I

City of Grand Forks

GRAND Staff Report
FORI€
4 Committee of the Whole - April 10,2023
City Council - Ap ril 17,2023
Agenda Item: Payment In Lieu of Taxes ( PILOT) Request from Enclave Companies
Prepared by: Todd Feland, City Administrator
Ryan Brooks, Deputy City Planner
Staff Recommended Action: Set May 15,2023, as the date to hold a public hearing and
consider approving the application pursuant to N.D.C.C 40-57.1.

April 10, 2023 -

April 17,,2023 -
BACKGROUND:
Enclave Companies is proposing to build an approximate 100,000 square foot industrial building
named The Exchange. The Exchange property site is approximately 10.38 acres located at 4425
36rh Avenue South in the strategic infrastructure groMh area of I29 South area. Enclave
Companies would construct and maintain ownership ofThe Exchange with the intent of leasing
this industrial buitding to three to four tenants.

The Exchange project provides strategic industrial building inventory that witl be generally turn-
key lbr prospective industrial customers looking at the Grand Forks regional market. The Grand
Forks regional market lacks available industrial building space, which is a competitive economic
development disadvantage fbr the Grand Forks regional market.

The Enclave Companies PILOT Pre-Application provides the estimated value of the land is
$850,000 and building improvements is $l I million for total project investment of
approximately $ l2 mitlion.

Enclave Companies original request was for a 20 yearll00%o PILOT tax exemption. City of
Grand Forks (City) administrative staff lbllowed up with the City's third-party financial advisor
Baker Titly and specifically Director Mikaela Huot to review the financial pro forma and to
provide a financial analysis ofrhe Exchange project. Based on Ms. Huot's financial review and
due diligence analysis, a suggested property tax incentive that includes a 100% exemption for a
five-year period is supported for The Exchange project.

By providing the PILOT incentive to The Exchange project the City will have helped facilitate
the investment of strategic industrial buitding capacity for the Grand Forks regional market. The
City will not be required to invest City funds to provide this indusrrial building capacity and will
only permit the delerral of property taxes fbr five years for the building improvimints.-

In advance of the City council public hearing on May 15, 2023, city staff will provide the
appropriate legal notices and individually notifu the North Dakota Department of Commerce,
Grand Forks School District, Crand Forks County, and Grand Forks Park District of The
Exchange project and public hearing. The City administration will provide a recommendation to
the City Council whether the PILOT exemption is in the best interest of the City as part of the
City Council's review and final decision.

ANALYSIS AND FINDINGS OF FACT:

o This request complies with N.D.C.C. 40-57.1, which provides for incenlives in the form oi
property tax exemptions tbr new or expanding businesses and PILOT.
o The No(h Dakota Department ol Commerce, Grand Forks School District, Grand Forks
County, and Grand Forks Park District will be individually notified ofThe Exchange project
and if the North Dakota Department of Commerce determines the projecl exceeds one billion
dollars, then it would hold a public hearing.
o Since the PILOT exemption is not greater than five years. the Grand Forks School District
and Grand Forks County do not have to approve the exemption.
. The applicant is requesting a PILOT exemption of five-year/l00%o. The City has previously
approved similar tax exemptions of five years and 100% to include Renaissance Zone and
Business Park projects.
. The PILOT exemption is fbr the building improvements only and not the land.
o Baker Tilly has provided third party due diligence support tbr the requested PII.OT
exemption.
o Ms. Huot of Baker Tilly and representatives of Enclave Companies will be available at the
City Council meeting for lbllow-up.

SUPPORT MATERIALS:
. PILOT Financing Pre-Application Application.
o The Exchange Project Overview.
o Baker Tilly Memo for Review from Mikaela Huot, Director, dated April 6,2023.
o Procedure for PILOT - E-Memorandum from City Attomey's Office, dated 2/l0l2l.
 City of Grand Forks
TarJ,nerement F i na n ci n g Pre -Application
u,k L^ l;j. lar<S C 21uo? 4 1 L3
Applicant lnformation:
Austin Morris
Applicant Name:
Austin Morris
Primary Contact:
300 23rd Ave E, Ste: 300, West Fargo, ND 58078
Address,
_.
Pn one:
7014784350
Ema.l.
Austin@Enclaveoompanies.com

LLC
Legal Entity Type:

Project lnformation:
4i155 36th Ave S, Grand Forks, ND 58201
Address of proposed project:

Proposed project timeline/milestones:

Proposed Construction Start Date: 6i/1/2023

Proposad Construction Complotion Date: 5/1/2025

property: 420.00
Current tax roll value of S

Estimated value of propeny upon completion of proposed project: -850,000

S (land)

-11 ,000,000
s (improvements)

Attach brlef desc.lptlon of proposed project; include any renderings or preliminary plans that are available.

