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Consideration for approval of a term sheet for tax incremental financing with JJH3 Group for a multi-family development at 7746 Menomonee River Parkway
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Submitted by:
Mark Hammond and John Ruggini
Department:
Development and Finance
A. Issue
JJH3Group LLC (the “Developer”) has submitted a Tax Increment Financing application requesting that the City incorporate a proposed 14-unit rental development at 7746 Menomonee River Parkway into the existing Tax Incremental District No. 11 (TID 11) and provide a Pay-As-You-Go (PAYGO) Developer Municipal Revenue Obligation (MRO) of approximately $880,000 for the remaining duration of the TID to support the development. This property is owned by the Wauwatosa Community Development Authority and the Developer has an offer to purchase agreement.
B. Background/Options
Project Overview
The proposed development consists of 14 total rental units at 7746 Menomonee River Parkway. The project includes four three-story townhouses configured as two side-by-side duplexes, each approximately 1,620 square feet with 2-bedroom/2.5-bathroom layouts, roof-level den/office space, large roof patios, and built over a 2-car garage. These townhouse units are projected to rent for approximately $4,800 per month.
The remaining ten units are 1-bedroom/1-bathroom apartments distributed across three floors, with each apartment having an assigned parking space in one of two grade-level garages. The apartment units break down as follows: three 800-square-foot units at approximately $2,000 per month, four 900-square-foot units at approximately $2,250 per month, and three 950-square-foot units at approximately $2,375 per month. All utilities will be provided from existing street mains and separately metered to each unit.
Groundbreaking is planned for Fall 2026 with occupancy expected in October 2027. The Developer estimates total project costs of $6,490,341, to be financed through a combination of $4,680,542 in debt and $1,809,799 in equity (which includes a $200,000 developer fee). The Developer projects an increase in incremental construction value of $5,200,000 and an estimated annual incremental property tax value of $99,268 when stabilized.
Affordable Housing
As approved by the Wauwatosa Community Development Authority, this project does not include affordable housing components, nor does the executed offer to purchase require payments in lieu. Staff notes that this is a missing middle housing project on an extremely difficult site to develop, with only 14 units and a limited TIF assistance amount given the short remaining period of TID 11. Given these constraints, requiring an affordable housing contribution would further jeopardize the financial feasibility of a project type that the community has identified as a critical need yet which the market has largely failed to deliver.
Workforce Participation
The Developer has agreed to work with the City to develop and implement a Participation Plan through which the Developer will make commercially reasonable efforts to hire or subcontract with Disadvantaged Business Enterprises and set a goal of hiring 25% of the additional construction workforce needed for the project from distressed ZIP codes within Milwaukee County. The costs for any consultants engaged to support these efforts will be paid by the City through the overall TID budget.
Current Market Conditions
The multifamily housing development market continues to face significant headwinds that make projects like this particularly challenging to finance and execute. Rising construction costs, elevated interest rates, increased material expenses, and labor shortages have substantially impacted development feasibility across the region. These market conditions have resulted in the delay or cancellation of numerous residential projects throughout southeastern Wisconsin. The confluence of these factors has created a financing environment where even well-conceived projects in strong locations struggle to achieve financial feasibility without some form of public-private partnership.
Financial Analysis
An independent financial feasibility analysis was conducted by Robert W. Baird & Co. (Baird) to evaluate the project’s economic viability and the appropriateness of the requested TIF assistance. Baird examined the Developer’s financial projections using cap rate analysis, cash-on-cash analysis, and internal rate of return (IRR) analysis.
