Now that the contract between the village and former downtown developer David Smith, owner of Equity Services Group (ESG) is terminated, the village must form a new plan on how to sustain the downtown tax increment financing (TIF) district.

The contract was terminated because Smith failed to meet a Jan. 1, deadline to attain $12.5 million to fund the project. The Village Board discussed the situation at its Monday night meeting.

"The next major milestone in TIF financing is 2014; we were heavily reliant on ESG coming forward with construction for additional tax revenues for the TIF," said Jonathan Sprawka, trustee.

Sprawka said even if a project of comparable value to ESG's would start tomorrow, the village wouldn't likely receive the new increment, or tax revenue, in time to begin paying the accelerated debt payments beginning in 2014.  

"Lake Zurich taxpayers will most likely face a double whammy; increasing public safety pension expenses and responsibility for paying the debt burden in the TIF," Sprawka added.

In addition to the opportunity cost of being tied into a project that ultimately failed, the village also owes $226,000 for the design charette work completed in May of 2008 by architecture firm Torti Gallas.

In the original contract with ESG, it stated Smith would pay Torti Gallas for the work and be reimbursed by the village, with interest, at a later date. The payment would be made out of the TIF fund.  

"So I understand, in addition to the $226,000 owed (to Smith) there is also 4.5 percent interest that has been accruing since May of 2008?" Jeff Halen, trustee asked.  "What is that amount?"  

Bob Vitas, village administrator, said the interest hasn't yet been calculated.

"The village will be requiring documentation that Torti Gallas was indeed paid by Smith before any reimbursements are made to him," said Vitas.

Moving forward, the village is considering a number of options.

"The termination of the contract is unfortunate, but the door is now open for anyone, including Smith, to come back with a plan for our downtown," said Tom Poynton, trustee.

"Smith could come back to ask for another extension to finalize his funding and that decision would be up to the board," said Vitas.  

"He could also walk away, but I think he has two years invested in it. We will probably hear from him in the middle of January," Vitas stated.

Vitas said the village is looking into hiring a TIF consultant to help reassess the current plan for downtown as well as where the village is with the TIF bonds due in 2014.

"We need to re-examine the plan we have been working with for the last two years," Vitas said. "The landscape has changed considerably."

There is also the potential of a 'Plan B' that Vitas said has been considered since early December after numerous funding deadlines were missed by Smith.

"As far as our Plan B, we are concurrently planning; part of any plan going forward has to give a clear vision of where we are today," said Vitas.  

Vitas had said that he has maintained relationships with former developers who showed interest prior to the contract being signed with ESG.

"We've been using Ehlers and Associates, a public finance consultant, to restructure the TIF debt and we will continue working with them on the public finance side of things," Vitas explained.

"Development is stalled everywhere, the question is how do we kick start this development?" Vitas asked.

Vitas said the question is if a development plan is sustainable and whether or not structures can be built and sold.

"It was necessary to honor the agreement, which in the end called for the termination of the contract absent of the $12.5 million," said Sprawka. "We need to develop as soon as possible."

A formal letter will be mailed to Smith in the coming days stating that the agreement is terminated due to no evidence of funding for the project by the extension deadline set by the board at the October 18, 2010 meeting.

"The ball is back in our court now," said Vitas.