TIF lnformation

Tlt Bond On TIF Exemption

Pf ro"
Slum/Blight TIF OR
x Economic Development TIF svol t lofo
Will requested TIF exceed 5 years? YES X,uo
+fi1*
The undeaigned certilies thot oll inlormotion provided in this prc-opplicotion is true dnd cotrect to the best oI the undersigned's
knowledge, ond thot the unde5igned is o duly outhodzed rcNesentotive of the opplicont. The opplkont ogrces to proyide
odditionol inJormotion os moy be requested by the City oftu the filing of this opplicotion.

04t03/2023
Signature of Applicanf s Representative Date
Sub e tPr

t '1425
36th Ave S - The Exchange
Grand Forks, ND 58201 - Nonh Dakota Area
****

LOCATION
Distan.e to Airport: 8.7 mi
Distar.e to Seaportl 648.4 mi
Distar:e to Rail Terminal: 28.4 mi
Populdtlon 500 Mile Radius 13,949,000
Populaiion 250 Mile Radius 1,970,153
I
-Jr- I
Populiiion 50 Mile Radius:

owNr. q
153,862

Arthur Greenberg Jr

PROPERTY
Type: Warehouse Tenancy Multl
Park:
RBA: 105,60C SF Col!mir Spa( s{l'w x 50'd
Year BuilURenov 2020 Truck Wells: Ngno
Ceiling Height: 24', Rail Served: None
Docks: 8 ext Sprinklers: ESFR
Orive lns: 4 tori2'w x 16'h Power:
Truak Court: Cranes:
Land Acres: 10.3E t.l Levelators: None
Offce: Taxes:
Parking 40 Sur{ace Sfaces ar6 availarle; Ratio of 0 8i 1,000 sF
Featu.es: Signage, Storage Space

VACANCY ASKII G RENT PER j! 12 M . LEASING ACTIVITY SF

Cunenr: 00/o Cune $7.50 Subjecl Propertyl
Last Qr-rarter: 0./o Last ' s7.s0 P6ers Total:
Ysar Ago: '100% Year L $7.s0 Peers Count: 3
Peers: oo/" Peer! Peers Avgl
Peer Submarkets 9.Oo/o Peer bnrarkets s9.94 Peer iubmark€ts Total 319,456
Peer Submarkets Avg: 464

AVAILABLE SPACE:

Currently No Ava;lable Spaces

() er.rcr-ave 1t13t2023
2023 CoSt Grou. - Licensed to Enct re Devetopment - 18112
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 G bakertil,ty
MUNICIPAL ADVISORS

Memo for Review

Todd Feland, City Administrator, City of Grand Forks
To:
Ryan Brooks, City Planner, City of Grand Forks
From: Mikaela Huot, Director

Date: April 6, 2023

The Exchange lndustrial Building Financial Review of Developer Request for

Subject
Assistance

Executive Summary
The City of Grand Forks (the "City") has been working with Enclave Companies (the "developer") on the
construction of an approximate 100,000 square foot industrial building referred to as the Exchange (the
"project"). The developer applied for a property tax incentive as a mechanism to create additional cash flow and
increase financial feasibllity following construction and lease-up/stabilization. The total development cost for
the project, including land acquisition and site development, is over $13.0 million.

The City has retained Baker Tilly to review the developer's financial information and assist with understanding
the project's need for a property tax incentive. The purpose of this memorandum is to provide a summary of
Baker Tally's review of the development project costs, sources of funds, proforma and supporting financial
information as provided by the developer to assist the City wlth making a determination if the project as
proposed would benefit from property tax incentive, as well as meet the merits of the City's policy objectives for
development incentives. When reviewing requests for financial assistance it is important to understand how the
level of financial assistance would impact the ability of the project to proceed as proposed and maximize new
value created on the current project site.

