Tax-Exempt Review Committee

Boards, Commissions & Committees

Tax-Exempt Review Committee - October 23, 2018 Minutes

Regular Meeting Tuesday, October 23, 2018

The October meeting of the Tax Exempt Review Committee of the City of Fargo, North Dakota, was held in the City Commission Room at City Hall at 1:00 p.m., Tuesday, October 23, 2018.

The committee members present or absent are:
Present: Robert Wilson, Jim Gilmour, Jim Buus, Kent Costin, Chuck Hoge, Dave Piepkorn, Mayor Tim Mahoney, Bruce Grubb, Jessica Ebeling, Mark Lemer, Ben Hushka, Erik Johnson
Absent: Jackie Gapp, Joseph Raso
Others Present: Chad Peterson, Austin Morris, Mike Allmendinger, Erin Anderson, Kati Wilcox

Commissioner Piepkorn called the meeting to order at 1:00 p.m.

Bruce Grubb made a motion to approve the minutes from the September meeting held on September 25, 2018. Jim Buus seconded the motion, which carried.

Review and Approve Changes to PILOT & TIF Policies and Downtown Housing Incentive Area Map
Jim Gilmour began by reviewing comments received from the public regarding draft policies for the TIF and PILOT programs. A memo seeking comment was posted September 29, 2018. Mr. Gilmour felt some feedback provided would be beneficial to implement with the policy changes but wanted feedback from the committee on others.

TIF Policy Changes:
• Either sidewalks/bike paths or transit should be available
• Added “good design characteristics” as an objective. This brings the total number of objectives to nine, five of which must be met for application approval

Jim Buus opened discussion on the subjectivity of the phrase “good design characteristics.” He asked if more clarification was necessary, and which person or entity would make that decision. Jim Gilmour explained the benefit of leaving some gray area in the language. Developers have an idea of what is expected and the committee still has flexibility to decide if the attributes fit the current needs of the area/project.

PILOT Policy Changes:
• Add the language “as required by a recorded Land Use Restrictive Covenant.” Keep all other wording in the policy.

• Add “to create attainable housing options, non-subsidized, for both sale and rent.”
• Change Policy #5 to match the TIF policy regarding land write-down.

Jim Gilmour then reviewed the individual comments from Dan Madler from Beyond Shelter, Mike Allmendinger from Kilbourne Group, and Austin Morris from Enclave Development.

Dan Madler expressed concern over an approximate $5,000 for “but-for” testing, and the effect this additional fee has on low-income housing tax credit (LIHTC) projects. Commissioner Dave Piepkorn feels the city has a responsibility to provide low-income housing and therefore should waive the cost of the “but-for” test, as the fee was initially put in place for business or commercial entities. Jim Gilmour stated there are only about three LIHTC applications per year, which also tend to be less complicated to review so the city could cover those costs. Kent Costin suggested keeping a modest fee on applications from for-profit organizations to relieve some of the city’s burden.

Mike Allmendinger asked for clarification on potential claw backs on “significant higher returns than projected.” Jim Gilmour explained the language is purposefully lax to leave openings for case-by-case discussion on individual projects.

Austin Morris provided several comments and questions regarding the changes, including the length of time each would be in effect. After some discussion amongst several members, it was decided that no policy could be guaranteed beyond two years due to the changes in both the city commission members, the needs of the city, and state legislation. The individual agreements with developers will also trump any changes to the policy, which alleviates concern of sudden changes during projects.

Because most of Mr. Morris’ comments were specific to his organization’s needs, Commissioner Dave Piepkorn suggested Jim Gilmour meet individually to review input and answer questions. Jessica Ebeling pointed out how briefly the comments were discussed at the Tax Exempt Review level and suggested a follow up after Mr. Morris meets with Mr. Gilmour to ensure all his points were taken into consideration. Commissioner Piepkorn agreed. Any further discussion can be had one-on-one, and then discussed publicly at future meetings.

County Action on the Edge 2 PILOT Application
Jim Gilmour explained the city commission voted to approve the PILOT Application from Commonwealth Development; however, the county has not yet taken action. A motion to both approve and deny the application failed for a lack of second. Cass County is comfortable approving the PILOT for five years, but not 15. Erin Anderson from Commonwealth Development and Cass County Commissioner Chad Peterson were both present for discussion.

Commissioner Piepkorn began by stating this application is for low-income housing and needs to be treated differently than a business application.

Commissioner Chad Peterson stated an issue he has is the $776,000 developer fee, which he believes to be too high. This project has a good ending result in a low-income housing complex; however, it is not a charity and approving a request for a tax exemption is not necessary with a profit as high as what is projected. He believes a five-year exemption is appropriate due to the higher costs of redeveloping downtown versus starting new in green field areas, but is struggling to support incentives for a for-profit apartment complex with close to at-market rents.

