HomeMy WebLinkAbout06-12-2012 Council Economic Development CommitteeAGENDA
City Council Economic Development Committee
Tuesday, June 12,2012
10:30 a.m.
Helling Conference Room
City Hall
1. Call to Order
2. Consider a recommendation on a Proposal from MDK Development.
L.L.C. for a Medical Office Building in the
Towncrest Urban Renewal Area
3. Staff time
4. Committee time
5. Other business
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��'CITY OF IOWA CITYM E M 0 RA N D U M
Date: June 8, 2012
To: City Council Economic Development Committee
From: Wendy Ford, Economic Development Coordinator ,
Tracy Hightshoe, Community Development Planner
Re: Request for financial assistance for redevelopment of Towncrest properties:
1020 William Street and 2611 Muscatine Avenue
We have received a request for financial assistance from Kevin Digmann, manager of MDK
Development, LLC, for a redevelopment project located at 1020 William Street and 2611
Muscatine Avenue in the Towncrest Urban Renewal Area in Iowa City. This is the current
location of Sinclair Gas Station and a building directly to the south, owned and used mostly for
storage by ACT. The proposal is for a one-story medical office building with 14,850 square feet.
The proposed building, shown in the following materials will provide retail/medical office space
for three building occupants with 6,605, 5,000 and 3,244 square feet, respectively.
The estimated project cost is $5,070,000 and includes the cost of land and business acquisition,
site remediation of underground storage tanks and the demolition of existing buildings on the
site and construction. The project would increase the assessed valuation of the property from its
current $885,880 to an estimated $2,127,240. The current property taxes paid annually on the
property are $36,102. The total anticipated property tax with the completed project is $86,693
annually, and is estimated to increase approximately 2% every other year thereafter.
The owner will be providing the required parking spaces for the medical office users and will
accommodate that requirement with a total of 58 parking spaces on site, next to, or behind the
building. In addition, the owner will be dedicating right of way on William Street in order to create
an additional 22 on street spaces perpendicular to the building (see site plan attached).
The developer is formally requesting $950,000 in financial assistance for the project. In 2011,
the City Council created a set of financial programs to assist projects in the Towncrest Urban
Renewal Area (URA) (resolution #11-264). Because this is among the first significant private
projects in the Towncrest URA, several financing tools are available:
Towncrest URA Gap Financing for Catalyst projects $300,000
Towncrest URA Predevelopment Design and Environmental
Assistance (a matching grant, not to exceed) 25,000
Tax Increment Financing 625,000
Total $950,000
The annual TIF increment generated by the project will be enough to repay the City's bonded
indebtedness within 20 years. The developer has agreed to a minimum assessment agreement,
which will guarantee the property taxes required to retire the City's indebtedness.
The following analysis examines this proposal against the City Council's economic development
process and policies which were adopted on December 6, 2011.
June 8, 2012
Page 2
Financial analysis
The City of Iowa City economic development process and policies are intended to establish
standard procedures and a framework for granting financial incentives. This is intended to
ensure that the City's financial resources are used as efficiently and effectively as possible. The
focus of the financial incentives policy is achieving community objectives. Following is a
summary of the consistency of the proposed Medical Office Building redevelopment project at
Muscatine Avenue and William Street with the stated community objectives of the economic
development process and policies:
1. Increase taxable valuation of property, especially commercial and industrial. This
Towncrest project will be a one-story medical office building on two parcels of land at
Muscatine Avenue and William Street. The total estimated assessed value of the
property will increase from $885,880 to an estimated $2,127,240.
2. Increase the number of jobs which have wages and fringe benefits exceeding the
county median. This project ensures that the high quality jobs of optometrists and
dentists are retained in the Towncrest area. The investment in the medical office building
will make the area more attractive for further investment by others, including those
already located in Towncrest. One goal of the Towncrest Urban Renewal Plan is to stem
the tide of the medical offices choosing to leave and relocate on the fringes of Iowa City
or in neighboring communities.
