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One Westfield Place - The Financials



WESTFIELD NEWS One Westfield Place – The Financials On September 19, 2022, the Town held the first part of a Live Facebook discussion on the One Westfield Place financials. Mayor Brindle was joined by Councilwoman Linda Habgood, Chair of Town Council Finance Policy Committee, Robert Powell, Partner, Nassau Capital Advisors, an expert in redevelopment finance, Steve Mlenak, Partner, Greenbaum Law, Legal Counsel, and Matt Jessup, Partner, McManimon, Scotland & Baumann, LLC, Bond Counsel. Mayor Brindle began the meeting with a brief history of the project and recited the goals set forth in the Town’s Master Plan Reexamination, adopted in 2019 – ● Reduce the Town’s dependence on personal residential taxes by expanding the tax base ● Create a vibrant downtown ● Offer diverse housing options for residents who are downsizing ● Advance affordable housing options ● Address traffic congestion ● Upgrade aging infrastructure and improve stormwater management. The Mayor also commented on the Town's slow population growth. The project will add 354 new residents. This is needed since Westfield has 2,700 fewer residents than it did when its population peaked in 1970 at 33,720 residents. The project will also add new employees to Westfield. Employment is down 2,000 since 2015. Brindle said, “Our businesses can’t survive on nights and weekend traffic alone.”

 


Steve Mlenak began with an overview of the project phases. The West Zone encompasses the Lord & Taylor vacant properties, totaling 7.3 acres. It will include 100,000 SF of office in the Lord & Taylor building, two residential buildings with 138 age restricted (55+) apartments, 16 townhomes for age 55+, 13,300 SF of street-front retail, and one residential building at North & Clark.




The North Zone is on a 0.22-acre portion of Municipal Parking Lot 8 on North Ave. It will include one residential building of 35 market-rate loft-style apartments, 2,110 SF of retail, and a public parking garage with 300 spaces. The South Zone is on a two-acre portion of Municipal Parking Lot 3 on South Avenue.



There will be two Mass Timber office buildings totaling 210,00 SF, 12,000 SF of retail, and a public parking garage with 200 spaces. Within the scope of One Westfield Place, there are $54.2M of planned public improvements. This includes the large public pedestrian areas on Quimby Street and by the train station, the North Avenue Town Square and South Avenue Town Green, two parking garages, traffic system upgrades, and pedestrian safety improvements. Why Partner With A Private Developer? It would not be possible for Westfield to undergo these public improvements without private sector investment. The financial structure that undergirds the relationship between the Town and Streetworks is Payment in Lieu of Taxes (“PILOT”). This is a state law that enables municipalities to negotiate and execute agreements with developers when certain criteria are met. Mlenak described PILOT as a “powerful tool used as a financial incentive to attract private investment in an area in need of redevelopment in a manner established by the municipality in a redevelopment plan that would otherwise not be financially viable.” Mlenak highlighted that a developer could come into Westfield and develop some pieces of the Master Plan, but it would not be possible to complete all aspects of the redevelopment plan without a PILOT. While the terms of the PILOT have not been finalized, the process involves the Town evaluating: 1) the cost of the project; 2) projected revenue to the developer; 3) sources and uses of funds (developer’s equity contribution and financing); 4) need for new services; 5) impact to the school district; and 6) the sale of municipal property.


After the Town completes its analysis and negotiations with the HBC | Streetworks, the redeveloper submits a PILOT application to the Mayor. The Mayor submits the application to the Town Council and if the Council approves it, it will be drafted as an Ordinance. If the Ordinance is approved, a financial agreement is entered into with HBC | Streetworks.


The agreement will include the term of the PILOT (usually 30 years) and an annual service charge (“ASC”) which is paid instead of the taxes. The annual service charge is a percentage of the project’s gross revenue. Mlenak underscored that gross revenue is top line revenue and “every cent of revenue is counted.” Under NJ law, the annual service charge must be at least 10% of the revenue. Also, to ensure that HBC | Streetworks is paying the proper amount, they are required to have an annual audit by an independent accounting firm and the audit is sent to the Town. Five percent of the ASC payment will go to Union County and 95% to the Town. Similar to a resident’s property tax, the Streetworks property tax is bifurcated into a tax on the land and a tax on the property improvements. The land taxes will be paid to the Town and then a portion goes to Union County and the Westfield School District. This is a new source of property tax revenue because the land was previously owned by the Town.

