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 economic growth.

The dynamics of industrial land development are set by the competitive forces in the region, and by the communities with whom London competes directly for new industrial investment. In South-westem Ontario, market conditions have discouraged the private sector from engaging in industrial land development.

London competes with communities such as St. Thomas, Strathroy, Chatham, Woodstock, Sarnia, Ingersoll, Brantford and other communities generally within a 100 kilometre radius of London. These communities have made significant investments in industrial parks as an inducement to stimulate economic growth, leading to the creation of new jobs. It is expected that this competition will increase over time as the investment in industrial land increases.

The economic impact from investment in industrial land is measured in terms of acres sold, jobs created and new industrial assessment. There will always be a time lag between investment and return - the challenge for a community is to shorten this time lag.

Unlike a private developer, a municipality receives, in addition to the proceeds 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 costs, creating a “surplus tax” for the municipality.

The financial returns to the City from the Forest City Industrial Park investment are forecast to exceed $4.4 million’ on a net cash investment of $8.5 million. In addition, it is forecast that over a 10 year period the City will, SOLELY as a result of its investment in the Forest City Industrial Park --

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Increase industrial assessment by approximately $40 million. Increase annual industrial tax revenues by approximately $1.5 million (plus an estimated annual $1.6 million contribution to education taxes). Create a total of 2,500 direct new jobs and 2,200 indirect jobs of which 1,500 and 1,300 are estimated to reside in London. Generate in excess of $60 million annual payroll from direct new employment and $58 million from indirect employment.

Net Present Value of 10 year net cash flow forecast, discounted at 5%. This is the estimated present value of the 10 year financial return in excess of the net cash investment made by the City in this development.

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Generate the capacity to pay approximately $30 million in total annual taxes’ from direct employment income and $28 million from indirect employment income. Generate the capacity to pay approximately $1.7 million in municipal tax from direct new employment and $1.6 million from indirect employment (employee’s resident in London only). Generate the capacity to pay federal and provincial income taxes from the profits of the new businesses (unquantifiable). Add approximately $340 million to the annual GDP of the city3.

London’s Industrial Land Strategy, combined with a focussed, strategic and aggressive sales effort have resulted in significant new investment in the community from industry leaders who have a long-term commitment to this community. Sale of industrial land for the last 5 years totaled 160 acres; 6 times the total sales for the preceding 5 years (28 acres). 60% (94 acres) of total land sales in the last 5 years have been to new investors as compared to 20% (6 acres) in the preceding 5 years.

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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 including personal income tax, PST and GST, gas taxes, municipal taxes, etc.

Based on average GDP per employee of $72,000 for 2,500 direct jobs and 2,200 indirect jobs.

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We have found that London does not compete in any meaningful way, for the same investment projects, with KitchenerNaterloo, Cambridge, Guelph and communities running east towards the GTA. London’s competitive position vis-a-vis Windsor is driven by issues more complicated than an assessment of industrial land values.

FINANCIAL RETURN

The investment in industrial land is recovered by the City through three revenue sources - land sales, industrial taxes, and municipal taxes generated from new employment (“Residential Tax”).

LAND SALES -

The demand for industrial land is driven by the community’s ability to attract new investment. London, through the LEDC, has taken an aggressive approach to stimulating demand with the result that recent land sales have been significantly higher than historical levels.

Historical Land Sales

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93 94 95 96 97 98 99 00 01 02 03 - Acres Sold Total Proceeds

London’s decision to be competitive in the regional industrial land market has played a vital role in the community’s success. This demand is a reflection of existing businesses deciding to expand in London and new Investors choosing London as a location for new facilities.

Experience suggests that an existing London company will view land pricing differently than a new Investor. An existing company sees market value in the context of adding to, or replacing, its existing business infrastructure and employees. As the cost of replacing this business infrastructure and training of new employees would, in most cases, be substantial, these companies are generally prepared to pay a premium

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to regionally established market price for London lands. The same company, planning to move to a new community where they would be starting from scratch in building their new facility, would be influenced by regional market prices and would only pay a competitive price for land.

