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HomeMy WebLinkAboutItem 08October 17, 2011 e Item No. Acceptance of Lakeville Liquor Economic Impact Study Proposed Action Staff recommends adoption of the following motion: Move to accept the Lakeville Liquors Economic Impact Study. Adoption of this motion will result in the completion of the Phase 1 study. Overview Per Council direction the Liquor Department was directed to conduct a study on the economic impacts of the Municipal Liquor Operation. Shenehon Companies were contracted by the city to evaluate various impacts of the City of Lakeville's municipal liquor operation The results of the analysis have been reviewed at a Council Work Session and have been referred to the Finance Committee for review and comment. Primary Issues to Consider o What issues were studied by Shenehon Company? o How was Shenehon Company Inc. selected to perform the study? o What was the cost of the study? Supporting Information Economic Impact Study for Lakeville Liquors (Executive Summary) Note: The entire study can be viewed on the City of Lakeville website at www.lakevillemn.gov Brenda L. Visnovec Liquor Operations Director Financial Impact:: None Source: Related Documents (CIP, ERP,) Notes: _The analysis was previously authorized by the City Council Council Report Page 2 Staff Analysis of Primary Issues o What issues were studied by Shenehon Company? Shenehon Companies were contracted by the city to evaluate the following three specific components: ECONOMIC IMPACT ON RETAIL DEVELOPMENT FROM OPERATION OF MUNICIPAL LIQUOR STORES IN THE CITY — Determine the economic impact (s) to Lakeville as it relates to the operation of the Municipal Liquor Stores. Specifically attempt to: a. Identify retail businesses that do no locate in cities with municipal liquor operations. b. Determine whether non - liquor selling retail businesses, in general, avoid cities operating municipal liquor stores. 2. FINANCIAL IMPACT COMPARISON OF LAKEVILLE WITH MUNICIPAL LIQUOR OPERTIONS TO THE ALTERNATIVE OF LICENSED PRIVATE LIQUOR STORES — Compare the financial and non - financial impacts to the city revenues of Lakeville under two scenarios. Each scenario assumes the city of Lakeville will relinquish its municipal liquor operations and implement private off sale liquor store licensure. a. Private liquor stores spaced no closer than 3 / miles apart in current commercially zoned areas. b. Open licensure of liquor stores with no spacing restrictions. 3. ECONOMIC IMPACT ON LAKEVILLE'S REVENUE FROM LIQUIDATION OF MUNICIPAL LIQUOR STORES (REAL ESTATE AND BUSINESSES) AND IMPROVED TAX BASE WITH POTENTIAL NEW DEVELOPMENT. 9 How was Shenehon Company Inc. selected to perform the study? After an extensive proposal and interview process, Shenehon Company Inc. was selected based on a number of outstanding qualifications including: They were the lowest responsible bidder out of the four companies that supplied proposals. Shenehon Company is a nationally accredited firm that works with both public and private sectors that work in all aspects of real estate valuation, market studies and appraisals. Their client list includes hundreds of high profile companies including American Express, Best Buy Co. and Cargill, as well as the public entities of the City of Eden Prairie, US Army Corps of Engineers and the University of Minnesota. Council Report Page 3 b What was the cost of the study? Initially the study was all inclusive to include strategies to move forward in the operations, or to exit the business with a proposed cost of $56,500. City Staff worked closely with the Liquor Committee and City Council to reduce the scope of the project to the three questions derived, with other phases available to be completed, based on the outcome of the initial study. Final cost of the initial study to this point is $25,000, there are options available to complete additional phases of the study, should the City Council wish to proceed. ON OLVA, gill Ul Moll MA EXECUTIVE SUMMARY ECONOMIC IMPACT ON RETAIL DEVELOPMENT FROM OPERATION OF MUNICIPAL LIQUOR STORES IN THE CITY Specific Analysis of Mafor Retailers The global survey dataset which includes the top 15 retailers in the United States with locations in the Twin Cities Metro Area was derived from the top 55 retailers in the world. Among the top 15, we first identified whether there were any locations in Lakeville, Minnesota. Of the 15 top retailers, seven were already located in Lakeville. We additionally looked at whether the top 15 retailers were located in other cities with municipal liquor within the Metro Area. If the retailer locates its stores in cities with municipal liquor, then there is likely little restriction due to the presence of municipal liquor. Of the 15 top retailers, each one had retail locations in a city with municipal liquor. Our retail dataset included hybrid retailers, or stores that market both merchandise (soft goods, hard goods, or food) and liquor. We note this makes such stores liquor- related. Hybrids would not ordinarily be part of our survey, and there is only one store in the Twin Cities that meets the hybrid criteria - Costco. We did include Costco in this survey and found that one of its five stores in the Twin Cities Metro market is, in fact, located in a city with municipal liquor. Overall Review of'Total Retail Development in Lakeville Compared to other South Alletro Cities and Regional Averages The Twin Cities Metro Area, including cities at the edge and embedded within the MUSA line, has a per capital built -out retail space that is 23.2 square feet per capita, with Lakeville's built -out retail at 19.1 square feet per capita. Thus, Lakeville has a higher per capita retail built -out space than other edge of MUSA cities which average 16,7 square feet. Lakeville's per capita real estate is somewhat below the overall metro average as would be expected for a developing area, but it is above average compared to other MUSA edge cities. A graphic representation of Lakeville's overall retail situation, compared with other identified cities and with the Twin Cities Metro Area, is as follows: Based upon our analysis, we do not identify that Lakeville's retail development is impeded when compared with similar edge of MUSA cities in the area. 1 1091 UALL SHENEHON COMPANY EXECUTIVE SUMMARY FINANCIAL IMPACT COMPARISON OF LAKEVILLE WITH MUNICIPAL LIQUOR OPERATIONS TO THE ALTERNATIVE OF LICENSED PRIVATE LIQUOR STORES We would anticipate the city of Lakeville under the scenario of licensure of private liquor stores would, over time, see the addition of six new private liquor stores, approximately 5,318 square feet in size each, which would compete with the existing three stores. In a private liquor store licensure scenario, we are of the opinion that the subject stores (particularly the two stores owned by the city) would likely have overcapacity and experience sharply lower sales per square foot. This expectation would lower the market value of both the real estate and the businesses. Financial Impact of Private Liquor Store Licensure on Revenues Property Taxes The impact on the city of Lakeville from the privatization of its municipal liquor stores is the shift from profits generated at the stores to revenues generated exclusively through property taxes and licensure. New property taxes would come from two sources: New development of retailers avoiding the city when there were municipal liquor stores and new liquor stores. We did not identify any new development from retailers avoiding the city and the only liquor stores identified were the two existing municipal stores which would be sold. We consider the property taxes for the municipal liquor stores sold under private licensure in the Payment in Lieu of Taxes (PILT) section. Payment in Lieu of Taxes The market value of the Galaxie Store, assuming the city ended its operation as a municipal liquor store, is estimated to be $1,720,000. The market value of the Kenrick Store would be $1,680,000. Assuming private licensure, the property taxes estimated for the Galaxie Store would approximate $24,244 per year, of which $7,699 is allocated to the city of Lakeville and the rest allocated to County, School and Other categories. The Kcnrick Store property tax payment is estimated at $23,669, of which $7,516 is allocated to the city. Therefore, total proceeds payable to the city in property taxes is $15,215, a figure lower than the payment in lieu of taxes with properties operating as municipal liquor stores (with payment in lieu of taxes at $66,931). Financial Contributions to the Communitv and Philanthropic Endeavors We do not view these categories as contributing substantively to the revenues of the city and benefit is difficult to measure. Private liquor stores generally operate smaller facilities with narrow margins, and any financial contributions or philanthropic endeavors by local liquor retailers tend to be limited (such as sponsoring a neighborhood baseball team, etc.). In comparison with municipally owned liquor stores we additionally note they do tend to do more within their community and maintain a stronger relationship with law enforcement. To the extent larger retailers (such as Target, etc.) provide contributions, the community benefits. We have identified seven of the top retailers already located in Lakeville, including a Wal -Mart (as of 2012) and Target. We do not identify any change regarding private liquor licensure as it relates to what larger retailers are willing to do for Lakeville or other communities. Licensing Fees From the League of Minnesota Cities Handbook for Minnesota Cities, Chapter 21 - Budgeting: "Another source of revenue for cities come from license and permit fees. Cities should be conservative when estimating these amounts as they can vary considerably from year to year. Municipal licensing should not be viewed as a significant source of revenue. In Minnesota, license fees must approximate the direct and indirect costs 1109 SHlNEI10N IXIMPA" EXECUTIVE SUMMARY in issuing the license and policing the licensed activities," We do not find licensure contributing revenue to the city above what is needed to provide the service of oversight for licensure. The additional fees would likely be paired with the increased costs associated with oversight associated with the private liquor store licensure scenario. Calculation of the Property Tax Impact on the Average Residential Property and Commercial- Industrial Property in Lakeville to order to ascertain the impact on average property taxation, we first estimate the level of revenues contributed by the municipal liquor stores, and then compare the alternate property taxes collected with private licensure of liquor stores. The overall total impact from the loss of cash flows from the municipal liquor stores, and the increased property tax collection is a net decline in the Levy and Tax Capacity. Considering the loss of municipal liquor store contribution of income to the city for 2011 (offset by properly tax receipts of the privatized stores), the average residential property owner would pay $2,815 in property tax (S49 more than the $2,767 paid with municipal liquor revenue contributions to the city). The average commercial - industrial property owner would pay property taxes of $33,850 ($236 more than the $33,613 with municipal liquor revenues) under private licensure. ECONOMIC IMPACT ON LAKEVILLE'S REVENUES