3. Redevelopment of blighted property. The two parcels that comprise the project site
are a gas station and a former office building turned storage facility. The Williams Street
property meets the State Code definition of blightedness which states "faulty lot layout in
relation to size, adequacy, accessibility, or usefulness," because the property line
separating it from the next building goes through a shared wall and will require
substantial remediation to correct. The Muscatine Avenue property may fit the definition
because of "insanitary or unsafe conditions; deterioration or other site improvements"
depending on the status of the underground gasoline storage tanks there (State Code
403.17).
4. Desirable projects which might not otherwise occur without financial incentives.
The Towncrest Urban Renewal Plan cites medical office buildings as desirable projects
for the area. Because of the high cost of land and gas station business acquisition,
coupled with site remediation of underground storage tanks and the demolition of
existing buildings on the site, this project would not occur without incentives.
Standard operating procedure for requests for economic development financial
assistance
The request for financial assistance for The Towncrest Medical Office Building has been
through the standard operating procedure Council established for economic development
financial assistance. In terms of intake and evaluation, we have been involved for months
negotiating project elements with the developer. We have worked with the developer to
maximize the use of the space considering parking needs and user requirements. We have
completed an in-depth financial gap analysis of the project using the services of the National
Development Council, which is summarized in a following attachment.
The due diligence phase of our evaluation is aided by the fact that the applicant is a well-
known Iowa City developer with whom the City has worked on other projects for more than five
years. For this particular project, we encouraged the developer to consider a project in
2
June 8, 2012
Page 3
Towncrest because we felt they had the expertise, energy and enthusiasm to carry off a
Towncrest Urban Renewal catalyst project.
The development agreement, when presented to the City Council, will include performance
measures that require the developer to complete the building in accordance with the concept
plan proposed. The developer will agree to a minimum assessment agreement and provide
additional securities as stipulated in the development agreement.
Gap analysis and additional evaluation criteria
The developer has been required to produce a gap analysis of why the $950,000 in requested
financial assistance is necessary. The City Council's stated goal is for the City's financial
assistance to be the last dollars in, and that "but for" the City's assistance the project would not
happen. The gap analysis is summarized in the attached report from the National Development
Council.
The City Council established several goals, objectives, and strategies for TIF projects. The
developer's equity is required to be at least equal or exceed the amount of TIF funds made
available for the project, and this has been achieved on a roughly 20% TIF funds request to
80% developer equity basis.
The requested City funding can be assembled with $300,000 from the Towncrest Gap Financing
for Catalyst Assistance program and $25,000 from the Predevelopment Design and
Environmental Assistance program established in 2011, with the remaining $625,000 from the
sale of bonds to be repaid to the City by Tax Increment Financing. It is a goal but not a
requirement for TIF funding to not exceed more than 50% of the TIF increment created. This
project will require most of the TIF increment created by the project over 15 — 18 years to fund
the TIF portion plus related finance charges to the City, depending on how the taxable
assessment exceeds the minimum assessment in the development agreement.
The eligibility goals, objectives, and strategies of the City's economic development process and
policies call out office uses, retail uses, and housing which support stated economic
development goals as eligible TIF projects. Of these, this project's proposed medical offices
make it eligible.
Summary
The request for financial assistance for the Towncrest Medical Office Building redevelopment
project has been submitted for your review according to the City's approved economic
development process and policies. Staff recommends approval of the request. If approved at
your June 12 Economic Development Committee meeting, it will be forwarded to the City
Council, along with a Development Agreement for consideration at the June 19 City Council
meeting. Staff and the applicant will be available at your June 12 EDC meeting to answer any
questions.
Attachments:
1. Developer's Request for Financial Assistance, 2. Financial Gap Analysis
cc: Tom Markus
Geoff Fruin
Kevin O'Malley
Jeff Davidson
Kevin Digmann
3
MDK DEVELOPMENT, L.L.C.
711 South Gilbert St.
Iowa City, IA 52240
June 4, 2012
City of Iowa City
c/o Jeff Davidson, Director of Planning and Community Development
410 E Washington St.
Iowa City, IA 52240
RE: Towncrest Redevelopment Project
Dear Jeff,
MDK Development, L.L.C., whose main principals are Mike Hodge, Dave Hodge, and Kevin Digmann, are
requesting the City's financial assistance for a new 14,850 square foot medical/office building with 80
parking spaces in the Towncrest area. We currently have under contract 102 Williams St. (ACT Building)
and 2611 Muscatine Ave. (Sinclair gas station). Our plan is to demolish the existing buildings and site.
