Ann Item # AGENDA MEMORANDUM

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1 Ann Item # AGENDA MEMORANDUM Meeting Date: January 7, 2014 To: From: Title: Honorable Mayor and Members of Town Council Mark Stevens, Town Manager Ordinance No : An Ordinance Approving a Public Finance Agreement between the Town, Alberta Development Partners, LLC and the Proposed Promenade at Castle Rock Metropolitan District No.1 (first reading); and Ordinance No : An Ordinance Amending Chapter 3.04 of the Castle Rock Municipal Code Concerning the Town s Sales Tax, by Providing for a Sales Tax Credit Against Certain Public Improvement Fees Paid at the Promenade at Castle Rock (second reading) Updated Information Since First Reading First reading of Ordinance No and Ordinance No regarding proposed financial agreements for the proposed Promenade at Castle Rock project were unanimously approved by Town Council at the November 19, 2013 regular Town Council meeting. For second reading, proposed changes have been made to the Public Finance Agreement in order to further address concerns expressed by the Outlets at Castle Rock. These proposed changes further expand upon previously established limitations established for location of outlet type tenants in the Promenade. No other changes to the ordinances or Public Finance Agreement are proposed from first reading to second reading. Consideration was given to concerns and requested revisions expressed by King Soopers representatives, but after consideration and analysis the Town team is not recommending any changes to the previously proposed provisions regarding King Soopers. Should in the future Alberta and King Soopers propose to the Town a specific project and deal structure pertaining to a new or relocated King Soopers to the Promenade, the Town Council may consider such proposal at that time and consider any related proposed amendments to the agreement. In response to questions from members of the public during and after the November 19, 2013 public hearing regarding zoning and traffic, additional information on these matters is included below in this report. Also included is a better project area map depicting traffic related improvements. Generally, should the Promenade project proceed to the land use amendment application stage later this year, updated traffic studies will be required by the Town and CDOT at that time based upon the specific property development proposal. However, it is important to note that existing zoning on the property allows by right a higher density and intensity of development than proposed by 1

2 Alberta for the Promenade project, and previous traffic studies were performed for the current higher intensity and density zoning and accepted by the Town and CDOT. The current zoning for the remaining approximately 200 acres of undeveloped property allows by right for maximum development much more intense than Alberta is proposing for the Promenade project. For example, under current approved zoning entitlements, the property can still be developed for as much as an additional 1.4 million square feet of commercial, 500 hotel rooms, 800 additional residential dwelling units and 80 nursing home beds, as compared to the up to 900,000 square feet of commercial and up to 350 multi - family residential units proposed by Alberta for the Promenade. So should Alberta ultimately submit proposed zoning changes for a maximum of 900,000 square feet of commercial and a maximum of 350 multi-family residential units on the remaining 200 acres of undeveloped property, this will actually be a downzoning to less intensive development than allowed under current zoning and lesser future traffic generation and impacts than estimated under current zoning. Finally, since first reading, updated project financial information has been prepared by Alberta and its consultants and reviewed by the Town team. This updated financial information, including updated Town revenue and return on investment estimates, is more conservative than previously presented, reflecting a longer time frame for build out of the project. The pro forma now reflects a commercial development schedule of 60,000 square feet in 2015, 140,000 square feet in 2017, 300,000 square feet in 2018, 200,000 square feet in 2019 and 200,000 square feet in This is a more conservative schedule of commercial development assumptions, conservatively estimating the completion date for the new I-25 interchange and associated on-site infrastructure in 2016 and assuming primary commercial development following this infrastructure completion opening in thereafter in phases from Should the new I-25 interchange be completed and opened by the end of 2015 as currently planned, depending upon market conditions, the commercial development schedule and associated financial estimates and assumptions could be accelerated to some degree. Executive Summary This staff report, and the staff and applicant presentations at the Town Council meeting, is intended to cover both ordinances since they are interdependent. If Ordinance No is not approved, there is no need to consider Ordinance No The Town proposes to enter into a Public Financing Agreement (PFA) with Alberta Development Partners LLC (Alberta) and the proposed Promenade at Castle Rock Metropolitan District No. 1 (Metro District) to facilitate the development of the Promenade at Castle Rock (Promenade). The Promenade is a proposed master planned development with up to 900,000 square feet of commercial and up to 350 multi - family residential units located on approximately 200 acres of undeveloped private property located generally between Highway 85 and Interstate I-25. As proposed, the Promenade at Castle Rock (Promenade) would be the largest single master planned commercial development in Castle Rock, located on property adjacent to the Outlet Mall, between two major highways with interstate visibility. Additional planned access is via the North Meadows extension and new I-25 interchange project 2