Following review of the request for assistance and supporting financial information, including conversations with
the developer and City staff, a recommendation can be made to provide some level of assistance to the project
As described further in the memo regarding revenue assumptions and revenue estimates, the amount of
assistance available would be less than what has been requested. ln addition, based on review of financial
need, the recommended term of assistance (number of years) would be less than what has been requested.
Based on review of the project related to need for assistance and for consistency with the City's financial
incentives guidelines, we can recommend 100% property tax exemption for up to 5 years.

Backq rou nd
Enclave Companies is propos ing construction of the Exchange as an approximate 100,000 square foot new
warehouse industrial bu ilding. The property site is approximately 10.38 acres located a|4425 36\h Ave S. The
developer submitted an applic ation for a property tax incentive to assist with cash flow in the early years of
project lease up and stabilizat ion. ln addition to acquisition, construction costs, tenant improvements, and
related sofuother costs, there are offsite improvements required for the site to be developable. Enclave
Companies would construct the building with plans to maintain long-term ownership. The new industrial space
would be leased to 34 tenants, subject to need for leasable space

The information provided here is of a general nature and as not intended to address the specific circumstances of any individual or entity. ln
specific circumstinces, the services oi a professional should be sought. Baker Tilly Virchow Krause, LLP kading as Baker Tilly is a member
oi if," !rob"t n"t rort of Baker Ta y lnternational Ltd., the members oi which are separate and independent legal entities. O 2018 Baker Tilly
Virchow Krause, LLP
Request for Assistance
The request for financial assistance is based on the construction of an approximate $13 million project that
would be funded by the developer through private funds and owner cash equity. The developer has requested
assistance to provide annual cash flow assistance and increase developer equity investor returns to a level that
would allow the project to proceed. The developer has cited extraordinary offsite improvement costs and
challenging market conditions as the driving need for assistance. Following review of the project financial
projections, we can support a portion of those costs as extraordinary and incorporating a need for assistance.
Property tax exemption would provade additional cash flow and increase feasibility. The sources and uses of
funds for the project are illuskated in the table below.

Sources and Uses

Sources Amount Uses Amount
Developer Equ itV 4,563,106 Property Acquisition 769,665
Private Financing I,47 4,341 Construction Site and Shell 8 037,281
City TIF Assistance . Off Site lmprovements 547 ,425
Construction Continqency 257 ,541
GC Fee 265,267
Pre Const Services 13,263
Consultants 321,000
City Costs '100,000
Financing and Funding Costs 898,560
Tl lmprovements 1 ,167 ,840

Other Soft Costs 38,774

Developer Fee 620,831
Total 13,037,447 Total 13.037,447

'TlF is proposed to be provided on an annual (lax exemption) basis, thercfore it is not shown as an uptront source

The developer's lnitial request for assistance was 100% property tax exemption for up to 20 years to reduce
operating expenses and provide for additional cash flow to meet debt coverage requirements and targeted
returns.

Proiect Financinq
There are generally two ways in which assistance can be provided for most projects, either upfront or on a
property tax exemption basis. With upfront financing, the City would finance a portion of the applicant's initial
project costs through the issuance of bonds or as an internal loan. Future revenues would be collected by the
City and used to pay debt service on the bonds or repayment of the internal loan. Wth tax exemption, the
developer would finance all pro.lect costs upfront and would receive an annual property tax exemptaon to
provide additional cash flow to repay the private financing (debt and equity).

Tax exemption is generally more acceptable than upfront financing for the City because it shifts the risk to the
developer. lf the tax exemption is less than originally prolected, the developer receives less and therefore bears
theriskof not being reimbursed the full amount of their financing. However, in some cases property tax
exemption may not be financially feasible. Wth bonds, the City would still need to make debt service payments
and would have to use other sources to flll any shortfall of revenues. Wth internal financing, the City
reimburses the loan with future revenue collections and may risk not repaying itself in full if revenues are not
sufflcient. The financing for this project would be tax exemption. The developer would finance all costs upfront
through a combanation of bank financing and equity and would receive annual property tax exemption.

