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TO: Mayor Richard C. Irvin
FROM: David Dibo, Director of Economic Development
DATE: February 8, 2019
SUBJECT:
A Resolution authorizing the execution of a Redevelopment Agreement with UEP Aurora, LLC to facilitate the redevelopment of certain real property located at 2 N Broadway in the City of Aurora, commonly known as the "Terminal Building."
PURPOSE:
To promote the continued revitalization of the downtown, the Economic Development Division recommends the approval of the RDA between the City of Aurora and Urban. Urban plans to redevelop the property with loft type market rate apartments and a restaurant on the ground floor.
BACKGROUND:
Current plans are for the development of 20 apartments and 3,500 square feet of restaurant space. Despite a strong regional and national apartment market, the Terminal building has attracted little interest. Housing, specifically at market rates is intrinsic to the cycle that not only creates activity and excitement but brings the demand for services that in turn supports businesses that attract more residents and more spending. Property values rise so that future incents developers to take risks on projects that previously were deemed infeasible. A building that has been mostly vacant for 50 years and has been an eyesore in the center of the urban core will be re-adapted and architecturally attractive. Sales tax revenues for the City will be generated by the restaurant, impacts to School District 131 is anticipated to be minimal given the likely market for these units. The redevelopment of the Terminal Building is consistent with the goals of the City’s Downtown Master Plan approved November 2017.
The City had been in court with the prior owner for the failure to correct numerous code violations. Urban Equity purchased the property in July of 2018 after a series of preliminary discussions with staff regarding possibilities for reuse. The obstacles to redevelopment are that market rents do not support the costs to rehabilitate a building such as Terminal. These buildings are relatively small and costly to renovate. The demand for these units has been relatively unproven with limited supply for prospects to affirm a viable market.
A partial solution is the use of Federal and State Historic Tax Credits to offset a portion of construction and acquisition costs. While these benefits are substantial, securing them is a time consuming and expensive process that requires expertise both in navigating the enabling bureaucracy to get a project qualified for these incentives and having the financial wherewithal to carry a project during this often long arduous approval process. This substantially reduces the pool of candidates willing or able to take on a project especially in a market that is still in the proving phase.
While these incentives are substantial, the Terminal Building and others the downtown building remain vacant because a “gap” still exists between the redevelopment value of these buildings and the costs of acquisition and development. Unless there is an active willingness of the municipality to first understand the nature and magnitude of this gap and then to work with the development team and city staff (Economic Development, Finance, Planning, Legal, Engineering) to fashion a program that incents the developer to put their equity in a transaction and sign for substantial loans then nothing will change, and the building will remain vacant and blighted.
DISCUSSION:
To evaluate the incentives for Urban as outlined in the RDA, the city conducted substantial due diligence as to the experience, financial wherewithal and reputation of Urban Equity Properties. Urban has developed over 150 units primarily in Rockford, IL.
The Terminal Building is already on the National Register for Historic Places which will save time on the front end of the approval process. (There still are many steps to be sure that anything that has historic significance is preserved as the building is substantially renovated).
The Terminal Building is in the TIF 1 District, a TIF that is expiring in 2022 and without the remaining life to assist in this or any development. Staff has evaluated the cost/benefit of extending this TIF versus establishing small “Micro TIF” that creates a win/win/win scenario for the developer, the City and School District 131. Simply extending the TIF would deny all taxing bodies access to the entire existing tax base, creating a Micro TIF, especially one targeted to a specific project with a very low existing assessment ($144,756 for the entire building) has minimal impact but resets the TIF clock for the development enabling future benefits to utilize to help render the redevelopment economically feasibility.
The methodology used considers the cost of the building, the equity provided, rents anticipated to be generated and incremental real estate taxes anticipated.
There are 4 levels to the economic incentives described in the RDA:
1. A City grant of $600,000
2. A Finish Line Grant of $75,000
3. A short term bridge loan for the City $ 1, 195,408.24
4. A pay as you go TIF split 80% (Urban) and 20% (City)
Below is a description, discussion of each incentive:
1. The City grant (called a “Forgivable Loan” by the developer) is a grant the City will provide to fill a portion of the gap that results from the “negative spread” between the cost of the building and its economic value. It will be given over a period of two years.
2. The Finish line grant is essentially a forgivable loan as well albeit with conditions. The Finish Line Grant Program is administered by Invest Aurora.