3 now under construction, as well as CDOT planned improvements to Meadows Parkway and eventually to Highway 85, and on site transportation improvements required under the current zoning and development agreement to be updated through the land use amendment process later this year should the proposed project proceed. As proposed, the Promenade would be built out over several years and would include a mix of large retail, mid - level sized retail, specialty retail, restaurants and possibly entertainment and hotel facilities with some multi - family residential. It would be constructed to a high quality standard consistent with other Alberta projects such as The Streets at SouthGlenn in Centennial and Cornerstar in Aurora. The proposed Promenade project would provide many direct and indirect benefits to the Castle Rock community, the Town, other local taxing entities and the greater Castle Rock market. These benefits include increased availability of goods and services in Castle Rock; increased revenues to the Town, Douglas County School District, Douglas County, Douglas County Libraries and the State; hundreds of new construction jobs and permanent jobs; establishment of broader range of goods and services located on the west side of I-25 which among other things over time should better disperse community traffic and community shopping and employment patterns; and increased Castle Rock economic and business activity due to market area shopper retention and attraction. Under the terms of the proposed PFA, the Town would use the Credit Public Improvement Fee (Credit PIF) mechanism to share, for up to 25 years, 27.5% of the new Town sales tax revenue generated from the Promenade. In conjunction with a 40 mill property tax only on the Promenade property to be established by the Metro District (not a general property tax applicable elsewhere in Town) and an Add on PIF of between 0.25% and 0.50% to be established by Alberta only within the Promenade, these revenues would be used to pay debt service on bond issue(s) of the Metro District yielding a net of $28.8 million for eligible public improvements on the property. The Town would not issue the bonds and the Town would not be responsible for repayment of the bonds. The Town would further assist the proposed project by reimbursing Alberta $4,450,000 of an estimated up to $8 million of various Town development fees paid by private parties over the development of the project. In addition, if actual total Town development fees exceed an agreed upon estimated amount, the Town would agree to cover the excess fee amount up to $2 million. Finally, the Town would agree to provide an additional $750,000 development fee reimbursement at the time the Promenade reached 700,000 square feet of developed gross leasable area. Alberta estimates the total project cost of the Promenade to Alberta at $180 million. Additional private project costs will be incurred by vertical construction of commercial and/or multi-family buildings constructed and owned by third parties, e.g. stores that purchase a pad site from Alberta and construct and own their own building. The Town estimates the Town s portion of these total project costs as set forth in the PFA at a maximum, not adjusted for net present value or including interest, of approximately $24.48 million, or approximately 13.6% of total Alberta project costs. Based upon Alberta estimates reviewed by the Town and based upon a conservative 3

4 development schedule, the Town estimates that the Town will recoup that net investment from net new sales tax and other revenues from the Promenade project by A portion of these new revenues to the Town would be subject to the Town being able to retain the revenues under TABOR. It is important to note that the Town is estimating TABOR excess revenues beginning in 2013 regardless of whether the Promenade project is constructed, the Promenade would increase estimated TABOR excess revenues but would not create the TABOR issue. As proposed, the Town s 27.5% sales tax sharing (Credit PIF) would not apply to a King Soopers should Alberta and King Soopers decide to locate a King Soopers store in the Promenade through December 31, In the event that Target and Alberta decide to relocate the Target store to the Promenade, through December 31, 2024 the Town s 27.5% sales tax sharing would apply only to the incremental increase in Target sales above the base of the existing Target. These provisions could be waived or modified by mutual agreement of the Town and Alberta. The Town s intent and goal is that the Outlets at Castle Rock and the Promenade will be complementary retail facilities that benefit and support one another. Per the terms of the proposed PFA, outlet stores located in the existing Outlets at Castle Rock as of January 1, 2014 and December 31, 2014, or outlet stores listed in Exhibit G to the agreement which are located at the Outlets at Castle Rock as of December 31, 2018, would not be permitted to be established in the Promenade through December 31, 2024 unless by mutual agreement of the Town and Alberta. There are various other modifications to outlet store restrictions included in the proposed second reading version of the agreement. The Town team believes these are meaningful restrictions and believes that the proposed additional changes since first reading further improve the provisions and should be approved. As of this writing, Alberta has indicated that the proposed revisions since first reading are acceptable to Alberta, and legal counsel representing the owner of the Outlets at Castle Rock that has indicated that the proposed PFA provisions regarding restrictions on outlet retailers as revised do not go far enough to entirely satisfy the concerns of the Outlets at Castle Rock owner. Other existing retailers currently in Castle Rock of a size greater than 50,000 square feet, such as Walmart, Safeway, Kohl s, Home Depot and Lowe s, would not be permitted to relocate in the Promenade through December 31, 2024 unless modified by mutual agreement of the Town and Alberta. These proposed restrictions regarding certain existing retail facilities within Castle Rock, while highly unusual, are intended to support the goal that the Promenade be primarily commercial development new to the community and protect the Town and the community from the Promenade building out with a significant level of relocation of existing major retailers. As part of the agreement, Alberta commits to an overall site plan, design and architectural quality and project amenities as contained in an exhibit to the agreement and generally as consistent with other Alberta projects. Should Town Council approve the financial agreement ordinances on second reading, Alberta would proceed to seek to acquire the property which is currently under contract. Alberta would then submit to the Town for consideration applications for zoning 4