Key findings from the Baird analysis include:
- Cap Rate Analysis: Baird’s model shows a Non-TIF 10-Year Cap Rate of 5.61% and a With-TIF 10-Year Cap Rate of 7.08%. When modeled with a 5-year sale assumption, the Non-TIF 5-Year Cap Rate is 5.47% and the With-TIF 5-Year Cap Rate is 6.73%. Baird considers an acceptable cap rate to be within the 6-9% range, and the proposal falls within this range with TIF assistance
- Cash-on-Cash Analysis: After year 10, the estimated cash-on-cash return is between 6-8%. Industry standards indicate a target range of 8-12%. The proposal falls slightly below this range when the developer fee is excluded, and within the range when included. Staff found this acceptable
- Internal Rate of Return: Without TIF assistance, the 10-Year IRR utilizing net operating income is 13.82% including debt service. However, when accounting for a projected Year 5 sale and payoff of the outstanding mezzanine loan (approximately $722,105 remaining balance), the IRR drops to 8.99%. With the requested PAYGO incentive of $880,000 incorporated, the Net Cash Flows IRR increases to 12.41%. Industry standards for conservative/low-risk real estate returns are typically between 8-15%, and the request falls within that range
- The Developer will receive up to 100% of annual property taxes refunded via the MRO through the life of TID 11, with total gross payments not to exceed $1,679,719
- The proforma estimates the net present value of the PAYGO to be $894,398, assuming a discount rate of 6%
- The proforma increment is estimated using the City’s current net tax rate of $19.09 per $1,000 of equalized value, based on a construction increment of $5,200,000 being achieved by January 1, 2029
- The PAYGO structure utilizing TID 11 is the recommended approach, as it shifts risk from the City onto the Developer and leverages the remaining life of an existing TID
TID 11 Incorporation
This project would be incorporated into the existing Tax Incremental District No. 11, utilizing the remaining life of the district (understood to extend through 2043). Incorporating the development into an existing TID allows the City to leverage available capacity without the administrative cost and complexity of creating a new district.
C. Strategic Plan (Area of Focus)
This project aligns with multiple areas of the City’s Strategic Plan:
Economic Development: The project represents over $6.4 million in private investment in the community and contributes to the tax base by adding an estimated $5,200,000 in incremental construction value. The Developer’s commitment to a Participation Plan supporting Disadvantaged Business Enterprises and workforce hiring from distressed ZIP codes further advances the City’s economic development and equity objectives.
Housing: This development directly addresses the critical need for “missing middle” housing in Wauwatosa - a housing type that the market has largely failed to produce despite strong demand. The 14-unit project, featuring a mix of rental townhomes and smaller apartments, fills two underserved niches: rental townhome offerings that provide older homeowners an attractive option to downsize and stay in a neighborhood they love, freeing up single-family homes for younger families; and apartments attractive to younger professionals, particularly those working at the nearby Regional Medical Complex. This is the type of housing that the Joint Housing Coalition and community stakeholders have consistently identified as a priority, yet which has seen very little private development activity. Supporting projects that deliver missing middle housing is essential to maintaining a diverse and accessible housing stock in Wauwatosa.
D. Fiscal Impact
The fiscal impact of this project may be discussed in open session to the extent that proprietary and confidential developer information is not disclosed. The City reserves the right to discuss specific financial details in closed session as permitted under Wisconsin’s open meetings law.
At a high level, the Developer projects an increase in incremental construction value of $5,200,000 and an estimated annual incremental property tax value of $99,268 when stabilized. The requested PAYGO MRO has a net present value of approximately $894,398, with total gross payments not to exceed $1,679,719 over the remaining life of TID 11.
E. Recommendation
Staff recommends approval of the attached term sheet including a Municipal Revenue Obligation with a present value of $894,398 and sending this to the Common Council for consideration.
This recommendation is based on the following considerations:
• The project addresses a demonstrated market need for missing middle housing in a challenging development environment
• Independent financial analysis by Baird confirms the project’s viability and the appropriateness of the requested PAYGO assistance
• The Developer’s cap rate, cash-on-cash return, and IRR all fall within or near industry standard ranges, indicating the requested assistance level is reasonable and not excessive
• The PAYGO structure protects the City’s financial interests by ensuring payment only occurs as increment is actually generated
• Incorporation into the existing TID 11 leverages available district capacity without requiring creation of a new TID
• The Developer’s commitment to a Participation Plan for Disadvantaged Business Enterprises and workforce hiring from distressed ZIP codes advances the City’s equity objectives
• The project will generate new tax increment from a substantial increase in assessed value within TID 11
recommendation
The Committee may convene into closed session regarding this item pursuant to Wis. Stat. §19.85 (1)(e), to deliberate or negotiate the purchasing of public properties, the investing of public funds, or conducting other specified public business, whenever competitive or bargaining reasons require a closed session. The Committee may reconvene into open session to consider the balance of the agenda.