Commissioner Piepkorn explained developers need these credits from local support to receive necessary financing, which is difficult to come by. Local leaders need to commit to making low-income and work-force housing a priority in this area or there will be none available.

Commissioner Peterson questioned if there was a better way to provide affordable housing. He believes revitalizing downtown has been a great success and suggested redevelopment projects begin moving further south past 13th Avenue, down University Drive South.
Commissioner Piepkorn explained the importance of continuing to do what has been successful. Downtown Fargo is the heart of the city – possibly even the state – and we need to work to keep it this way. People who work downtown should be able to afford to live downtown as well.

Mayor Tim Mahoney addressed Commissioner Peterson’s concerns. He stated other projects currently in progress could bring an additional 3,000 to 5,000 people downtown for employment. While there may currently be a 12% vacancy rate, the most recent downtown study does show a need for more affordable housing in the near future. The income brackets for the Edge 2 would provide housing options for those working in service-oriented jobs, which are common downtown.

Mayor Mahoney emphasized that the PILOT status itself is critical for the project to begin. Without approval, the project would not go forward. The Renaissance Zone alone has proven successful by decreasing the overall tax burden in the city and the county by 4%. If the city begins shutting down PILOTs and denying incentives, developers will take these projects elsewhere and we will lose that success. Mayor Mahoney encouraged Jim Gilmour to meet with Commissioner Peterson and discuss his objections.

Mr. Gilmour explained the federal rules require the project to stay low income for 15 years, with the state regulating an additional 15 years following, or 30 years total. There are risks involved with that large of a timespan so the development fee is built in as added financial protection. He offered to send the financials from the Edge 2 Flats to the city’s financial advisor at PFM to review the overall rate of return with and without county participation. Commissioner Chad Peterson agreed the more information provided the better.

Mr. Peterson continued on to state that the argument over approving the PILOT application has become frivolous at this point because the actual amount of tax dollars is minimal in relation to the city and school board. However, it is principled argument and he believes it is time to focus attention, find successes, and achieve balance elsewhere. Commissioner Peterson also stated he feels he is an “outsider” as a county commissioner meddling in city business. Commissioner Dave Piepkorn urged the importance of all entities being on the same page and sending an appropriate message about low-income housing and housing for homeless persons in downtown Fargo as a group.

Kent Costin stated PFM is tasked with analyzing cash flow when completing “but for” tests, which means they would be calling attention to the $700,000 development fee if it appears unnecessarily high. Jim Gilmour agreed this is correct and the information can be sent to PFM if Commonwealth Development is willing to provide it.

Mr. Gilmour then inquired on the difference in property taxes if the project were developed by a non-profit, versus the for-profit that is Commonwealth. Ben Hushka calculated an estimated tax bill of $30,000 with full county participation, versus only $14,481, or about half, if the project was developed by a non-profit.

Erin Anderson from Commonwealth Development approached the group for comment. She explained the average rent for the building is $703, which averages at 53% area median income. The Affordable Tax Credit Housing guidelines considers this low income. The state also restricts profits at 10% and the $776,000 developer fee is about 7%. A non-profit entity could potentially pursue the same percentage in fees due to having the same risks and overhead involved in this project. In addition, without county participation and an $11,000 decrease per year in the amount of incentive, the project would need an additional $300,000 with their first mortgage to fund the project. This would also require Commonwealth Development to defer $484,260, or 62%, of the total development fee. Erin Anderson explained the committees within her organization would not move forward with this project with this low of a fee, nor would they be able to obtain approval from any investor or North Dakota Housing Finance Agency (NDHFA). Any deferred fee over 25% is considered an additional risk or liability.

Dave Piepkorn opened the floor to comments and questions. Mayor Mahoney urged a subgroup meet to review the application and the numbers in more detail, again focusing on the need for this type of housing be available in Fargo. Commissioner Chad Peterson explained all county commissioners would approve a five-year application. Robert Wilson agreed, quoting a prior discussion with Chairman Steen: “Five years, yes. Ten years, maybe. Fifteen years, no.”

At Jim Gilmour’s request, Erin Anderson explained the importance of maintain level expenses spread over 15 years as NDHFA does not allow for varying expenses. If the county commission votes to approve the PILOT for either 5 or 10 years, the total exemption given would still need to be averaged over the entire 15-year span.

Austin Morris from Enclave Development approached the podium to emphasize that the $776,000 development fee is not total profit. There are significant costs that are not recoverable with low-income housing projects, particularly with the staffing time necessary in lengthy approval process. Mr. Morris also explained the return on investment for LIHTC projects is not significant, and the development process is riskier and more challenging. This in combination with the actual profits being minimal is the reason why there are so few applications filed each year.

Commissioner Piepkorn thanked Austin Morris for his feedback and adjourned the meeting at 2:08p.m., Tuesday, October 23, 2018.