FOREST CITY INDUSTRIAL PARK FIN AN CIAL RETURNS EXECUTIVE SUMMARY The City of London is engagedl in industrial land development for the sole purpose of fostering eonomi growth. The dynamis of industrial land development are set by the ompetitive fores in the region, and by the ommunities with whom London ompetes diretly for new industrial investment. In South-westem Ontario, market onditions have disouraged the private setor from engaging in industrial land development. London ompetes with ommunities suh as St. Thomas, Strathroy, Chatham, Woodstok, Sarnia, Ingersoll, Brantford and other ommunities generally within a 100 kilometre radius of London. These ommunities have made signifiant investments in industrial parks as an induement to stimulate eonomi growth, leading to the reation of new jobs. It is expeted that this ompetition will inrease over time as the investment in industrial land inreases. The eonomi impat from investment in industrial land is measured in terms of ares sold, jobs reated and new industrial assessment. There will always be a time lag between investment and return - the hallenge for a ommunity is to shorten this time lag. Unlike a private developer, a muniipality reeives, in addition to the proeeds of sale, an ongoing stream of tax revenues from both the new industrial user as well as employees of the new enterprise. These new tax dollars are not totally offset by osts, reating a surplus tax for the muniipality. The finanial returns to the City from the Forest City Industrial Park investment are foreast to exeed $4.4 million on a net ash investment of $8.5 million. In addition, it is foreast that over a 10 year period the City will, SOLELY as a result of its investment in the Forest City Industrial Park -- a Inrease industrial assessment by approximately $40 million. Inrease annual industrial tax revenues by approximately $1.5 million (plus an estimated annual $1.6 million ontribution to eduation taxes). Create a total of 2,500 diret new jobs and 2,200 indiret jobs of whih 1,500 and 1,300 are estimated to reside in London. Generate in exess of $60 million annual payroll from diret new employment and $58 million from indiret employment. Net Present Value of 10 year net ash flow foreast, disounted at 5%. This is the estimated present value of the 10 year finanial return in exess of the net ash investment made by the City in this development. 1
1 301 Generate the apaity to pay approximately $30 million in total annual taxes from diret employment inome and $28 million from indiret employment inome. Generate the apaity to pay approximately $1.7 million in muniipal tax from diret new employment and $1.6 million from indiret employment (employee s resident in London only). Generate the apaity to pay federal and provinial inome taxes from the profits of the new businesses (unquantifiable). Add approximately $340 million to the annual GDP of the ity3. London s Industrial Land Strategy, ombined with a foussed, strategi and aggressive sales effort have resulted in signifiant new investment in the ommunity from industry leaders who have a long-term ommitment to this ommunity. Sale of industrial land for the last 5 years totaled 160 ares; 6 times the total sales for the preeding 5 years (28 ares). 60% (94 ares) of total land sales in the last 5 years have been to new investors as ompared to 20% (6 ares) in the preeding 5 years. Without the City s Industrial Land Strategy, these new investments would not have been made in London. * All taxes paid by an individual in a year inluding personal inome tax, PST and GST, gas taxes, muniipal taxes, et. Based on average GDP per employee of $72,000 for 2,500 diret jobs and 2,200 indiret jobs. 2
We have found that London does not ompete in any meaningful way, for the same investment projets, with KithenerNaterloo, Cambridge, Guelph and ommunities running east towards the GTA. London s ompetitive position vis-a-vis Windsor is driven by issues more ompliated than an assessment of industrial land values. FINANCIAL RETURN The investment in industrial land is reovered by the City through three revenue soures - land sales, industrial taxes, and muniipal taxes generated from new employment ( Residential Tax ). LAND SALES - The demand for industrial land is driven by the ommunity s ability to attrat new investment. London, through the LEDC, has taken an aggressive approah to stimulating demand with the result that reent land sales have been signifiantly higher than historial levels. Historial Land Sales loo T 4.3 80 -- -- $ 60 3 - k E:.d -- 40 2 - - 93 94 95 96 97 98 99 00 01 02 03 Ares Sold Total Proeeds M -5 1 0 0 5 Q) E p1 London s deision to be ompetitive in the regional industrial land market has played a vital role in the ommunity s suess. This demand is a refletion of existing businesses deiding to expand in London and new Investors hoosing London as a loation for new failities. Experiene suggests that an existing London ompany will view land priing differently than a new Investor. An existing ompany sees market value in the ontext of adding to, or replaing, its existing business infrastruture and employees. As the ost of replaing this business infrastruture and training of new employees would, in most ases, be substantial, these ompanies are generally prepared to pay a premium * 4
