Re: Lanterns Fiscal Impact Analysis. Background. Analysis Process. June 7, Mr. Scott Carlson Carlson Land PO Box 247 East Lake CO 80614

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1 June 7, 2013 Mr. Scott Carlson Carlson Land PO Box 247 East Lake CO Re: Lanterns Fiscal Impact Analysis Dear Mr. Carlson: As per your request, this analysis quantifies the likely fiscal effects of developing approximately 1,200 single family homes at the Lanterns subdivision within the city of Castle Rock, Colorado. A full description of the subject property is provided elsewhere in the development application. Background The city of Castle Rock is located in central Douglas County, approximately 30 miles south of the Denver Central Business District and 40 miles north of Colorado Springs. The city has approximately 18,300 households and nearly 50,000 residents along with a complementary mix of commercial, industrial, and public land uses. Castle Rock is the Douglas County seat and the largest incorporated community in the county. The city provides a full array of municipal services on a general fund budget of about $32 million per year. The city also operates a number of enterprise funds in which annual revenues from dedicated taxes, fees and charges are sufficient to recover annual operating costs. Enterprise funds include water and sewer services, golf operations, a community center and development services. The proposed Lanterns development site is approximately two miles south of the city s center, just north of the Bell Mountain Ranch property. The site adjoins I 25 on its western boundary and the existing Crystal Valley Ranch subdivision to the north. The property owners anticipate the eventual construction of 1,200 single family units. The pace of development is uncertain, but the developer foresees a gradual build up to roughly 100 new homes per year. Project build out will likely take years. Analysis Process This analysis quantifies how development of the Lanterns will affect Castle Rock general fund revenues and associated service delivery costs. This analysis is based on a Castle Rock specific fiscal impact model developed by BBC Research & Consulting, which translates development expectations into new city revenues and reciprocal service delivery costs.

2 Page 2 In order to model city service delivery and revenue systems, BBC collected municipal budget information and demographic data from the city and the State of Colorado Department of Revenue, as well as property tax rate information from the Douglas County Assessor s Office. These data were supplemented by personal interviews with city and county staff. The property owner and developer provided project specific detail, including likely home values and expectations of development pace. Summary of Results The Lanterns project is expected to produce a modest negative impact on the city s general fund, estimated at about $100 per unit/year. By way of example, in year five with an estimated 450 units on the ground, the development will produce costs in excess of revenues in the amount of about $55,991. By way of comparison, the city s current general fund budget is $32 million. A summary of project effects is provided below: Figure 1. General Fund Net Fiscal Impact Source: BBC Research & Consulting. Net General Fund Lanterns Project Year 1 Year 5 Build Out Revenues $58,061 $536,103 $1,458,528 Expenditures 65, ,095 1,578,919 Net Impact ($7,727) ($55,991) ($120,391) Built Units ,200 Per Unit General Fund Impact ($155) ($124) ($100) Per unit losses in the early years are the result of a modest time lag in property tax and sales tax collections between the time of unit construction, eventual occupancy and tax receipts. A few points are worth noting in considering these conclusions: The city of Castle Rock is a regional service and retail center. The community s retail base generates considerable business from persons living outside of the city. No internal residential development can replicate this level of non resident sales. While the Lanterns project on paper presents a small net loss to the city, so too does every current household in the city. The Castle Rock community is essentially subsidized by non resident sales tax collections and can thus afford relatively high levels of public services in comparison with other similarly sized communities that lack the stimulation of regional retail sales. It is quite possible that Castle Rock will continue to enjoy the importation of sales tax revenue from outside the community, or even grow that external capture rate, which would negate the modest losses associated with in town residential development. Residential growth within the city, such as the Lanterns, will reinforce the community s regional shopping position and help stimulate an increasingly diverse and robust retail environment. The Lanterns developer will provide all on site infrastructure necessary for the development of the project. In addition, construction of the 1,200 units will produce over $8.0 million in impact fees designated for expansion of capital infrastructure elsewhere in the city.