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Historical Land Sales (Existing Companies and New Investors)

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93 94 95 96 97 98 99 00 01 02 03

Existing Companies 0 New Investors

The price at which industrial land is sold is determined by arm’s length negotiation between an Investor and the city. The Investor will be well aware of the industrial land asking prices in the regional market5 and will not, as a general rule, pay a premium to locate in London, despite its geographic position at the centre of the region and established business and training infrastructure.

The price negotiated is market value. The city’s total cost of buying and developing industrial lands is irrelevant to the Investor.

In the early to mid 90’s) London’s competitors were considerably more successful in attracting new investment to their communities than was London. One of the reasons given for this fact is that London had set its asking price for its industrial land substantially higher than regional market prices. With the change in approach in 2000 (the decision to be a competitor in the regional market), London has now concluded industrial land transactions at prices that are consistent with regionally established market prices. These prices may have been less than net developed cost of land to the City6.

Financial returns to a municipality from its industrial land development activities are determined by looking at the net gain or loss on land sales together with new sources of direct and indirect municipal tax revenues.

The economic development process invariably involves MEDT. One of their activities is to tour clients

The Municipal Act considers the sale of land at less than “market value” to be bonusing. The sale of land through a collection of municipalities where industrial land offerings are the main topic of discussion.

at less than “cost” does not give rise to bonusing.

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MUNICIPAL TAX REVENUES -

New investments result in revenues to the city 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 costs to the municipality (“variable costs”). However, in the early stages of a new investment and the payment of new taxes, the variable costs incurred by the city 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 costs but will be available to either reduce the mill rate below what it otherwise would have been or added to surpluses of the city. This “surplus tax” should be considered a financial return in an evaluation of industrial land development activities. Expressed differently, a new dollar of municipal tax revenue will not be immediately offset by a new dollar of expenditure. This difference (surplus tax) would not exist for the City without new development.

The following graph has been prepared from hypothetical data7 to reflect the generation of “surplus tax”.

Relationship Between Tax Revenue and Cost

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Year - Revenues - -Costs - - - - - Base Cost - Base Revenue

New investment creating new jobs provides a new pool of resources that allow individuals to pay residential tax. The variable costs to the City for individuals would be greater than for industry as the homeowner places a greater demand on community services 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 actual data; this has been prepared for illustration purposes only.

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FINANCIAL RETURN ON FOREST CITY INDUSTRIAL PARK

The municipal land development activity should measure financial returns from a combination of net results from land sales, and the long-term impact of receiving taxes from industrial users and their employees.

There are a variety of factors that will impact the financial returns to a municipality from its industrial land development activities. These would include -

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1. Purchase price of raw land

2. Servicing costs of land

3. Government Grants that offset servicing costs

4. Time sequencing of -

Land sales Construction Building Coverage Employment generated from new investments

5. Sale price of land

6. Others

This model shows that the City has significant positive returns from the Forest City Industrial Park development when evaluated with market tested assumptions.

For instance, the Forest City Industrial Park development shows a positive financial return (NPV) in excess of $4.4 million from its investment of $8.5 million (see Appendix B for the detailed calculation).

The data assumptions on which this 10 year assessment has been made are -

Net land development costs Acres available for sale (after infrastructure lands) Forecasted balances over 10 years -

$8.5 million 141 acres

Acres sold 112 acres Revenue from land sales Municipal tax generated (10 year aggregate) -

$5.3 million

Industrial tax $8.8 million Residential $9.2 million

Municipal tax generated (annual) - Industrial tax $1.5 million

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Residential tax

Industrial tax Residential tax

Direct jobs created

“Surplus tax” generated (10 year aggregate) -

Employment -

Estimate of employees resident in London

Discount rate for NPV calculation

$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.

