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HomeMy WebLinkAbout2012-11-SPTM-rpt2APPROPRIATION COMMITTEE TOWN OF LEXINGTON o 0 V k p Q t4 rMn x n , U APRIL 19Th IN"t 2nd REPORT TO THE NOVEMBER 2012 SPECIAL TOWN MEETING Article 8: Approve TIF Agreement(s) (Supplement to l gt Report, Released November 13, 2012) Released November 16, 2012 Appropriation Committee Members — Fiscal Year 2013 Glenn Parker, Chair • John Bartenstein, rice Chair /Secretary • Joe Pato, rice Chair Robert N. Addelson (ex-officio; non - voting) • Robert Cohen • Mollie Garberg Alan Levine • Eric Michelson • Richard Neumeier • Jonina Schonfeld APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM Warrant Article Analysis and Recommendations Article 8: Approve TIF Agreement(s) Funds Requested Funding Source Committee Recommendation N/A N/A Approve (5 -2) Approving this article would authorize the Board of Selectmen to enter into a Tax Increment Financing (TIF) agreement with Vistaprint USA, Incorporated, covering a portion of anticipated new construction at 95 Hayden Avenue. Background Vistaprint provides marketing products and services to millions of small businesses and organizations globally. Its North American headquarters are currently located at 95 Hayden Avenue where the company leases 219,505 square feet of space. Rapidly growing, Vistaprint employs between 750 and 880' permanent full-time workers in Lexington (including 28 Lexington residents) and expects to create an additional 300 new permanent positions in software development, engineering, marketing, video editing, information technology, and corporate support functions over the next few years. This growth is taxing the current facility and has led Vistaprint to search for new space. In 2009 Town Meeting approved a zoning by -law amendment requested by the then owners, The Beal Companies LLC, allowing construction of a new building for office and laboratory uses and associated parking on the property — to be known as Three Ledgemont Center (aka Ledgemont 3). The Beal Companies did not, however, proceed with construction and Vistaprint began exploring alternate locations for its expansion plans. In the summer of 2012 Hobbs Brook Management LLC purchased the property and has subsequently proposed plans to construct a roughly 150,000 square foot facility designed with a campus -style atmosphere and state -of the -art environment systems consistent with the 2009 Preliminary Site Development and Use Plan (PSDUP). This plan makes on -site expansion for Vistaprint viable again and Vistaprint seeks to lease an estimated 100,000 square feet of the new facility for ten years with an option to extend for two five - year periods and an option to lease the remainder of the space. Vistaprint also intends to renegotiate its lease on the existing space, which currently expires in 2017, to be co- terminus with the lease on the new facility. Vistaprint has requested that the town agree to a Tax Increment Financing (TIF) arrangement that would reduce their property tax obligation on the new facility for a period of thirteen years. Technically the reduction of the obligation is to the property owner Hobbs Brook, but the terms of the lease effectively transfer the tax obligation to Vistaprint. A Massachusetts TIF agreement may run between five and twenty years and can exempt between 5% and 100% of property taxation on all or part of the increased value resulting from development. In addition, Vistaprint is pursuing investment tax benefits from the Commonwealth under the Economic Development Incentive Program (EDIP). These additional benefits may be obtained as a Certified Expansion Project (EP) or as an Enhanced Expansion Project (EEP). Substantial sales outside the Commonwealth and plans to create an extraordinary number of jobs make Vistaprint eligible to obtain these benefits under either program. 1 Oral remarks by Vistaprint at the November 13 TMMA Information Session identified 750 current employees, but written materials establish 880 as the baseline position count prior to expansion associated with the TIF request. APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM To obtain benefits under the EP, however, Lexington must grant a TIF or a special tax assessment and approve the Certified EP before Vistaprint applies to the Economic Assistance Coordinating Council (ECAC), the organization that administers the Commonwealth's program. TIF Proposal TIF Year Fiscal Year TIF % 1 FY16 45% 2 FY17 40% 3 FY18 35% 4 FY19 31% 5 FY20 28% 6 FY21 26% 7 FY22 24% 8 FY23 19% 9 FY24 14% 10 FY25 9% 11 FY26 2% 12 FY27 2% 13 FY28 2% Table 1: Proposed TIF Schedule The proposed TIF covers a thirteen year period beginning when Vistaprint occupies the completed 100,000 square foot facility, assumed to be in FY16. Each year of the TIF the property tax obligation associated with this portion of the building is reduced by the percentage listed in the TIF % column of Table 1 above. This reduction is also reflected in the Town's "new growth" number used to determine the levy limit under Proposition 2'/z. The TIF does not apply to the additional, roughly 50,000 square feet of leasable space in the new building. Existing leased space and personal property located in either building is taxed at the full rate and is not subject to the TIF. Quantitative Analvsis In our analysis, we consider potential benefits to the town under several scenarios in an attempt to answer the question "Is the Town likely to be better off financially if it approves the TIF agreement or if it votes it down ?" In structuring the scenarios we have held certain factors constant: 1) The expected tax rate 2) The rate of inflation for the property value 3) The assessed value of the new building in a given year once in service' 2 The draft TIF agreement dated November 14, 2012 does not explicitly exclude this additional 50,000 square feet. It is our understanding that this will be corrected and our financial analysis assumes