3 Page 3 Beyond the general fund, the proposed Lanterns project will also produce over $1.0 million per year in various fees, charges and taxes that accrue to the city s transportation, development services and community center funds. These funds are designed to be operated on a cost recovery basis. Each unit in the Lanterns will generate about $8,000 in use tax in the year of its construction. If a small share of these funds were allocated to the general fund, the Lanterns would cover its associated operating costs for most of its entire development period. This analysis reinforces the perception that residential units in Castle Rock are modestly subsidized by commercial land uses, particularly retail operations that draw sales tax revenue from regional markets. Castle Rock Financial Structures Castle Rock pays for most key public services out of the general fund. The city also accounts for certain specific services and targeted revenues by way of special purpose and enterprise funds. The focus of this study is on the city s general fund, although project specific revenues accruing to other funds are also documented. In completing fiscal impact projections for the Lanterns project, BBC used the city s most recent full year s financial data (2012), which presents the most current profile of city service delivery expenses and revenue generation characteristics. Castle Rock has certain notable broad financial management practices that influence how new development affects costs and revenues. Particularly relevant practices are noted below: Sales tax dedication. The city s 4.0 percent sales tax accrues to the general fund. By policy, not by statute, the city allocates sales tax revenues to the transportation fund (25%), community center (5%), and the general fund (70%). BBC has assumed continuation of this policy. Use tax. The city s use tax on imported residential building materials is also designated for certain special funds. This project produces considerable use tax revenue, over $8,000 per unit in the year of construction, which is distributed to the transportation and transportation capital fund, the community center fund and long term planning. Internal charges. The city provides a variety of administrative and support services to the enterprise funds. The general fund charges enterprise and other operating funds for these services and thus the general fund budget shows a substantial cash transfer from other funds. We ve anticipated continuation of this practice. Enterprise funds. Castle Rock to its credit has multiple enterprise funds, where annual operational costs and replacement capital investment expenses are recovered from a specific set of taxes, fees and charges and the funds are balanced each year. In most Colorado communities, water and sewer operations are operated as enterprise funds. In Castle Rock, the city also operates enterprise funds for the golf course, the community center (recreation center), and building services functions. Transportation fund. The city maintains a transportation fund for snow removal, maintenance, repair, and expansion of street systems. This is not a true enterprise fund

4 Page 4 because it relies on annual transfers of general fund revenues, but it effectively operates with the same internal spending discipline whereby costs and revenues are balanced each year. In addition to a share of sales and use taxes, the transportation fund receives motor vehicle taxes, highway user trust funds from the state, and road and bridge funds from the county. The city supports a multi year street maintenance and repair program through this fund. Fire and rescue revenue. The fire and rescue department serves the city and a larger fire district surrounding the city. The non municipal district pays the city for contracted services ($427,000/yr). We have removed this expense and the equivalent revenue from the city s fire related budget in order to present a more accurate portrayal of in town fire services. Impact fee fund. Castle Rock charges impact fees on new development. As required by law, these fees are collected and reserved exclusively for expansion of specified capital facilities in proportion to the demand placed on these facilities by new growth. The Lanterns contribution to this fund is calculated later in this report. City General Fund Revenues Residential development in Lanterns will generate sales and property taxes in relationship to household income, local retail spending and household property values. Other revenues are largely forecasted on a per household basis. Figure 2 on the following page shows the 2012 value of all city revenues, current estimated perhousehold revenue attributions and the revenue impact of the Lanterns project in the early years of development and at full build out.

5 Page 5 Figure 2. The Lanterns General Fund Revenue Effects REVENUES 2012 Council Approved Budget Percent New Unit Amount Lanterns Project (YE Estimates) Residential per Household Year 1 Year 5 Build Out Revenues Property Tax General $987,408 Ind. Calculation $ $13,556 $65,068 General Sales 20,721,135 Ind. Calculation 33, , ,413 Motor Vehicle 2,100, % 98 4,884 43, ,224 Utilities Tax 2,025, ,709 42, ,015 EMS Transport 1,000, ,325 20,929 55,810 Specific Ownership Tax 238, ,984 13,289 Use 18, ,032 General Intergovernmental 135, License & Permit Tax 89, ,863 4,967 Charges for Services 294, ,162 16,433 Fines & Forfeitures 475, ,106 9,950 26,534 Other Revenue (Misc) 358, ,499 19,998 Investment Earnings 74, ,567 4,178 Transfers In from Specific Funds 682, ,587 14,283 38,089 Cost Allocation Fees 2,766, ,432 57, ,376 Interfund Loan Revenue 66, ,382 3,684 Capital Leases 330, ,906 18,417 Total $32,362,259 $489 $58,061 $536,103 $1,458,528 Current Castle Rock Housing Units 18,276 Source: BBC Research & Consulting. Further explanation of these forecasts is provided below. Sales taxes. The city relies heavily on sales tax for general fund operations. Lanterns associated sales tax revenues will be generated by new resident spending within the city. Some additional tax revenue from the purchase of building construction materials within the city is also likely but not included in these forecasts. BBC calculated Lanterns household spending on city taxable retail goods using household expenditure data from the Bureau of Labor Statistics Consumer Expenditure Survey (CES). These household spending data are available by household income level and geographic region. The CES tables of expenditures by retail category (Appendix Figure A) were used to allocate the after tax income of likely Lanterns residents. Lanterns units are anticipated to attract twoworker households with average family earnings of about $91,000 per year. Two capture rates are applied to the CES expenditure estimates. The first adjustment identifies expenditures that are likely to occur in the city of Castle Rock and the second distinguishes those expenditures that are sales taxable. By this process, each Lanterns household is expected to spend about $23,900 per year in the city of Castle Rock, with approximately 70 percent of the resulting 4.0 percent sales tax accruing to the general fund.

