project Feasibility Evaluation — "but -for" test Methodology Evaluate the performance of the project with and without an investment of public funds. Is the project feasible? Yield on Cost • Evaluation of the static performance of the project based on net operating income divided by total project costs. • Yield on cost typically ranges from 6.0% to 8.0% (7.0% applied). Net Present Value • Estimated by applying an appropriate discount rate to the annual project cash flows. The discount rate is used to bring future cash flows to a current net present value. • The discount rate reflects the weighted average cost of capital and accounts for industry standards for return to debt and equity. The discount rate for this project is estimated at 9.0%. Developer Return — with and without public investment — Yield on Cost approach • Project cost includes acquisition, site work infrastructure, architecture and engineering, vertical construction and others. • Annual Revenue assumes rental rates of $27.50 and $29 per sf and stabilized vacancy rate of 5.0%. The yield on cost target is 7.0%. Without public investment, this project calculated return on cost is 5.68%. In order to get to the 7.0% cost hurdle, the project needs an upfront investment of $1.34 million. The second approach takes the project's ten year cash flow starting with construction costs, integrating net operating income, escalated at 2% per year and also integrating a disposition value in year ten. Based on those cash flows and a discount rate of 9% they estimate a net present value gap without public investment of -$1.01 million.