Economic Development Financing Alternatives and Due Diligence

Transcription

1 Economic Development Financing Alternatives and Due Diligence Presentation to the Government Finance Officers of Missouri May 3, 2012 Presented by: Tom Kaleko & Joe Lauber

2 2 ECONOMIC DEVELOPMENT FINANCING ALTERNATIVES

3 3 Community Improvement District (CID) Entity Type Eligibility Permitted Uses Political subdivision or non-profit corporation (separate entity) Petition of property owners equaling more than 50% per capita and by assessed valuation Established by ordinance Wide variety of public improvements and services Limited use for private structures to remediate blight Within district boundaries only Financing Alternatives Sales tax (1/8% increments; max 1%) Property tax Special assessments User fees Debt Issuance Permitted Revenue bonds (maximum term of 20 years)

4 4 Transportation Development District (TDD) Description Political subdivision (separate entity) Eligibility Permitted Uses Varies. Most often by petition by 100% of property owners Formed by court order Public transportation related facilities Financing Alternatives Sales tax (1/8% increments; max 1%) Special assessments Property tax (maximum of $0.10 per $100 AV) Tolls Debt Issuance Permitted Revenue bonds (maximum term of 40 years)

5 5 Tax Increment Financing (TIF) Description Eligibility Permitted Uses Financing Alternatives Special purpose district Blighted, conservation, economic development, enterprise zones (blight is most common and most legally defensible) Public or private facilities (Public facilities only if economic development TIF) Does not create a new tax- captures revenues from taxes 100% of property tax increment (PILOTs) 50% of economic activity tax increment (EATs) (sales, franchise, earnings taxes) Maximum of 23 years Debt Issuance Permitted Revenue bonds (maximum term of 23 years)

6 6 Neighborhood Improvement District (NID) Description Special purpose district Eligibility Permitted Uses Petition by owners of record of 2/3 of area or Election Public facilities Financing Alternatives Special assessments (maximum 20 years) Debt Issuance Permitted Limited general obligation temporary notes Limited general obligation bonds (maximum term 20 years)

7 7 Chapter 100 Tax Abatement/ Industrial Development Bonds (IDBs) Description Eligibility Permitted Uses Project-specific abatement and financing mechanism Plan approved by municipal governing body Warehouses, distribution facilities, service facilities for interstate commerce, industrial plants Tax Abatement Property tax abatement for municipally-owned property Sales tax abatement for materials Can require PILOTs Debt Issuance Permitted Revenue bonds General obligation bonds Cannot exceed 10% of assessed value in municipality Requires constitutional majority voter approval (up to 4/7)

8 DUE DILIGENCE 8

9 9 Role of Finance Officer in Economic Development Engage in process from the beginning Participate in vision/strategy/policy Develop new skills Key player in financing elements Key player in development agreement Manage program for compliance

10 10 Risk! Development = Future Performance Future Performance = Risk Find your organization s comfort zone! Developer s world has changed Tighter lending regulation and practices equals limited access to credit Property value reductions loan adjustments AV appeals Oversupply of space; tenants have all the leverage Places developer between tenants and public Developer s approach to public has changed Buying time for existing projects by reduce carrying costs (taxes) New projects Public money and infrastructure in first: public one of developer s banks Buy time to lease up with capitalized interest Set stage for tenants through public improvements & planning approvals Push risk developer and bankers don t want to public

11 11 Common Types of Risk Market Ability of the developer to execute its business plan despite competition or changes in general market conditions Legislative Legislative changes impacting the project and the financing tools used Event Material damages resulting from catastrophic events that may be either uninsurable or not economically insurable Losses resulting from interruption of business Construction Ability of the developer to construct the project for the estimated cost within the anticipated schedule

12 12 Resources Fit to the needs of each project Expertise Needed Local conditions/preferences Economic development & land use law Finance - city/county specific and financing tools to be used Other subject matter experts Member(s) Local government staff Representatives of the governing body Staff attorney Consulting attorney Local government finance staff Financial advisor State DED representative Market feasibility consultant Engineer Architect