that this additional leasable space is taxed at the full rate. 3 Once construction is completed, the assessed value on the property is computed using the mass appraisal income method. This is roughly based on the class of space, square feet of leasable space, and prevailing occupancy rates. We assume that the same building conforming to the PSDUP will have been built in each scenario. Therefore, our models use the same assessed value in a given year for each scenario in which construction of the proposed space has been completed and the space is deemed to have been put in service. APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM In addition, we base our scenarios on the representation by Hobbs Brook Management that they intend to develop the property and that three of their last construction projects were done on spec without a tenant committed prior to construction. The bottom line for each of several scenarios is summarized below in Table 2, including expected incremental property tax revenue (excluding personal property tax), and additional net benefit collected until the end of the TIF. Appendix A contains these data as well as the FY2013 net present values (computed using a 3% and a 4% deflator). These figures are presented as a model to compare the relative impact on tax revenues using reasonable assumptions in regard to tax rates and property values. These are not projections for the actual revenue collected since the tax rates and property assessment over the 13 -year period of the TIF are uncertain. In considering expected net fiscal benefit to the Town, it is appropriate to also consider personal property and the effects of accelerating occupancy on the cost of providing municipal fire and police services to the facility. Vistaprint is a high technology company with a greater concentration of high -value equipment per employee as well as high -end telecommunications equipment. The valuation of Vistaprint's personal property is roughly twice the amount of what is generally found in class A office space. In addition, mitigation payments of $500,000 associated with the rezoning of the property in 2009 are due upon the beginning of construction. Table 2 also illustrates the expected additional net benefit to the town taking into account these various factors through the end of the TIF period. Scenario 1 and 2 yield the same additional net benefit since these revenues and expenses are not subject to the TIF and the scenarios differ only in whether the TIF is granted or denied. Scenario 5 illustrates the potential loss of revenue to the Town if Vistaprint leaves its current facility and is replaced by a more conventional tenant with less valuable personal property. As should be expected, the Town receives the greatest revenue if construction proceeds without a TIF on the accelerated schedule to meet Vistaprint's rapid growth requirements (scenario 1). The TIF agreement was constructed so that the property tax revenue received by the Town during the lifetime of the TIF (scenario 2) would be roughly the same as if there were no TIF and Hobbs Brook built the facility on a slower construction schedule and with a 3 -year delay in occupancy (scenario 4). If Hobbs Brook were to build out the facility with only a 2-year delay (scenario 3), we would expect revenue to the Town to be mid -way between the no -TIF and TIF based scenarios. The worst case scenario in terms of revenue would be if no new construction occurred (scenario 5). 4 Property tax data are the same as published by the Town on November 15, 2012 but include the effects of property taxes collected during construction of approximately $500,000 for each scenario. < http:/ /www.lexingtomua.gov /towngovern nent/2012STM/Property- tax - analysis- of- TIF.pdf > 5 Net fiscal benefit refers to the difference between total taxes paid and the estimated municipal costs associated with the property. For our calculations we have only looked at the net benefit associated with the space covered by the TIF and for scenario 5 the additional loss of personal property taxes above those associated with a conventional tenant if Vistaprint vacates its current space at 95 Hayden Avenue. APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM Table 2: Expected incremental revenues under various scenarios Qualitative Analvsis It is impossible to predict with certainty when Ledgemont 3 will be developed. Even if the TIF agreement is approved, Vistaprint remains in negotiations with another property owner in another community and may find that the difference in lease rates for existing property relative to the lease rate for new construction at Ledgemont 3 is too large to warrant expansion in Lexington. Similarly, it is impossible to know when Hobbs Brook may choose to develop the site in the absence of Vistaprint's desire to expand. Nonetheless, the location is highly desirable and was acquired by Hobbs Brook with the knowledge that Vistaprint was looking for expansion space elsewhere. We believe that scenario 3 (a 2 -year delay without the TIF) is possible and that scenario 4 (a 3 -year delay without the TIF) is reasonably likely. As a result, we view the revenue associated with scenario 4 to be the minimum expected by the Town with respect to any TIF to be granted. The proposed TIF agreement satisfies that limit and provides a slightly better return when calculated as a net present value. Should Vistaprint choose to relocate to another community at the end of its current lease in 2017, as assumed in scenario 5, there is a risk that the current property at 95 Hayden Avenue may remain vacant for an extended period of time. While this will have limited short-term effect on the property's assessment, it may serve to reduce the region's occupancy rate and may reduce the roughly $1,000,000 in local commercial spending associated with Vistaprint's employees and its domestic and international visitors. This spending on local hotels, restaurants, and services improves the local economy and contributes to local meal and hotel occupancy tax receipts for the town. Given the desirability of the property, we see a protracted vacancy as a relatively low- probability event and discount its broad effects. We do, however, see a greater potential for a new tenant to have a more conventional mix of personal property and for those revenues to be cut in half to about $75,000 per year. Incremental benefit in million $$ Scenarios for development of Ledgemont 3 Property Tax Additional net Total benefit 1) TIF is turned down, but Vistaprint stays with construction and occupancy $ 9.53 $ 0.66 $ 10.19 proceeding on the proposed schedule. 