to regionally established market prie for London lands. The same ompany, planning to move to a new ommunity where they would be starting from srath in building their new faility, would be influened by regional market pries and would only pay a ompetitive prie for land. Historial Land Sales (Existing Companies and New Investors) 70-60 - 50-2 40-2 30-20 - 10-0 - 2 m I I I I I I I I I 1 93 94 95 96 97 98 99 00 01 02 03 - Existing Companies 0 New Investors The prie at whih industrial land is sold is determined by arm s length negotiation between an Investor and the ity. The Investor will be well aware of the industrial land asking pries in the regional market5 and will not, as a general rule, pay a premium to loate in London, despite its geographi position at the entre of the region and established business and training infrastruture. The prie negotiated is market value. The ity s total ost of buying and developing industrial lands is irrelevant to the Investor. In the early to mid 90 s) London s ompetitors were onsiderably more suessful in attrating new investment to their ommunities than was London. One of the reasons given for this fat is that London had set its asking prie for its industrial land substantially higher than regional market pries. With the hange in approah in 2000 (the deision to be a ompetitor in the regional market), London has now onluded industrial land transations at pries that are onsistent with regionally established market pries. These pries may have been less than net developed ost of land to the City6. Finanial returns to a muniipality from its industrial land development ativities are determined by looking at the net gain or loss on land sales together with new soures of diret and indiret muniipal tax revenues. The eonomi development proess invariably involves MEDT. One of their ativities is to tour lients through a olletion of muniipalities where industrial land offerings are the main topi of disussion. The Muniipal At onsiders the sale of land at less than market value to be bonusing. The sale of land at less than ost does not give rise to bonusing. 5
f MUNICIPAL TAX REVENUES - New investments result in revenues to the ity in the form of industrial tax and property tax paid by the employees ( Residential tax ). A portion of this newly generated revenue will be offset by additional osts to the muniipality ( variable osts ). However, in the early stages of a new investment and the payment of new taxes, the variable osts inurred by the ity will be less than the new tax revenues resulting in a surplus tax. A material portion of new tax revenues will NOT be offset by osts but will be available to either redue the mill rate below what it otherwise would have been or added to surpluses of the ity. This surplus tax should be onsidered a finanial return in an evaluation of industrial land development ativities. Expressed differently, a new dollar of muniipal tax revenue will not be immediately offset by a new dollar of expenditure. This differene (surplus tax) would not exist for the City without new development. The following graph has been prepared from hypothetial data7 to reflet the generation of surplus tax. Relationship Between Tax Revenue and Cost 23 $ 18 13 8 1 I I I I I I I I I I 1 2 3 4 5 6 7 8 9 10 - Year Revenues - -Costs ----- Base Cost - Base Revenue New investment reating new jobs provides a new pool of resoures that allow individuals to pay residential tax. The variable osts to the City for individuals would be greater than for industry as the homeowner plaes a greater demand on ommunity servies than does industry. Thus, the surplus t:ax from individuals paying residential tax would represent a smaller portion of total tax than that generated by new industrial assessment. Not atual data; this has been prepared for illustration purposes only. 6
FINANCIAL RETURN ON FOREST CITY INDUSTRIAL PARK The muniipal land development ativity should measure finanial returns from a ombination of net results from land sales, and the long-term impat of reeiving taxes from industrial users and their employees. There are a variety of fators that will impat the finanial returns to a muniipality from its industrial land development ativities. These would inlude - t 1. Purhase prie of raw land 2. Serviing osts of land 3. Government Grants that offset serviing osts 4. Time sequening of - 5. Sale prie of land 6. Others Land sales Constrution Building Coverage Employment generated from new investments This model shows that the City has signifiant positive returns from the Forest City Industrial Park development when evaluated with market tested assumptions. For instane, the Forest City Industrial Park development shows a positive finanial return (NPV) in exess of $4.4 million from its investment of $8.5 million (see Appendix B for the detailed alulation). The data assumptions on whih this 10 year assessment has been made are - Net land development osts Ares available for sale (after infrastruture lands) Foreasted balanes over 10 years - Ares sold Revenue from land sales Muniipal tax generated (10 year aggregate) - Industrial tax Residential Muniipal tax generated (annual) - Industrial tax $8.5 million 141 ares 112 ares $5.3 million $8.8 million $9.2 million $1.5 million 7
Residential tax Surplus tax generated (10 year aggregate) - Industrial tax Residential tax Employment - Diret jobs reated Estimate of employees resident in London Disount rate for NPV alulation $1.7 million $5.2 million $4.8 million 2,500 1,500 5% The variables used in the model are explained in Appendix A. 8