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APPENDIX A

VARIABLES INCLUDED IN FINANCIAL MODEL

The variables used in this financial model are listed below. The variables fall into the following categories -

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Cost of purchasing and developing industrial lands (net of government grants) Revenues generated from the sale of industrial lands Construction of plants and determination of municipal assessment Forecasts for the determination of municipal industrial tax revenues Forecasts for employment in new plants and determination of residential taxes paid by employees Forecasts for “surplus tax”

PURCHASE AND DEVELOPMENT OF INDUSTRIAL LAND -

1. Cost of purchase - Cost of land, Acres Acquired, Closing Costs and Servicing Costs are required to

compute the total cost of purchasing the land.

2. Other costs or reductions - Financing costs and government grants can be reflected in the model if they

apply.

3. Saleable acres - An estimate of acre yield is required to compute the amount of saleable acres.

Since not all the purchased land can be sold due to storm water reservoirs, sewers, access to utilities, roads, soil etc. an estimate of the net acres available for sale is reflected in the model.

REVENUES GENERATED AS A RESULT OF LAND SALES -

1. Direct Revenue - An estimate of acres sold per year, selling price per acre and selling costs are

required to compute the direct revenue from land sales.

- Estimates on Building Permits can be incorporated into the model if appropriate

2. Municipal Tax Revenues

The City of London receives municipal taxes revenues from new investments through two sources:

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- Industrial tax: The municipal taxes paid by a company, calculated at the industrial mill rate, on the assessed value of the property. Estimates of building coverage and assessed value have been made to determine the level of industrial taxes paid by the new company.

- Residential tax: on residential properties owned by employees of the new company.

The total taxes paid by employees captures the total of all taxes paid by production workers. This includes personal income tax, municipal tax, PST and GST, gas taxes, etc. Based on prior research’, it was found that on average, workers pay 48% of their income in taxes of all forms.

Similarly, an estimate, based on past experience, of 6% of total taxes paid is considered residential tax. When tested, the model yielded an average residential tax amount per employee which was reasonable and consistent with the City’s averages.

3. Variable Cost - Common belief holds that every dollar of municipal tax revenue is offset by a

dollar of cost on parks, infrastructure, community programs, etc. To the extent that a municipality develops new assessment and new tax revenues, there is not an immediate additional cost (variable cost) resulting from this new revenue. For instance, the addition of one new industrial plant will not add substantial additional costs to the municipality at the time this plant starts paying municipal taxes.

- Historical experience suggests that the variable costs to the city from an additional industry are not the same as an additional residential neighbourhood. This is because the level of services the city is obliged to provide, like snow removal, policing, fire, safety, tree removal, roads, etc., is greater for residential users than for industrial users. Hence, the variable costs to the city will be higher for residential users.

Using the same argument, we know that the aggregate taxes paid by an industrial taxpayer are much higher than property taxes paid by residential users. This leads us to believe that the variable costs for the city for servicing a new company are nominal.

Using this logic, it is assumed that 90% of new industrial tax, and 70% of new residential tax is “surplus tax” in the first year.. This estimate declines over time to the point where the estimated tax revenues are offset by costs.

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OTHER VARIABLES -

1. Employmenthncome generated - Production phase: A factor of 2.5 jobs per 1,000 sq. ft. of building space is

used. This variable is based on historical experiences and was found to be reasonable for companies operating in the Forest City Industrial Park.

Source: The Frazer Institute, June 27,2002

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- Average Salaries: Estimates of salaries are required for calculating the total salaries and the associated taxes paid by the workers. Production phase salaries are estimated to be $40,000 per year.

2. Multiplier Analysis - Multipliers reflect the relationship between some change in the economy and

the succeeding economic activity that occurs as a result of that change. This implies that expenditures and direct new jobs created by a new company in the Forest City Industrial Park will create additional demand for goods and services in the London region. This spin-off activity will thereby create additional employment (“Indirect employment”).

Multipliers are used only for demonstrating economic impact of new industrial development in London. In this financial model, the economic impact of the multipliers has not been included in determining the financial returns from the Forest City Industrial Park.

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3. Employees residing in London - In order to further increase the efficacy of the model, estimation is required for

the proportion of the new employment which resides in London. This approximation is necessary to compute the residential taxes paid to the municipality from employment generated by new investment.

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