The contractor for the project will be Hodge Construction and Architect will be Neumann Monson. The
building will be completed as a commercial condominium and the spaces may be sold to end users. The
total project cost is estimated at approximately $5,000,000. Since this project is a redevelopment of
two properties into a green field, we are seeking City assistance of $950,000 for pre -development
expenses and to reduce the acquisition and demolition cost to a comparable commercial lot in the Iowa
City area. The current assessed value of existing sites combined is $876,950. Enclosed you will find:
1. Building Elevation
2. Site Plan
3. Summary of Land cost and Comparable other sites
4. Cost estimate for the Project
5. Preliminary Construction Schedule
6. Commitment Letter from Hills Bank
This project would be a great start to the City's overall plan for redevelopment of the Towncrest area. If
approved, we would begin construction this fall with occupancy fall 2013. If you have any questions
please call me at 631-0548 or email kdigmann@yhoo.com.
Sin r ,
i
K ann���
Manager, MDK, Development, L.L.0
Proposal for the Redevelopment
of 1020 Williams St. & 2611 Muscatine Ave.
Request for financial assistance totaling $950,000 through Tax Increment Financing and
Towncrest Development incentives.
1) Signed letter of interest submitted by the Developer. Attached.
2) Project Summary
Developer plans to acquire 1020 Williams St. and 2611 Muscatine Ave., demolish
the existing on site structures and build an approximate 14,850 sf building. The
proposed new building will be one story with approximately 58 ground level
parking spaces. There will be approximately 22 on street parking spaces. The
exterior fagade, brick veneer, will meet the Towncrest Design Plan requirements.
3) Site plan with front elevation. Attached
4) Description of the Development Team
Project Owner, Developer and General Contractor:
Hodge Construction, Mike Hodge, 711 S. Gilbert St., Iowa City, Iowa.
319.354.2233, mehodge@ia.net.
Architect: Neumann Monson, 221 E College St., Suite 303, Iowa City, IA 52240
5) Evidence of site control. Evidence provided to City previously, now in possession of
Developer.
6) Potential issues related to zoning, environmental hazards, utilities or other
infrastructure issues
Zoning: Setback of less than 10 feet is requested. Exact amount of setback to
be determined with final site plan. Mixed use zoning required for a setback less
than 10 feet. Current zoning is CC-2.
Environmental hazards: Project involves removing underground petroleum
storage tanks.
RE
7) Development budget. Attached
Summary of capital funding sources. Included is lender commitment.
Funding
Funding Source & Type of Funds:
Amount
- - -
Bank: _Hills Bank
$3,680,000
Applicant Contribution of Equity (private)
i $440,000
- _
Other Private Resources
$0
(please list)
City of Iowa City
$950,000
TOTAL — Must equal "use of funds"
$5,070,000
Based on conversations with local lenders an Urban Renewal Revenue Note is
not feasible as the developer is not able to guarantee the financial gap that
exists with this project.
Up to $25,000 of the $950,000 in pre -development expenses requested for
environmental assessment and architectural expenses incurred before
construction commences.
Operating proforma. NA. Three commercial condominiums will be sold upon
completion of construction.
10) The end users of the building will be for medical or office use. The also may be
a small retail users.
11) Preliminary schedule for the development. Attached.
