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Twin Lakes TIF District No. 17 Page 4 of 6 June 9, 2009 Definition of Substantial Renovation Because "Substantial renovation" can mean different things to different people, LHB has attempted to clarify exactly what we consider to be "substantial renovation" as it relates to Minnesota Statutes, Section 469.174, Subdivision 10(a) (1). a. First we researched national standards as to how much building owners should budget for annual maintenance and repair on their buildings as a percentage of replacement cost of the building. 1. According to the University of California "Facilities Renewal Budget Model " report of 1999, building owners should budget between two and three percent of current replacement value of their buildings for maintenance and repair work. This does not include routine janitorial work and routine items such as changing light bulbs and filters. 2. According to the Building Research Board of the National Research Council, one and one-half to three percent of a building's replacement value should be budgeted for maintenance and repair. b. Based on this information, LHB utilized two and one-half percent as the desired amount of maintenance and repair that should be budgeted annually to keep a building in good working condition. We recognize through experience that only a small percentage of sophisticated building owners actually budget for and spend this amount of money every year on maintenance and repair. This is because most business owners are driven by other budgetary issues and tend to neglect the building maintenance and repair line items in their annual budgets. By establishing how much a building owner should be budgeting per year for maintenance and repairs, LHB is of the opinion that we could more easily establish an amount that would be considered "substantial" in comparison. If an owner is budgeting 2.5 percent of the building's replacement cost annually, most business owners or home owners would have to take out a loan to cover the cost of a substantial building improvement. Assuming they had a fixed level of income to work with, they would have to keep the loan payment at a level very near the origina12.5 percent they should have been budgeting each year. In addition, they still would have to budget for the origina12.5 percent on top of the loan. In most cases, the mortgage terms would have to extend out to a point beyond the life expectancy of the building they were trying to improve, as most buildings built in the past fifty years are not designed to last beyond 40 years. d. Based on the calculations described above, we have defined substantial renovation for purposes ofMinnesota Statutes, Section 469.174, Subdivision 10(a)(1), as renovation with costs exceeding 20% ofthe building's replacement value. Findings: All 10 of the remaining buildings exceed the criteria required to be determined substandard buildings.