6 Page 6 Property taxes. The Lanterns anticipates home values averaging $400,000. Residential property is assessed at 7.96 percent of market value. The city has a general mill levy of 1.7 mills, which is a very low taxing rate by metropolitan Denver measures. Each Lanterns home is expected to generate approximately $50 per year to the general fund. Per household revenues. As reflected in the prior Figure 2, the majority of city revenues were forecasted using the existing per household revenue multiplier and the project s build out schedule. Per household revenue multipliers were derived for each line item in the 2012 general fund budget and applied to the cumulative number of Lanterns households. These projections recognize that other land uses besides residential development contribute to city revenues. For instance, non residential development also generates utility taxes, motor vehicle revenues, and various fines and service charges as well as property tax and some sales tax. Based on county property assessment data that document the amount of non residential development in the city, BBC estimates that about 15 percent of Castle Rocks property development is in commercial, retail, industrial, or institutional uses. Sales and property tax aside, BBC estimates that non residential development pays about 15 percent of the city s general fund revenues. City Expenditures In 2012, the city of Castle Rock provided general fund services to approximately 18,300 housing units at a cost of approximately $32 million. The largest service expenses are in the police department; fire and EMS operations; and recreation/parks programs. Figure 3 shows 2012 city expenses by department, per household service costs with adjustments, and forecasts of Lanterns associated service costs during the first year of development, fifth year (stable year), and at build out.

7 Page 7 Figure 3. Lanterns General Fund Expenditure Effects EXPENSES 2012 Revised Percent Percent New Unit Amount Lanterns Project Budget Amount Residential Variable per Household Year 1 Year 5 Build Out General Administration Administration $1,444, % 90 % $60 $3,022 $27,199 $72,531 Human Resources 585, ,225 11,027 29,405 Community Relations $522, ,094 $9,848 26,262 Finance/Purchasing 3,042, ,368 57, ,841 Data Processing/IT $1,791, ,750 $33,752 90,005 Judicial 271, ,111 13,629 Legal $498, ,044 $9,393 25,047 Facilities 989, ,070 18,633 49,689 Public Safety Police Department $8,253, % 90 % $345 $17,274 $155,462 $414,567 Fire and EMS Depts. 8,651, , , ,567 Public Works Engineering/Administration 85 % 90 % $0 Community Development Planning & Zoning Division $445, % 90 % $19 $932 $8,390 $22,373 Parks and Recreation Parks & Open Space $2,693, % 90 % $133 $6,632 $59,691 $159,175 Streetscape & Trail Maint. 1,670, ,701 33,311 88,830 Total Expenditures $30,860,931 $954 $65,788 $592,095 $1,578,919 Annual Revenues Minus Expenditures ($7,727) ($55,991) ($120,391) Current Castle Rock Housing Units 18,276 Cummulative Households ,200 Source: BBC Research & Consulting. Non residential costs. In calculating a per household service cost multiplier, this model recognizes that residential development is not the only land use driving municipal costs. All land uses, including retail, industrial, and commercial, require some city services. Traffic management, police department, ambulance services, and road maintenance expenses are all sensitive to the presence of non resident workers, shoppers, and the demands of commercial property for police and fire protection. Variable costs. Virtually all public service organizations have some fixed costs that are not proportionately affected by new residential growth; e.g. city council expenses, city finance or facility maintenance are examples of service costs that may rise with household growth, but will not rise proportionally with new household growth. In the prior Figure 3, estimates of variable costs are shown by expenditure line item. Lanterns Impact By the process described here, we anticipate that the city general fund will experience a small annual loss as a result of the Lanterns project. Figure 4 shows that at build out, projectassociated general fund expenses will reach $1.58 million while revenues are projected at $1.46 million, leaving a shortfall of $120,391 spread over 1,200 units. This equates to $100/per unit/year.