APPENDIX A VARIABLES INCLUDED IN FINANCIAL MODEL The variables used in this finanial model are listed below. The variables fall into the following ategories - 0 0 0 Cost of purhasing and developing industrial lands (net of government grants) Revenues generated from the sale of industrial lands Constrution of plants and determination of muniipal assessment Foreasts for the determination of muniipal industrial tax revenues Foreasts for employment in new plants and determination of residential taxes paid by employees Foreasts for surplus tax PURCHASE AND DEVELOPMENT OF INDUSTRIAL LAND - 1. Cost of purhase - Cost of land, Ares Aquired, Closing Costs and Serviing Costs are required to ompute the total ost of purhasing the land. 2. Other osts or redutions - Finaning osts and government grants an be refleted in the model if they apply. 3. Saleable ares - An estimate of are yield is required to ompute the amount of saleable ares. Sine not all the purhased land an be sold due to storm water reservoirs, sewers, aess to utilities, roads, soil et. an estimate of the net ares available for sale is refleted in the model. REVENUES GENERATED AS A RESULT OF LAND SALES - 1. Diret Revenue - An estimate of ares sold per year, selling prie per are and selling osts are required to ompute the diret revenue from land sales. - Estimates on Building Permits an be inorporated into the model if appropriate 2. Muniipal Tax Revenues The City of London reeives muniipal taxes revenues from new investments through two soures: 9
- Industrial tax: The muniipal taxes paid by a ompany, alulated at the industrial mill rate, on the assessed value of the property. Estimates of building overage and assessed value have been made to determine the level of industrial taxes paid by the new ompany. - Residential tax: on residential properties owned by employees of the new ompany. The total taxes paid by employees aptures the total of all taxes paid by prodution workers. This inludes personal inome tax, muniipal tax, PST and GST, gas taxes, et. Based on prior researh, it was found that on average, workers pay 48% of their inome in taxes of all forms. Similarly, an estimate, based on past experiene, of 6% of total taxes paid is onsidered residential tax. When tested, the model yielded an average residential tax amount per employee whih was reasonable and onsistent with the City s averages. 3. Variable Cost - Common belief holds that every dollar of muniipal tax revenue is offset by a dollar of ost on parks, infrastruture, ommunity programs, et. To the extent that a muniipality develops new assessment and new tax revenues, there is not an immediate additional ost (variable ost) resulting from this new revenue. For instane, the addition of one new industrial plant will not add substantial additional osts to the muniipality at the time this plant starts paying muniipal taxes. - Historial experiene suggests that the variable osts to the ity from an additional industry are not the same as an additional residential neighbourhood. This is beause the level of servies the ity is obliged to provide, like snow removal, poliing, fire, safety, tree removal, roads, et., is greater for residential users than for industrial users. Hene, the variable osts to the ity will be higher for residential users. - Using the same argument, we know that the aggregate taxes paid by an industrial taxpayer are muh higher than property taxes paid by residential users. This leads us to believe that the variable osts for the ity for serviing a new ompany are nominal. - Using this logi, it is assumed that 90% of new industrial tax, and 70% of new residential tax is surplus tax in the first year.. This estimate delines over time to the point where the estimated tax revenues are offset by osts. * OTHER VARIABLES - 1. Employmenthnome generated - Prodution phase: A fator of 2.5 jobs per 1,000 sq. ft. of building spae is used. This variable is based on historial experienes and was found to be reasonable for ompanies operating in the Forest City Industrial Park. Soure: The Frazer Institute, une 27,2002 10
- Average Salaries: Estimates of salaries are required for alulating the total salaries and the assoiated taxes paid by the workers. Prodution phase salaries are estimated to be $40,000 per year. 2. Multiplier Analysis - Multipliers reflet the relationship between some hange in the eonomy and the sueeding eonomi ativity that ours as a result of that hange. This implies that expenditures and diret new jobs reated by a new ompany in the Forest City Industrial Park will reate additional demand for goods and servies in the London region. This spin-off ativity will thereby reate additional employment ( Indiret employment ). - Multipliers are used only for demonstrating eonomi impat of new industrial development in London. In this finanial model, the eonomi impat of the multipliers has not been inluded in determining the finanial returns from the Forest City Industrial Park. 3. Employees residing in London - In order to further inrease the effiay of the model, estimation is required for the proportion of the new employment whih resides in London. This approximation is neessary to ompute the residential taxes paid to the muniipality from employment generated by new investment. 11
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