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.
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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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