8 Page 8 Figure 4. General Fund Net Fiscal Impact Source: BBC Research & Consulting, 2013 Net General Fund Lanterns Project Year 1 Year 5 Build Out Revenues $58,061 $536,103 $1,458,528 Expenditures 65, ,095 1,578,919 Net Impact ($7,727) ($55,991) ($120,391) Built Units ,200 Per Unit General Fund Impact ($155) ($124) ($100) It should also be noted that this projection does not include the project related sales and use taxes that are dedicated to other funds, which are documented later in this report. Impact fees In addition to general fund receipts, the Lanterns development will produce substantial impact fee revenue. As noted in Figure 5, by project completion the Lanterns will generate over $8.1 million in funds for offsite capital expansion elsewhere in Castle Rock. Figure 5. Impact Fees Schedule Source: BBC Research & Consulting. IMPACT FEES (2,600 2,699 sq ft/unit) Total Fees Fee/Unit Parks & Recreation $3,380,300 $3,073 Municipal Facilities 638, Fire 696, Police 363, Transportation 3,097,600 2,816 Total Impact Fees $8,175,200 $7,432 These capital expansion funds are also afforded a share of Lanterns generated use tax. Special Purpose Funds The city of Castle Rock maintains three special purpose funds that use certain dedicated revenues to support specific city functions. Figure 6 documents the additional revenue from the expected increase in the city s sales tax revenue. Figure 6. Dedicated Funds Revenue Impact Dedicated Funds Revenue Impact Year 1 Year 2 Year 5 Build Out Transportation Fund $164,111 $ 339,914 $410,069 $1,042,711 Community Center Fund 26,072 54,653 69, ,041 Development Services Fund 220, , ,169 1,102,922 Source: BBC Research & Consulting.

9 Page 9 As noted above, the city s transportation fund will collect over $1.0 million in Lanterns based fees at build out, mostly from a dedication of sales tax (25.0 percent of sales tax collections), but also from an allocation of state highway reimbursements and a share of use taxes. These funds will be available for roadway repair and maintenance throughout the city. Similarly, the Lanterns will produce substantial revenue for the development services fund, which will cover all costs of building review and related services associated with the Lanterns project. Funds to the Community Center are from 5.25 percent of Lanterns local sales tax generation. I hope these calculations have been helpful in communicating the effects of this development on local revenues and service delivery costs. Sincerely, Ford C. Frick Managing Director

10 Page 10 Appendix A Figure A 1. Per Household Spending Expenditure Category Average Annual Expenditure Percent Spent in Castle Rock Percent Sales Taxable Per Household Spending in Castle Rock Median Household Income before taxes $91,000 $81,767 Food $9,775 $8,783 Food at home 5,307 4, % 100 % $4,530 Food away from home 4,467 4, ,211 Alcoholic beverages $844 $ % 100 % $683 Housing $25,689 $23,083 Shelter (75% owned dwellings) 15,229 13, % 100 % $2,053 Utilities and fuels 4,958 4, ,455 Household operations 2,018 1, Housekeeping supplies Household furnishings and equipment 2,560 2, ,150 Apparel and services $2,821 $2, % 100 % $1,267 Transportation $13,580 $12,202 Vehicle purchases (net outlay) 4,824 4, % 0 % $0 Gasoline and motor oil 3,841 3, Other vehicle expenses 3,879 3, Public and other transportation 1, Health care $4,742 $4,261 Health insurance 2,561 2,301 0 % 0 % $0 Medical services 1,423 1, Drugs Medical supplies Entertainment $4,325 $3, % 75 % $2,332 Personal care products and services $1,053 $ % 100 % $852 Reading $188 $ % 100 % $152 Education $1,976 $1, % 0 % $0 Tobacco products and smoking supplies $321 $ % 0 % $0 Miscellaneous $1,246 $1, % 75 % $0 Cash contributions $3,123 $2, % 0 % $0 Personal insurance and pensions $12,084 $10, % 0 % $0 Total $81,767 $73,471 0 % 0 % $23,901 Annual Per Household Retail Spending $23,901 Source: Bureau of Labor Statistics; BBC Research & Consulting