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When projects involve municipal incentives, Redevelopment Agreements are often required.





Sam Polsky is a principal of Polsky & Associates Ltd., a law firm based in Chicago.






hether 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.


     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.

March/April 2003

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