5 changes, signage plans and other land use items related to obtaining final approvals for the proposed master plan of the property. Should all proceed as proposed, Alberta anticipates beginning construction in 2014 on an initial up to 60,000 square feet of commercial development on the south side of the property for opening in The primary development, located in proximity to Highway 85 and Interstate 25, is largely dependent upon the schedule for completion of the North Meadows extension and new I-25 interchange, which the Town currently anticipates being completed by the end of 2015 (the agreement requires completion by the end of 2016). It is therefore anticipated that primary development will occur during the time frame, some of this development could occur sooner depending upon the actual completion date of the new I-25 interchange and actual market conditions. Based upon Alberta s conservative estimates of the Promenade development timeline, development elements and resulting taxable retail sales and property assessed valuation, it is estimated that by 2021 net new annual sales tax revenues to the Town will be in excess of $4 million per year, plus net development fee revenues, building use tax revenues, property tax revenues and other increased revenues to the Town resulting from the new and increased economic activity. Based upon these same estimates, by 2022 new property tax revenues to the Douglas County School District are estimated at over $1,500,000 per year, over $600,000 per year to Douglas County and over $130,000 per year to Douglas County Libraries. Douglas County is also estimated to receive over $2,600,000 in new gross annual sales tax revenues annually by 2022, plus other revenues to the County. The proposed level of Town financial participation and return on investment to the Town (and other local taxing entities) are considered highly advantageous to the Town by national and Colorado industry standards for this type of project. Also, unlike many similar projects, the use of Urban Renewal is not proposed for this project. The proposed PFA is the result of extensive negotiations among the parties over the course of 2013 and is consistent in all material respects with the conceptual financial deal structure as unanimously approved by the Town Council on July 2, Discussion This is a complex project and complex agreement containing innumerable details negotiated over the course of the past year. Detailed information is contained in the proposed ordinances, the PFA and its exhibits, and the financial information and analysis attachment hereto. When the project was initially proposed, there was a very large financial gap identified which made the project financially unfeasible unless that gap could be closed through the use of public financing tools and negotiations on project costs. This financial gap was narrowed and eventually closed through negotiations on a combination of proposed Town financial participation, proposed Metro District financing, and cost reductions, reduced yield expectations and other measures by Alberta. 5