Developer Pro forma But-For Analysis

Prior to approving a property tax incentive and providing public assistance for a project, the City must make
several findings, including the "but for" test which is to find: that the proposed development would not
reasonably be expected to occur solely through private investment within the reasonably foreseeable future,
therefore making assistance necessary for the project to proceed. The developer has provided financial
information showing that the operating cash flow requires annual property tax exemption financial assistance
from the Clty (tax increment) to decrease total operating expenses enough to allow projected revenues to
support annual operating expenses and debt service, while providing a reasonable return on investment. The

The information provided here is of a general nature and is not intended to address the specific carcumstances of any individual or entity. ln
speciflc circumstances, the services of a professional should be sought. Baker Tilly Virchow Krause, LLP kading as Baker Tilly is a member
oftheglobal network ofBakerTilly lnternational Ltd., the membels ofwhich are separate and independent legalentities O20l8BakerTilly
Virchow Krause, LLP
"but-for" test is used to determine whether a project is likely to proceed as Droposed without public financial
assistance.

To understand the project performance and returns shown by the developer we utilized the project cost and
operating information to generate ten-year operating proformas. The purpose of evaluating the operating
proformas, with and without assistance, is to understand the potential returns to the developer through the initial
development of the project and the operation of the enterprise over time. Metrics that we use when analysing
the developer's expected equity returns include cash-on-cash and internal rale of return. Cash-on-cash
measures the annual return an investor makes during that same year and is the basis for the developer's
revlew ofthe prolect and need for public assistance. lnternal rate of return (lRR) measures the long term
investment in the pro.iect, which is typically a developer's intent, and is based on total equity investment in the
prolect.

Generally, should anvestor returns lie below a reasonable range without assistance, we could assume the
project would not move forward without assistance. Should the returns lie within a reasonable range with the
assistance, we could assume the amount of assistance tested is appropriate for the project. All such estimates
should be viewed as general indicators of performance and not exact forecasts. The number of current and
future variables affecting these estimates are great.

The financial feasibility and level of financing (debt and equity) available for the project is ultimately based on
net operating income. Net operating income is calculated as revenues less operating expenses. The annual
revenues (lease rates) and operating expenses are based on current estimates of the market as provided by
the developer. Without property tax exemption, additional revenues or decreased expenses would be
necessary to provide for sufflcient annual cash flow as necessary to obtain a level of debt financing necessary
to fund all prolect costs. Subject to market conditions, the developer is limited in the ability to increase
revenues or reduce costs generally making this option infeasible.

Analysis of the developer's operating proformas with and without assistance provides a range of projected
returns to the developer. We made certain assumptions based upon the following information provided by the
developer: Substantial changes to these developer assumptions would likely have an impact on analysls of the
proposed project.
. debt and equity amounts
. lease rates for industrial tenants
. vacancy rates
. annual revenue and operating expense inflators
. estimated project costs including developer fee

We reviewed the developer's operating proforma forthe project using the developer's assumptions for square
footage and lease rates of the new building. The proforma is based on the real estate transaction only and not
the projected annual net revenues of the tenants. The developer is assuming a lease rate of $7.2slsquare foot
with 2.5% annual rent escalation with NNN lease to support annual debt service repayment. Financing terms
for the project include a maximum loan based on 65% debt flnancing and 35% equity. The anticipated loan
amount would be $8.5 million with 6.5% interest rate. Annual property tax exemption would provide additional
cash flow (reducing the property tax burden) that allows the project to better meet minimum debt coverage
ratios. The projected debt coverage ratio is projected to be below-market without assistance. The projected
rates of return without assistance are expected to be below market, thus justifying the need for public financial
assistance.