SIGN
S16N
SIGN
SITE PLAN
1" = 40--0" -
HODGE TOWNCREST
-U-,
PARKING SUMMARY:
80 provided
55 req'd for spaces A & B combined
25 available for space C
N
C�
NEUMANN MONSON, PC
SUBJECT SITE
Location
2611 Mucatine Sinclar Station
1.020 Williams (ACT Building)
Total site cost
Demolition and site preperation
Cost to ready site to shovel ready
City assistance
Net Land Price
COMPARABLE SITES
Location
Lot 49 Old Town Village
2507 N Dodge St
2509 N Dodge St
Towncrest Medical Plaza
Land Pricing and Comparisions
Parcel size
Price
Price/sq ft
17,500
$
537,500
$ 30.71
28,263
$
750,000
$ 26.54
45,763 $ 1,287,500
$ 275,100
45,763 $ 1,562,600
$ (950,000)
45,763 $ 612,600
Parcel size
50,965 $
51,401, $
87,120 $
Asking Price
650,000
295,555
500,940
$ 28.13
34.15
13.39
Price/sq ft
$ 12.75
$ 5.75
$ 5.75
Average price per sq ft for other sites 189,486 1,446,495 $ 7.63
Hodge Construction - Towncrest Development
Estimate of Probable Cost
Demolition and Site Preperation
Environmental Assessment
Demolition
ACT Building
Relocate electrical service
Reconstruct Exterior Wall
Gas Station
Canopy Demolition
Underground Storage Tank Removal and Hauling
Paving
Hauling and Dump Fees
Contaminated soil removal and replacement
Retaining Wall
Total Demolition and Site Preparation
Costruction cost of New Building
Sitework
Walks
Paving
Curb
Lighting
Landscaping Allowance
Site Amenities Allowance
Utilities
Building Cost
Construction Cost - Shell & White envelope
Contingency @ 10.0%
Total Construction Cost
Expenses
Survey & Soil Borings
A/E Fees
Printing
M isc.
Total Costruction cost of New Building
Land Cost
Developer Fee -5%
Construction Cost - Tenant Improvements
Final Total Project Cost
Cost Per Square Foot
Q U $/U Subtotal Total
$ 25,000
148,800 cf $ 0.48 $ 71,000
$ 10,000
1,010 sf $ 20.00 $ 20,200
36,000 cf $ 0.48 $ 17,300
6,185 cf $ 0.24 $ 1,500
$ 2,000
3,590 sy $ 8.85 $ 31,800
1,500 cy $ 16.05 $ 24,100
$ 50,000
1,200 sf $ 18.50 $ 22,200
$ 275,100
Q U $/U Subtotal Total
5,600 sf $ 3.50 $ 19,600
28,000 sf $ 3.73 $ 104,400
1,400 If $ 22.50 $ 31,500
$ 20,000
$ 20,000
$ 15,000
$ 25,000
$ 235,500
14,850 sf $ 115.00 $ 1,707,750
$ 1,707,750
$ 222,000
$ 2,165,250
$ 10,000
$ 216,525
$ 20,000
$ 5,000
$ 251,525
$ 2,691,875
$ 1,287,500
$ 198,969
14,850 sf $ 60.00 $ 891,000
$ 5,069,344
$ 341.37
TOWNCREST CONSTRUCTION SCHEDULE
MONTH
DESCRIPTION OF WORK
June - 2012
City to approve TIF Assistance for the project
July
Architectural Plans begin
August
Bid Project and get final cost for end users to approve
August
Sign Final contracts with end users
Sept
Close on Properties, Begin demolition of Properties
Oct
Begin Sitework and Underground Utilities
Nov
Foundation & Electrical Groundwork
Dec
Building Structure, Exterior Skin, M/E Rough -In
Jan - 2013
Building Structure, Exterior Skin, M/E Rough -In
Feb
Building Structure, Exterior Skin, M/E Rough -In
March
Interior Construction, M/E Rough -in
April
Interior Construction, M/E Rough -in
May
Interior Finishes
June
Interior Finishes
July
Interior Finishes
August
Punchlist & Misc Finish Items
September
Occupancy
Hills Bank
and Trust Company
April 25, 2012
City of Iowa City
410 E Washington St
Iowa City IA 52240
RE: Hodge Construction Company
711 S Gilbert St
Iowa City IA 52240
131 Main Street
Hills, Iowa 52235
319-679-2291
After reviewing financial information and the proposed plans for construction in the Towncrest area of
Iowa City, Hills Bank is pleased to provide a commitment of financing to Hodge Construction Company
and or related entities for construction purposes. Loans to the company would not exceed 80% of the
appraised value of the facilities upon completion. A construction loan will be secured by a first
mortgage on the property and will also require personal guarantees. At the present time, the loan
would bear an interest rate of 4.5% per annum for one year from closing. The commitment of this rate
will be good for 45 days from the date of this letter.