2) TIF is approved, construction and occupancy proceed on the proposed $ 8.32 $ 0.66 $ 8.98 schedule. 3) TIF is turned down, Hobbs Brook proceeds with a longer construction $ 8.95 $ 0.42 $ 9.36 schedule, occupancy is delayed by 2 years. 4) TIF is turned down, Hobbs Brook proceeds with a longer construction $ 8,31 $ 0.50 $8.81 schedule, occupancy is delayed by 3 years. 5) TIF is turned down, Vistaprint leaves and $ 0 ($ 0.55) ($ 0.55) no new construction occurs on the site. Table 2: Expected incremental revenues under various scenarios Qualitative Analvsis It is impossible to predict with certainty when Ledgemont 3 will be developed. Even if the TIF agreement is approved, Vistaprint remains in negotiations with another property owner in another community and may find that the difference in lease rates for existing property relative to the lease rate for new construction at Ledgemont 3 is too large to warrant expansion in Lexington. Similarly, it is impossible to know when Hobbs Brook may choose to develop the site in the absence of Vistaprint's desire to expand. Nonetheless, the location is highly desirable and was acquired by Hobbs Brook with the knowledge that Vistaprint was looking for expansion space elsewhere. We believe that scenario 3 (a 2 -year delay without the TIF) is possible and that scenario 4 (a 3 -year delay without the TIF) is reasonably likely. As a result, we view the revenue associated with scenario 4 to be the minimum expected by the Town with respect to any TIF to be granted. The proposed TIF agreement satisfies that limit and provides a slightly better return when calculated as a net present value. Should Vistaprint choose to relocate to another community at the end of its current lease in 2017, as assumed in scenario 5, there is a risk that the current property at 95 Hayden Avenue may remain vacant for an extended period of time. While this will have limited short-term effect on the property's assessment, it may serve to reduce the region's occupancy rate and may reduce the roughly $1,000,000 in local commercial spending associated with Vistaprint's employees and its domestic and international visitors. This spending on local hotels, restaurants, and services improves the local economy and contributes to local meal and hotel occupancy tax receipts for the town. Given the desirability of the property, we see a protracted vacancy as a relatively low- probability event and discount its broad effects. We do, however, see a greater potential for a new tenant to have a more conventional mix of personal property and for those revenues to be cut in half to about $75,000 per year. APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM The committee has also considered general principles with regard to granting a TIF. There is little desire to create a precedent leading to an expectation of obtaining a TIF for commercial expansion within Lexington. The committee feels that granting a TIF should be done cautiously, in a manner that balances the broad interests of commercial property owners, residential property owners, and those of enabling or accelerating commercial development. In the current request, the committee believes that the amount of the requested TIF is appropriate — it results in no loss of revenue relative to our reasonable expectation for development of the property and it provides an incentive for Vistaprint, a company that imposes a relatively low burden on town services, to remain in town. The Committee recommends approval of this request (5 -2). APPROPRIATION COMMITTEE 2' REPORT TO THE NOVEMBER 2012 STM Appendix A — FY2013 NPV Calculations Table A1: Expected total property tax revenues under various scenarios Property Tax revenue in million $$ Scenarios for development of Ledgemont 3 Total NPV (*3% NPV (*4% 1) TIF is turned down, but Vistaprint stays with construction $ 9.53 $ 7.15 $ 6.53 and occupancy proceeding on the proposed schedule. 2) TIF is approved, construction and occupancy proceed on S8.32 $ 6.18 $ 5.63 the proposed schedule. 3) TIF is turned down, Hobbs Brook proceeds with a longer $ 8.95 $ 6.62 $ 6.02 construction schedule, occupancy is delayed by 2 years. 4) TIF is turned down, Hobbs Brook proceeds with a longer $ g,31 $ 6.07 $ 5.49 construction schedule, occupancy is delayed by 3 years. 5) TIF is turned down, Vistaprint leaves and no new $ 0 $ 0 $ 0 construction occurs on the site. Table A1: Expected total property tax revenues under various scenarios Table A2: Expected additional net benefit under various scenarios Additional net benefit in million $$ Scenarios for development of Ledgemont 3 Total NPV (*3% NPV (*4% 1) TIF is turned down, but Vistaprint stays with construction $ 0.66 $ 0.38 $ 0.38 and occupancy proceeding on the proposed schedule. 2) TIF is approved, construction and occupancy proceed on $ 0.66 $ 0.38 $ 0.38 the proposed schedule. 3) TIF is turned down, Hobbs Brook proceeds with a longer $ 0.42 $ 0.38 $ 0.37 construction schedule, occupancy is delayed by 2 years. 4) TIF is turned down, Hobbs Brook proceeds with a longer $ 0.50 $ 0.44 $ 0.43 construction schedule, occupancy is delayed by 3 years. 5) TIF is turned down, Vistaprint leaves and no new ($0.55) ($0.41) construction occurs on the site. Table A2: Expected additional net benefit under various scenarios