Economic Development Fundamentals. September 22, 2016

Transcription

1 Economic Development Fundamentals September 22, 2016 Matt Stout, Esq Colin Kalvas, Esq Moderator: Jeffrey R. Rink Managing Director, KeyBanc Capital Markets Inc. Bricker & Eckler LLP

2 Economic Development Simple definition: activities which promote investment, create jobs, and enhance communities. Generally includes collaboration between government entities and private entities

3 Economic Development Ohio Constitution Definition: Certain activities which: create or preserve jobs and employment opportunities, improve the economic welfare of the people of the state, control air, water, and thermal pollution, or dispose of solid waste Article VIII, Section 13

4 Economic Development From a local government point of view, economic development consists of deploying various tools which advance those goals

5 Tools Covered Tax Increment Financing (TIF) Community Reinvestment Area (CRA) Enterprise Zone (EZ) Special Assessments and Property Assessed Clean Energy (PACE) Financing

6 Tax Increment Financing (TIF) Tax: based on real property taxation Increment: applies only to the increase in real estate taxes resulting from a development Financing: allows a developer and local government to pay for needed public infrastructure improvements

7 TIF Basics Service payments in lieu of taxes Owners of property subject to TIF required to pay service payments in lieu of taxes Paid in the same amount and collected in the same manner as real property taxes TIF is therefore a way to focus otherwise dispersed tax money on specific, local improvements

8 TIF Basics Uses of service payments in lieu of taxes Service payments are collected into a segregated fund which must be established May be used to pay for public infrastructure improvements as defined in O.R.C (A)(7). Generally include: roads, sewers, environmental remediation, land acquisition, demolition, storm water remediation, gas, electric and communications service facilities

9 TIF Basics * Tax Increment Finance Best Practices Reference Guide (CDFA and ICSC), page 2.

10 TIF Basics Governments which may implement: Municipal corporations (O.R.C &.41) Townships (O.R.C ) Counties (O.R.C )

11 Creation TIF Basics Legislative authority passes ordinance or resolution Determines base year as of January 1 Identifies TIF boundaries and parcels Notice must be given to school district and other affected political subdivisions Form DTE 24 Exemption application filed with the Ohio Department of Taxation Contains parameters set forth in the authorizing legislation

12 TIF Basics Project TIF vs. incentive district TIF Project TIF applies to a specific parcel or parcels (See O.R.C (B)) Incentive district TIF applies to all parcels within a geographic district (See O.R.C (C)) No more than 300 contiguous acres exhibiting one or more characteristics of economic distress as listed in ORC Public improvements do not need to directly benefit every parcel Municipal Urban Redevelopment TIF (.41 TIF) Unique TIF used in urban redevelopment setting

13 TIF Basics Percentage of increased value to which TIF may apply Up to 75% without the consent of the impacted city, local, or exempted village school district Up to 100% with consent Note that county consent is required for municipal corporation and township incentive district TIFs if exemption is over 75%

14 Term of TIF TIF Basics Up to 10 years without the consents of the impacted city, local, or exempted village school district Up to 30 years with consent Note that county consent is required for municipal corporation and township incentive district TIFs if term exceeds 10 years

15 TIF Basics Rights of school districts and counties Along with consent is ability to negotiate compensation Maximum compensation for city, local, and exempted village school districts and joint vocational school districts is amount that would have been paid but for TIF ( non-school TIF ) Maximum compensation for county is amount that would have been paid but for TIF (recall, only applies to municipal corporation and township incentive district TIFs)

16 TIF Basics Municipal Income Tax Sharing - Municipality must share income tax with School District if: Municipal Income tax in place New payroll in excess of $1,000,000 No make whole provision for School District in place Six Months to Negotiate Agreement 50/50 Municipality entitled to infrastructure set-off (up to 35% of annual income tax increase)

17 Why Use TIF? Encourage development Facilitate redevelopment Finance infrastructure No additional cost to developer But revenue stream is development dependent

18 TIF Monetization General obligations bonds or cash payment by government Government takes risk Revenue bonds and conduit bonds Generally requires additional security Pay-as-you-go TIF Developer takes risk Developer financing Developer takes risk / provides security