Upon completion of the project, it is anticipated that any part of the facility that is retained by the
company will then be amortized over a period not to exceed 25 years. The interest rate for permanent
financing will be determined at the time of extension.
If you have any questions or if there is any way that I can be of additional assistance to you, please feel
free to contact me.
Sincerely,
Tim N. Smith
Senior Vice President
TNS/cem
Hills • Iowa City • Coralville • North Liberty • Kalona • Cedar Rapids • Lisbon • Mount Vernon • Marion • Wellman
hillsbank.com 1-800-445-5725
MEMORANDUM
Date: June 6, 2012
To: Jeff Davidson, Director, Planning & Community Development, City of Iowa City
From: Tom Jackson, Director, National Development Council
Raquel Favela, Director, National Development Council
CC: Steve Long, Community Development Coordinator, City of Iowa City
Tracy Hightshoe, Community Development Planner, City of Iowa City
RE: Review of Request for Financial Assistance for Towncrest Medical Office Building Development at
Muscatine Avenue and Williams Street
At your request, NDC has reviewed the request for $950,000 in gap financing assistance submitted by MDK
Development LLC/Hodge for the multi -unit, medical office condominium building (the "project") proposed for
the corner of Muscatine Avenue and Williams Street in the Towncrest redevelopment area. NDC's review
concluded with an analysis of the updated materials submitted by MDK/Hodge and transmitted by City staff on
June 4, 2012. NDC also reviewed several preliminary proposals for the project site and met with Kevin Digman
of MDK/Hodge and City staff on multiple occasions to discuss the project's specifics, including project costs,
financing sources and condo sale scenarios. Follow-up conversations by phone and email were conducted to
secure additional information for our review.
As proposed, the project will purchase, demolish and remediate the parcels of land located at the corner of
Muscatine and Williams that are currently occupied by a Sinclair gas station and a building owned by ACT. A
14,850 medical office building will be constructed on the site at a total project cost of $5,069,344. The
developer expects to sell the building to interested medical practices as three (3) condo units. While executed
sales contracts for the condos and an as -complete appraisal are not yet available, information submitted by
the developer includes evidence of a preliminary financing commitment from Hills Bank for up to 80%of the
as -complete appraised value of the project with an interest rate during construction of 4.25%. MDK/Hodge
has estimated the total bank financing at $3,680,000 and has offered to invest owner equity in the amount of
$440,000. To complete the financing sources in an amount equal to the proposed total project cost, the
developer has requested $950,000 in gap financing assistance from the City.
Given the developer's estimate of total construction financing and the bank's underwriting criterion of an 80%
maximum loan to value ratio, an as -complete fair market value of $4.6 million has been calculated for the
project. Assuming that the total sales price of the three (3) condominiums would match this value — and given
the proposed owner equity and City assistance amounts proposed by the developer, sources and uses and
associated developer returns are estimated as follows:
Total Project Cost $5,069,344
Sources
Bank $ 3, 680,000
Developer Equity 440,000
City Assistance 950,000
Total Sources $5,070,000
NATIONAL UEv, E LOPMENT CO11 UNCIL 112
Towncrest Medical Office Building— MDK/Hodge
June 6, 2012
Page 2
Sale Price
$4,600,000
Less 6% commission
276,000
= Net Sales Price
$4,324,000
Less Bank payoff
3,680,000
= Sales Proceeds
$644,000
Less Costs in excess of Sales Price
469,344
= Net Proceeds (taxes excluded)
$174,656
If estimated construction interest, based on the bank's preliminary rate and the developer's proposed
schedule, of approximately $95,000 is added to the expenses, the developer's requested developer fee of
$198,969 is added to the proceeds, and the $656 difference between the developer's sources and uses is
added back into the mix, the net proceeds total (rounded to the closest thousand) comes to $279,000. This
would provide the developer with a profit on the $4.6 million sale price of approximately 6.1% or on total
project costs of approximately 5.4%. Either method provides a measure of the developer's return that is
reasonable.
Conclusion: the project as presented demonstrates a need for gap financing in the requested amount of
$950,000. If final project costs, bank terms, executed sales contracts or appraised values differ substantially
from the numbers outlined above, NDC will update this review as requested by the City.
NATIONAL DEVELOPMENT COUNCIL I