An additional measure of project feasibility is the Debt Coverage Ratio (DCR), which is a calculataon detailing
the ratio by which operating income exceeds the debGservice payments for the project. lf the DCR is greater
than 1.0 it indicates the project has operating income that is greater than the debt-service payment by some
margin; conversely if the DCR is less than 1.0 it indicates the project is incapable of meeting its debt-service
payment and would need to seek additional revenue sources to pay its debt. Typical lending standards will
require a DCR of significantly greater than '1.0 as a measure of cushion in the event actual revenues and
expenses are different than projected.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or enlity ln
specific circumstances, the services of a professional should be sought. Baker Tilly Vi.chow Krause, LLP trading as Baker Tilly is a member
of the global network of Baker Tilly lnternational Ltd., the members of which are separate and independent legal entities. @ 20'18 Baker Tilly
Virchow Krause. LLP
Based on the developeas stated position and analysis of the supporting information, our opinion is the City
could reasonably make a finding that public flnancial assistance through a property tax exemption would be
necessary for the project to proceed as proposed. Our review of the project financials is to assist with making
the determination that 1) public assistance is necessary and 2) an appropriate level of assistance. When
considering an appropriate level of public assistance for the project, we recommend focusing on public financial
support that would be consistent with flnancing of the extraordinary proiect costs that are restricting the project
from being financaally feasible. lt is not uncommon for the value of a project to be less than the total private
investment, and thus warrants the need for assistance as a gap filler between investment and value. Certain
costs such as acquisition, site improvements and public improvements generally do not equate to value and
other sources of financing become necessary for financing of those costs.

Conclusion
The developer has requested financial assistance through property tax exemption for construction of a new
100,000 square foot industrial building in the City. The developer initially requested the maximum level of
property tax exemption of 100% over up to 20 years plus additional assistance to increase the projected
business performance. Through the submission of the property tax incentive application and supporting
financial information, the developer has indicated that the pro.iect would not occur on the current site without
financial assistance from the City due to those extraordanary costs. The with-assistance scenario illustrates that
City flnancial assistance through annual property tax exemptions will have a positive impact on the project
performance. The operating expenditures would decrease, resulting in increased net operating income and
cashflow available after debt service payments resultang in projected rates of return rising to a level that is
closer to industry standards for similar type projects and necessary to attract the equity investors. Wthout
assistance, the project is not deemed financially feasible as it would not provide market returns as necessary to
attract the appropraate debt and equity requirements

Based on due diligence financial review as outlined an the supporting project memo, a suggested property tax
incentive that includes a 100% property tax exemption for a 5 year period is supported for this project.

The information provrded here is of a general nature and is not intended to address the specific circumstances of any individual or entity. ln
specific circumstanc€s, the servic€s of a professional should be sought Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member
of the global network of Baker Tilly lnternational Lld., the members of whach are separate and independent legal entities. O 2018 Baker Tilly
Virchow Krause, LLP
 CITY OF GRAND FORKS
24 Norlh 4th Street
GRAND FORKS, NORTH DAKOTA 58203

OFFICE OF CITY ATTORNEY

E-MeMoRANDUM
To: City File

CC: Daniel L. Gaustad (dan@grandforkslaw.com)

From: JEQ (quinn@grandforkslaw.com)

Re: Procedure for PILOT

Date: 02.10.21

Date
Statute Requircment
Completed
N.D.C.C. $ 40-s7. l-03(3) Consult with the department of commerce
Unless the City Council determines there is no
existing business within the City for which the
potential project would be a competitor, the
potential project operator shall publish two notices
N.D.C.C. $ 40-57. 1 -03(s) to competitors, the form of which must be
prescribed by the tax commissioner, of the
application for payments in lieu of taxes in the
official newspaper ofthe municipality at least one
week apart.
The City shall determine whether the payments in
N.D.C.C. $ 40-s7. l-03(s) lieu oftaxes is in the best interest ofthe
municipality belore it give approval.
N.D.C.C. $ 40-s7. r-03(7) During the negotiation of the option to make
payments in lieu oftaxes, the City shall include. as
nonvoting ex officio members of its governing
body, a representative appointed by the school
board and a representative appointed by the board
of township supervisors ofeach township affected
by the proposed action.

Poge I of2
N.D.C.C. $ 40-57.1-03(7) Must comply with N.D.C.C. $ 40-05-24 if more than 5 years.
N.D.C.C. $ 40-0s-24(l) Send the Chairman of the County Commission and
president of the school district a letter, by certilled
mail, notice ofthe terms ofthe proposed property
tax incentive.
N.D.C.C. S 40-0s-24(2) Within 30 days, the County and school district shall
notify the City whether they elect to participate in
granting the tax incentive.
N.D.C.C. S 40-0s-24(3) No response is treated as participating

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