13 Review Process 13

14 14 Plan What is the problem or opportunity? Approach as a resource allocation decision Avoids Tool fixation Overspending Policy False project legitimacy Plan Practice Set economic development goals through an inclusive community self-assessment Use goals to establish criteria by which to evaluate projects

15 15 Policy Not a shortcut Your community s thou shalts and thou shalt nots References and links Plan and Practice Common exception: IDB tax abatement Practice Breadth and scope of review dictated by: Public risk Policy Private use of public funds Level of community interest Funding agreement Plan Practice

16 16 Developer Review Developer s managerial and financial capacity to successfully execute the project Evaluate: Experience - of team assigned to the project Financial Resources of the company, ownership and any affiliated companies Disclosures conflicts of interest or priority, defaults, legal suits, judgments, criminal convictions or bankruptcies Degree of evaluation influenced by starting comfort and risk exposure Conclusions begin terms sheet

17 17 Project Feasibility Market feasibility studies are not created equal The private proforma The public proforma Sensitivity Low Sensitivity / High Confidence Moderate Sensitivity / High Confidence High Sensitivity / High Confidence Low Sensitivity / Moderate Confidence Moderate Sensitivity / Moderate Confidence High Sensitivity / Moderate Confidence Confidence Low Sensitivity / Low Confidence Moderate Sensitivity / Low Confidence High Sensitivity / Low Confidence

18 18 To What Benefit? Approach varies by certainty of payback, size of project and risk exposure Benefits only or cost-benefit Direct Indirect Induced Formulary approach (IDB) requires advance analysis

19 19 The But-For Analysis Can the project generate a reasonable profit without the requested subsidy, within the current marketplace and time? 1. Examine proposed development costs and operating income for reasonableness 2. Project the developer s profit with and without subsidy Measured as Internal Rate of Return (IRR) 3. Perform sensitivity analysis on factors: Greatly influencing the developer s return For which there is a degree of uncertainty 4. Compare results to the current market for like projects

20 Where the Rubber Meets The Road Terms sheet evolves to specific language in development agreement Use high tides of negotiation leverage to your advantage Seek risk mitigation/performance assurance terms Replacement value insurance coverage and duty to rebuild Business interruption accounts PILOTs/EATs protection Public participation clauses Clawbacks 20

21 21 Risk Mitigation Low Market, Legislative & Event Risk Mitigation Construction Risk Mitigation City Selects Underwriter Capitalize Interest for Initial Period Developer Requirements & Risk Mitigation Debt Service Reserve (Bond Funded) Debt Service Coverage Requirement (Low) Supplementary Reserve (Super TIF Funded) Supplementary Reserve (Coverage Funded) Supplementary Reserve (Developer Funded)* Debt Service Coverage Requirement (Moderate) Require Proof of Private Financing Prior to Bond Issuance Back-Up CID or TDD Sales Tax Moderate Back-Up CID Special Assessment* Bonds Issued When Certain % Tenanting Achieved (Multiple Series) Require Guaranteed Maximum Price Construction Contracts Prior to Bond Issuance

22 22 Risk Mitigation (contd.) Moderate Market, Legislative & Event Risk Mitigation Bond Proceeds Placed in Escrow and Released Based on Business Committed to Open or Open Construction Risk Mitigation Developer Requirements & Risk Mitigation Bonds Sized on Commitment to Open w. 3rd Party Revenue Forecast (Multiple Series) Debt Service Coverage Requirement (High) Developer Letter of Credit* Developer Buys Subordinate Debt Series Not Backed by City Annual Appropriation Developer Carry-Back Note for Portion of Debt Not Backed by City Annual Appropriation City Holds Land Until Ready to Develop Developer PAYGO for Portion of Debt High Bonds Issued After Project (or Portion) is Constructed and Operating

23 23 Recent Legislative Activity House and Senate Committee reports related to Mamtek deal Nearly 1 dozen Bills introduced HB 1865 (passed House 4/26/12) Public hearing requirement before issuance of annual appropriation backed debt DED to require 3 rd party verification of financial information DED to conduct background checks on principals of start-up companies DED required to share information about incentives applicants to local governments in state-local incentive deals DED to create a 5-star rating system for state-local deals

24 24 Contact Us Joe Lauber Lauber Municipal Law Tom Kaleko Springsted