3. The bridge loan is an interest bearing short term loan that is collateralized by the monetization of the historic tax credits; while not legally described as such it is essentially a short term investment by the City guaranteed by the developer. The City intends to finance this loan through a short term line of credit with a local banking institution and this line of credit will need to be approved by the City Council at a later date, concurrent with the adoption of the new TIF for the development.
4. Incremental TIF dollars will grow as taxes increase; the developer will get 80% of these partially offsetting on behalf of School District 131.
The incentive package is critical for the success of this agreement/project. Based on a 23 year analysis of cash flows from the project, the developer will be receiving very little return on investment in the first 10 years based on rents and the commercial debt needed for the project. In years 11-13, the developer begins to receive a return on their investment through the TIF. This structure shows the level of partnership involved in this agreement. As is noted in the Agreement, without the adoption of the TIF, the agreement will be voided.
The developer will rent 12 parking spaces in the F Lot (5 existing, 7 to be created) at rates charged by the City to all users. A similar arrangement will occur with either the E Lot or the JoCo lot for additional 8 spaces.
The total project value will be approximately $6.5 million.
IMPACT STATEMENT:
The project aligns with the recommendations set forth in the Downtown Master Plan (O17-080), which calls for the redevelopment of existing properties. In the Downtown Experience Chapter, the plan specifies that the City of Aurora: “Identify and activate vacant spaces.” In the Downtown Economy Chapter, the plan specifies that the City of Aurora “Support the downtown core by enhancing livability,” and “Maximize the rehabilitation of the existing downtown residential spaces through engagement, resources, and support.
RECOMMENDATIONS:
Staff recommends the approval of the redevelopment agreement attached as Exhibit A.
cc: Finance Committee
CITY OF AURORA, ILLINOIS
RESOLUTION NO. _________
DATE OF PASSAGE ________________
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A Resolution authorizing the execution of a Redevelopment Agreement with UEP Aurora, LLC to facilitate the redevelopment of certain real property located at 2 N Broadway in the City of Aurora, commonly known as the "Terminal Building."
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WHEREAS, the City of Aurora has a population of more than 25,000 persons and is, therefore, a home rule unit under subsection (a) of Section 6 of Article VII of the Illinois Constitution of 1970; and
WHEREAS, subject to said Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs for the protection of the public health, safety, morals, and welfare; and
WHEREAS, UEP Aurora, LLC (the "Developer") has proposed to redevelop real property located at 2 N. Broadway in the City of Aurora (the "Terminal Building") by renovating the existing and vacant 6-story building, to include restaurant and retail commercial space on the ground floor and twenty (20) multi-family residential units on floors 2-6 (generally, the “Project”);
WHEREAS, the Project would not be economically viable but for the assistance and participation of the City; and
WHEREAS, the City and the Developer have negotiated a Redevelopment Agreement to facilitate the Project; and
WHEREAS, said Redevelopment Agreement is attached to this resolution as Exhibit A and incorporated into this resolution as if fully set forth herein; and
WHEREAS, approval of the Redevelopment Agreement is in the best interest of the City and the health, safety, morals and welfare of its residents and taxpayers and will be in furtherance of the Redevelopment Plan, thereby providing for economic development, enhancing the tax base of the City and other taxing districts and adding to the welfare and prosperity of the City and its inhabitants;
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Aurora, Illinois, as follows: that the Redevelopment Agreement attached to this resolution as Exhibit A shall be and hereby is approved; and further
BE IT RESOLVED, that the Mayor is authorized to execute a Redevelopment Agreement that substantially and materially conforms to the provisions of the Redevelopment Agreement set forth in Exhibit A on behalf of the City; and further
BE IT RESOLVED, that the several City Officers and employees designated in the Redevelopment Agreement shall be and hereby are authorized to perform the function and duties set forth in the Redevelopment Agreement; and further
BE IT RESOLVED, that the Mayor is authorized to execute such additional documents or agreements between the City and the Developer which are related to and subordinate to the Redevelopment Agreement so long as (1) such additional documents or agreements are consistent with and do not conflict with the provisions of the Redevelopment Agreement authorized by this Resolution (2) are necessary to carry into effect the purposes of the Redevelopment Agreement, and (3) do not impose any additional liabilities upon the City.