6 A proposed commercial development of up to 900,000 square feet cannot be located in a market the size of Castle Rock without both expanding the market and impacting the existing market. Town financial participation to some extent influences the market. The Town Council has been particularly concerned with potential impacts to existing commercial areas and potential location or relocation of existing major retailers. As a result, a significant element of negotiations pertained to the proposed restrictions regarding King Soopers, Target, Outlet stores and other existing retailers of 50,000 square feet and greater. The proposed approach to Town financial involvement is advantageous to the Town as the Town assumes little risk. The actual amount of sales tax sharing is a function of the scope and success of the actual new commercial development, and the Town s sales tax sharing is on sales tax revenues from the proposed new development. The development fee reimbursement approach means that Town cash obligations are tied to actual private building activity with the Town reimbursing a portion on new development fee revenues generated by and paid by the private development. The only near term financial impact to the Town is that under the proposed agreement the Town will need to set aside $4,450,000 in cash in a restricted account to be available for development fee reimbursements as development ensues, i.e. the Town would have to commit and reserve cash from the Economic Development Fund and other Town Funds with actual payments made from a portion of new development fees generated by the project as it develops. In the negotiations, the Town made the choice of including the development fee reimbursement and cap approaches as opposed to increasing the 27.5% sales tax sharing approach to a higher percentage. Sales tax sharing agreements of up to 50% are not uncommon in these types of projects. The only financial risks to the Town are that the amount of transfer/cannibalization of existing taxable sales is greater than the conservative 30% amount assumed in the financial model, which would result in a lower increase in net new sales tax revenue to the Town. The financial model used is considered conservative especially considering the restrictions in the proposed agreement regarding existing major retailers which reduces the risk of higher cannibalization of sales, so there is a greater likelihood that the cannibalization percentage will be less than 30% as opposed to higher than 30%, resulting in higher net new sales tax revenues to the Town than currently estimated. Additional public actions that would be required associated with the proposed project would include Town Council consideration of an amended Metro District service plan, and various land use approvals including Town Council consideration of zoning, vesting and platting actions, Town Council consideration of a sign package for the property and various infrastructure and building plan review and permitting approvals. It is during these public processes that traffic studies, signage, additional project detail and other development related matters of interest to the public will be presented and considered. The current zoning for the remaining approximately 200 acres of undeveloped property allows by right for maximum development much more intense than Alberta is proposing for the Promenade project. For example, under current approved zoning entitlements, the property can still be developed for as much as an additional 1.4 million square feet of commercial, 500 hotel rooms, 800 additional residential dwelling units and 80 nursing 6

7 home beds, as compared to the up to 900,000 square feet of commercial and up to 350 multi - family residential units proposed by Alberta for the Promenade. So should Alberta ultimately submit proposed zoning changes for a maximum of 900,000 square feet of commercial and a maximum of 350 multi-family residential units on the remaining 200 acres of undeveloped property, this will actually be a downzoning to less intensive development than allowed under current zoning. When the property was approved for its current zoning and the current development agreement for the property approved in 1994 and later amended in 2005, traffic studies were done based upon the higher level of development proposed and approved at that time. These traffic studies did not include the North Meadows extension having a raised interchange at Highway 85 or a new interchange at I-25, nor did they include the improvements to Meadows Parkway that CDOT is now planning. When Alberta prepares an updated traffic study as will be required by the Town and CDOT should/when zoning and development agreement amendments are proposed later this year, these transportation improvements, as well as the lower density of build out proposed by Alberta for the property, will improve traffic level of service estimates from those prepared in the prior traffic studies. Also, Alberta currently anticipates most development will occur concurrent with and after the opening of the new I-25 interchange. Pre new interchange development will likely occur primarily in the south portion of the project, and CDOT s planned Meadows Parkway improvements in 2014 should help with additional traffic generated by development of the southern portion of the Promenade. Also, the Town is in continuing discussions with CDOT regarding the feasibility of the Town taking over responsibility for the traffic signals through the Meadows/Founders corridor of Highway 86. CDOT is planning to eventually widen Highway 85 through Castle Rock to four lanes. CDOT s Highway 85 widening project is being done in phases and at the current pace and plans it will likely still be 8 10 years before the section through Castle Rock is completed, which is only a few years after conservative estimates of full build out of the Promenade project. Once this Highway 85 widening is completed it will further improve area traffic conditions. As the Promenade and the Meadows Town Center and other Meadows commercial areas develop and provide goods, services and employment west of I-25, this should also further help overall area traffic flow. Numerous traffic studies of the area were done as part of the North Meadows environmental assessment process which assumed higher development densities in the area over time and through build out than the Promenade proposal. These studies showed acceptable traffic levels of service even at higher development densities than the Promenade proposal. North Meadows Extension construction is currently the two lane backbone system with all four ramps at Highway 85 and I-25. The Town will have to widen the North Meadows Extension to four lanes when traffic warrants and Town financial capability allows. If the Promenade is fully developed, it would likely accelerate the need for widening North Meadows to four lanes. Should that be the case, the additional revenues generated to 7

