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you are a developer in the city or in the suburbs, there will probably
come a time when you're asked to enter into a Redevelopment
Agreement with a municipality to document some element of a public/private
partnership. You might be demolishing a shopping center in a TIF
area and developing a new center in place of an old one, receiving
new sales taxes to help pay for extraordinary development costs,
or simply getting a class 6b or class 8 real estate classification
that will substantially reduce your tax bill. In any of these cases
the municipality will want an agreement to show the quid pro quo – and
to justify the exercise of its political discretion in favor of
your project.
Redevelopment Agreements (or Development Agreements in the case of
new construction on a vacant parcel) are meant to give assurances
to the municipality that it's getting the project the developer
is promising, and that the discretionary exercise of its authority
is wise, based on what the developer will deliver. From the developer's
standpoint, the Redevelopment Agreement defines the incentive and
any relevant conditions.
The City of Chicago has very structured
and detailed requirements developers must observe for most TIF Redevelopment
Agreements. The
most important of these stem from public policy decisions about the
City's role in employment obligations for assisted projects.
Be prepared to meet these requirements before you start negotiating
a Redevelopment Agreement with the City.
Developers must agree that at least
25% of budgeted expenditures be expended for contract participation
by certified Minority Business
Enterprises (MBE) and 5% expended for contract participation by certified
Women's Business Enterprises (WBE). Although there may be specific
waivers for certain sole-source items that aren't available
through MBE or WBE sources, failure to meet these percentages will
allow the City to terminate any incentives to the developer. A detailed
plan of how these commitments will be met should be a top priority
for anyone hoping to benefit from a City of Chicago TIF.
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There is also a requirement that 50% of total construction work
hours be performed by Chicago residents. Failure to meet this requirement
isn't a default, but does result in a penalty of one-twentieth
of 1% of aggregate hard costs for each percentage-point shortfall.
Chicago and many other municipalities require that prevailing wage
be paid for some, if not all, construction costs of the project. To the
extent that funds are used for public improvements, this will be a statutory
requirement.
Furthermore, many municipalities will want
developers to require their tenants to use "job readiness" or other programs
to identify local residents who may be available for hire. In most cases,
these types of requirements are on a "best efforts" basis,
but there must be a good-faith effort to comply.
On the financing side, there are key provisions that will affect
the bottom-line benefit to the developer. The commencement date for the
accrual of interest in the case of TIF, or the start date for sales tax
sharing, should be negotiated to yield the best results.
It's also crucial to analyze the starting point for computation
of real estate or sales-increment. Your project may be complete but will
not be assessed, nor will new real estate taxes be collected, for more
than a year. If the construction of a large project will extend over more
than one assessment year, this is especially important to consider.
While under certain Redevelopment Agreements
interest may accrue for the "drawdown" of construction funds, a postponement
of this accrual may make sense in order to capture a larger increment.
In
the case of a sales-tax deal, it may be wise to defer the date
from which sales are computed to capture a portion of more mature sales – rather
than immediate accrual based on a much smaller sales – tax number.
Of course, immediate accrual may make sense in very long-term agreements,
since even partial years of incremental real estate or sales taxes
shouldn't diminish the net present value of the benefits. TIF, sales tax
and incentive
agreements should be structured based on a financial analysis that
considers such effects of commencement dates. |
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