 

Digging Into The Numbers Robert Powell advised Westfield on the financial aspects of the project to determine its feasibility. Powell examined the development costs, projected rents for each property type, estimated operating costs, funding sources, and projected increases in rental income and operating expenses over time. The numbers are used to calculate the developer’s projected return if they make the expected equity investment.

Powell said the return has to be at least 10% or 11% to be competitive. Some of the developer’s investment is for a public purpose. This includes 36 low and moderate income apartments, $8M for streetscape improvements, and $3M for private property improvements.

"Take Me to the PILOT" 🎵 If there was not a PILOT and the developer had to pay full taxes, the project would generate a return on equity in the mid-single digits. This would not be “adequate in today’s capital markets to justify a projected equity investment in excess of $150M,” Powell concluded.

The Town negotiated an agreement that struck a balance between the maximum financial benefit to the Town and the minimum financial viability for the developer. Powell said the agreement will generate an internal rate of return on equity in the low double digits (10% range) and factors in construction cost and lease-up risks. The projected PILOT payments represent 70% of theoretical full taxes in years 1 - 5; 75% of taxes in years 6 - 15; and 81% of taxes in years 16 - 30. The annual payments that the developer pays are based on the project’s gross revenues. Years 1 through 5, it is 13%. Years 6 through 15, it increases to 14%. Years 16 through 30, it increases to 15%. If the revenues are lower than expected, the developer will have to pay additional funds to ensure the minimum payment of taxes. PILOT revenues will increase over time as the project is built and leased. For example, in year 5, 2032, the revenues are projected to be about $5M and will ramp up to $11M in 2056. The total PILOT revenue is projected to be $214M.

 


HBC Will Pay For Redevelopment Area Bonds

Matt Jessup explained the necessity of Westfield issuing bonds and how the developer will pay the debt service. The $54.2M of public improvements are on land owned by the Town. Initially, the improvements will be funded by the developer and three Redevelopment Area Bonds (RABs):

● $16.5M for the North Parking Garage ● $13.0M for the South Parking Garage ● $16.5M for the other public improvements. Streetworks will provide $8M to the Town early in the project for improvements such as the North Avenue Town Square. Jessup explained that the bonds will be issued over time as the Streetworks development reaches milestones. Here is how the project will be staged: 1) West Zone construction reaches milestones 2) North Parking Garage bond is issued 3) South Zone construction begins after 50% of office building 1 is pre-leased 4) South Parking Garage bond is issued 5) South Zone construction reaches milestones 6) Public Improvement Bond is issued Jessup added, “The staging ensures that we don’t get ahead of project revenues and over issue bonds relative to Streetworks buildout and completion of the redevelopment project.”


The Town has a “PILOT sufficiency test” which monitors the revenues to ensure that 80% of revenue is available to pay the debt service for bonds issued. Each bond is issued for 25 years, at a level debt service, and at a 4% interest rate based on the Town’s AAA credit rating. Jessup said the 4% interest was conservatively high.

Jessup addressed a question about the possibility of improvements exceeding cost projections. He said, "We have a debt service cap. We will measure the debt service interest rate against 80% of the PILOT. If there is not sufficient revenue, we are not doing all of the projects. ... We will never issue more in bonds than the project can support." Paying the Debt Service Over the life of the project, the average annual debt service for all three bonds will be $3M. Revenues to the Town will ramp up from $4.6M in 2030 to $10.98M in 2056. This averages to $7.13M per year, or $213M over the life of the project. Since the total debt service over the project is $73M, the Town will net $140M over 30 years. This averages to over $4M per year in tax revenue which can be used for general municipal use. Mayor Brindle interjected that the project will produce "public benefits that the Town would never be able to afford and taxes will be stabilized for the long term."


Ensuring Streetworks Pays Westfield A special assessment is a tax imposed on land that received improvements. The tax is paid to the municipality. Special assessment taxes are typically used when new sidewalks or sewage lines are installed. Property owners who receive the benefit of the improvement are taxed for the cost of improvement. The Town can use a special assessment on Streetworks property if Streetworks does not pay the full amount of PILOT revenue. If the special assessment is not paid, Westfield would acquire a first lien position on the property ahead of all other parties (equity investors and construction lenders) who have a lien, or right to a lien. The potential for Westfield to acquire a superior lien position is a strong incentive for Streetworks to pay Westfield the owed PILOT revenue. A special assessment remains in place for three consecutive years.



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