8 the Town by the Promenade project, as well as Castle Rock Development Company s additional financial obligations to North Meadows west of Highway 85 as the Meadows further develops, will help pay for the widening of the North Meadows Extension to four lanes sooner than previously anticipated without the Promenade project. In the existing development agreement applicable to the property, which likely will be amended as part of the Alberta land use application changes if/when submitted, the property owner/developer is responsible for all necessary on-site transportation improvements. An updated traffic study would determine, in addition to the necessary internal site street and traffic circulation infrastructure construction, whether Alberta will need to do such things as additional left turn lanes or left turn storage capacity, right turn lanes or acceleration or deceleration lanes for traffic interfaces with Highway 85. CDOT is aware of the proposed Promenade project and will be part of the traffic study review team since CDOT has access jurisdiction for Highway 85, Meadows Parkway and the new I-25 interchange connection. So overall, while an updated traffic study for the proposed Promenade project is not required at this stage in the process (Alberta does not yet own the land and has not yet submitted any revised land use plans for consideration through required public processes), review of existing, higher density and intensity zoning and associated traffic studies, traffic studies performed for the North Meadows project and additional transportation improvements under construction or planned since the preparation of previous traffic studies, all indicate that the proposed Promenade project would have lesser development density and lesser future traffic impacts than under current zoning and traffic studies. While specific proposed tenants cannot be disclosed at this time, Alberta represents there has been strong market interest in the proposed project from an extensive array of retailers including bigger boxes, mini-majors, specialty retailers, restaurants and others. In the proposed PFA, the Town would share 27.5% of the Town s 4% sales tax revenue on the new taxable sales generated from within the project area (subject to the restrictions as noted herein), or a shared sales tax rate of 1.1%, for up to 25 years or upon retirement of the bond issue(s), whichever occurs first. In order for this sales tax sharing revenue to be pledged for bond repayment, it cannot be subject to TABOR annual appropriation requirements. There are several different mechanisms/options that have been used by Colorado municipalities to address this issue, and the option proposed is use of the Credit PIF approach. In this approach, essentially for the period until the bonds are paid off up to 25 years, the Town reduces its sales tax rate applicable to the Promenade area from 4% to 2.9% and a 1.1% PIF is established in the project area. In this way, the 27.5% sales tax sharing is achieved with the sales tax sharing amount not going directly to the Town and hence not subject to Town Council annual appropriation and available to be pledged for bond debt service. In addition to the Credit PIF, revenue to repay the Metro District bonds would be generated by the Metro District s 40 mill property tax levy on the Promenade property, and the establishment by Alberta of an Add on PIF of at least 0.25% but no more than 0.50%. The final amount of the Add on PIF between 0.25% and 0.50% would be established by Alberta based upon the amount needed to assist with bond repayment. 8

9 The Add on PIF would be an additional fee paid by the consumer when doing business at the Promenade. Proposed project analysis indicates a very strong financial return on investment to the Town and significant additional revenues to the County, School District and Libraries. More detailed financial information is presented in Attachment A. As one example, analysis and conservative estimates show net new sales tax revenues to the Town during the project s first 5 years (through 2019) of $4,968,392, first 10 years (through 2024) of $26,295,628 and over 25 years (through 2039) of $101,423,434. Staff Recommendation A Town team comprised of Town Staff, EDC Staff, development consultant Tim Leonard and financial and bond consultants Steve Jeffers of Stifel Nicolaus and Dee Wisor and Sally Tasker of Sherman and Howard has been principally responsible for negotiating the proposed PFA and ordinances with the various parties pursuant to policy direction provided by Town Council and instruction to negotiators provided by Town Council. A negotiation, and a project, of this magnitude and complexity require a degree of compromise and give and take. None of the parties involved, including the Town, are completely successful in obtaining every provision they might prefer. The Town has been successful in achieving its primary goals, limiting its financial involvement to an amount necessary to enable the project to proceed, protecting the Town s financial interests and exposure and providing degrees of protection regarding existing major retail facilities in the community. Consequently, we recommend approval of the ordinances and agreement as presented on second reading. Proposed Motion The suggested motion is: I move to approve Ordinance No , an Ordinance approving a public finance agreement between the Town of Castle Rock, Alberta Development Partners LLC and the Proposed Promenade at Castle Rock Metropolitan District No. 1, on second reading. And, I move to approve Ordinance No , an Ordinance amending Chapter 3.04 of the Castle Rock Municipal Code concerning the Town s sales tax, by providing for a sales tax credit against certain Public Improvement Fees paid at the Promenade at Castle Rock, on second reading. Attachments Attachment A Financial Information and Analysis Attachment B - Project Area Map 9