FROM LIQUIDATION OF MUNICIPAL LIQUOR STORES (REAL ESTATE AND BUSINESSES) AND IMPROVED TAX BASE WITH POTENTIAL NEW DEVELOPMENT In addition to the financial impact from the loss of cash flows and changes in tax base, the city would also gain cash flows from the sale of its three municipal liquor stores. We will, therefore, compare current net income of the municipal liquor stores with potential net income that results from the cash flows derived from the liquidation of these assets (including the real estate of two liquor stores and three liquor store businesses). We considered the impact of private liquor licensing on the city's revenues through changes in property tax in the prior analysis. It'e also value the properties assuming private licensure. Zhe value of these assets assuming private licensure is toner• than when the properties operate as municipal liquor stores with geographic exclusivity in Lakeville. Proceeds from Real Estate - Following is the concluded value of the real estate: Lakeville Liquor - Kenrick Store (Private Licensure) $1,680,000 Lakeville Liquor - Galaxie Store (Private Licensure) $1,720,000 Total $3,400,000 11091 UAL SHINENOP CO.InNv EXECUTIVE SUMMARY Proceeds from Businesses - Following is the conclusion of the three Lakeville Liquor Store businesses: Market Value of Lakeville Liquor Store Businesses Assuming Private Licensure Heritage wodcing Capital $38,357 Inventory $403,599 Fixed Assets $92,861 Execs, Cash $786,176 Going Concern - Goodwill $179,007 Total Market Value $1,500,000 Galaxie Kenrick Total $302,286 $403,615 $744,258 $490,938 $505,914 $1,400,451 $67,435 $91,245 $251,541 $1,365,000 $1,659,993 $3,811,169 $ 24,341 $39 $242,581 $2,250,000 $2,700,000 $6,450,000 Contribution to Revenues from the Sale of Real Estate and Businesses - The sale of the liquor store assets results in a total of $3,400,000 for the real estate and $6,450,000 for the businesses, or $9,850,000. From these proceeds a total of $3,359,661 in bonding must be paid. The net proceeds are, therefore, $6,490,339. Total Real Estate $3,400,000 Total Businesses 16 Total of Real Estate and Business $9,850,000 Less: Bond Debt ($3.359.661) Net Proceeds $6,490,339 These proceeds can be invested and provide a revenue stream to the city. Minnesota Statutes, Section '1 18A.04 guides Municipality Investments, which limits investments to governmental bonds, notes, bills, mortgages (excluding high -risk mortgage- backed securities), and other securities, which are direct obligations or are guaranteed or insured issues of the United States. Assuming limitations on investment, a I% annual return is currently at market for these proceeds. Considering the total value of the properties (real estate and business) at $6,490,339 the investment proceeds would be equal to $64,903 per year. Alternatively, the city could lease the real estate. Impact on the Tax Levy Resulting from the Revenues Derived from the Sale of Liquor Store Real Estate and Businesses Owned by the city of Lakeville - Finally, we would consider the additional revenue provided from the proceeds of the sale of the municipal liquor store real estate and businesses. The proceeds are estimated at $64,903 replacing the net income provided to the city by the municipal liquor stores totaling $1,175,000. Considering the loss of municipal fiquor store contribution of income to the city for 2011 and replacement with returns from sales of the municipal stores (real estate and business), the average residential property owner will pay $2,813 (it was $2,767 with municipal liquor revenues) in property tax, and the average commercitd- industrial property owner wilt pay $33,836 (it was $33,613 with municipal liquor revenues) in property tax. 11091 ludm. SHENEHON wmrM y EXECUTIVE SUMMARY Overall, each residential homeowner will owe an average of $46 more in property tax and the average commercial - industrial owner will owe an average $223 more in property tax. SUMMARY We have identified a significant financial benefit provided by the municipal liquor stores. Cash flows derived from the stores are estimated at $1,175,000 compared with a $20.75 million city net levy (or 5.66% of the levy) in 2011. The estimated saleable value of the assets generating this cash flow was estimated at $6.49 million. Therefore, considering the cash flows generated from these assets of $1.175 million, the rate of return is 18% ($1.175 cash flow divided by $6.49 million saleable value). if sold, the city would receive an estimated I % return on these proceeds. The benefit we identified from having municipal liquor stores was pronounced. Our analysis found that in order to provide an equivalent level of property tax relief to homeowners and commercial businesses, an additional $112,000,000 market value of commercial real estate would need to be constructed in the city to offset the lost benefit of the $1,175,000 annual cash flows generated by the three municipal liquor stores. This level of development is the equivalent of 20 to 40 large commercial developments needing to be built but for the presence of the existing three municipal liquor stores. Further, our analysis-indicated that it was unlikely any commercial retail development has been lost due to having municipal liquor stores. The primary driver for commercial retail development is demographic. Alternatively, if Lakeville sold all of the real estate and businesses associated with the municipal liquor stores and applied these to the annual lost revenues, the fund would be depleted in approximately 5.5 years. The estimated total proceeds from sale of' municipal liquor would be $6,490,339, divided by the annual lost revenues derived from these assets at $1,175,000. 1 1091 UWL SHIMMON mmrnnv