19 Combining TIF With Other Tools CRA TIF could be subordinate to total abatement of CRA for CRA period (O.R.C ) Special assessments Special assessments can back up TIF service payments in event development does not occur at desired pace New Community Authority

20 Community Reinvestment Area (CRA) Characteristics of CRAs Real property tax exemption Municipalities and counties have the authority to create new CRAs Area within a municipal corporation or the unincorporated area of a county Area in which housing facilities or structures of historic significance are located Reality used to grant commercial/industrial exemptions where at least two housing structures exist

21 Community Reinvestment Area Types Pre July 1, 1994 CRA (CRA) No agreements No revenue sharing No school district notice or approval Post July 1, 1994 CRA Agreements Revenue sharing School district notification and approval

22 CRA Basics Creation (O.R.C ) Municipal corporation or county passes legislation after housing survey Area is in need of renovation At least 20% of properties in need of rehabilitation Incentive parameters established May be only on residential property, only on commercial / industrial property, or on both Maximum exemption is 100% of new value Must publish notice of legislation Must petition ODSA for confirmation of CRA

23 CRA Basics Exemption term (O.R.C (D)) Remodeling costing $2,500+ of residential with fewer than two dwelling units: up to 10 years unless historically significant Remodeling costing $5,000+ of residential with greater than two dwelling units or remodeling of commercial industrial: up to 12 years unless historically significant New construction: up to 15 years

24 CRA Basics Granting exemption (O.R.C ): Residential: Application to housing officer Verification of construction or remodeling and its cost and other eligibility criteria Housing officer grants exemption Forwards approval to county auditor

25 CRA PROGRAMS BENEFITS EXEMPTION LEVELS: CRA Basics PRE JULY 1, 1994 CRA POST JULY 1, 1994 CRA Real Property Must be 100% Up to 100% Personal Property None None Inventory None None TERM EXEMPTIONS: Residential Remodeling (2 units or less; minimum $2500) Residential Remodeling (more than 2 units; minimum $5000) Residential New Construction Commercial and Industrial Remodeling (minimum $5000) Commercial and Industrial New Construction Up to 10 years as specified in the legislation that creates the CRA Up to 12 years as specified in the legislation that creates the CRA Up to 15 years as specified in the legislation that creates the CRA Up to 12 years as specified in the legislation that creates the CRA Up to 15 years as specified in the legislation that creates the CRA Up to 10 years as specified in the legislation that creates the CRA Up to 12 years as specified in the legislation that creates the CRA Up to 15 years as specified in the legislation that creates the CRA Up to 12 years as negotiated and approved in an CRA Agreement Up to 15 years as negotiated and approved in an CRA Agreement

26 CRA Basics Granting exemption (cont d): Commercial / industrial Pre-1994 same process as residential Post-1994 negotiate agreement under O.R.C If agreement required, may require school district approval (O.R.C (A)) Agreement must be in form set forth in O.R.C Agreement must be certified to ODSA

27 Annual Compliance CRA Basics Commercial / industrial with agreements must comply with reporting to ODSA as described in O.R.C All exemptions must be reviewed by housing officer (O.R.C ) and by housing council (O.R.C ) In addition to commercial / industrial agreement reporting, enacting government must give annual status report to ODSA (O.R.C )

28 Why Use CRA? Encourage development Encourage redevelopment Encourage maintenance of historically significant structures

29 Monetizing CRA(?) CRA does not itself produce any revenue But governments have been able to negotiate voluntary compensation from developers For municipal corporations, additional income tax from added jobs or residents may be an advantage

30 Combining CRA With Other Tools Special Assessments New Community Authority TIF Note that CRA will take priority for its term, but once over, TIF service payments become payable

31 Enterprise Zone (EZ) Enterprise: encourage businesses to make specified types of investments Zone: specified geographic area

32 EZ Basics Governments which may create: Municipal corporations (O.R.C ) Counties (O.R.C )

33 Zone characteristics Minimum population: EZ Basics County pop. > 300,000 = 4,000 min. pop. of EZ County pop. < 300,000 = 1,000 min. pop. of EZ Single contiguous boundary

34 EZ Basics Legislation creates EZs Copy of legislation and related documents must be certified to ODSA for confirmation

35 EZ Basics Types of Zones (both cities/counties) Non-Distressed Based (Limited Authority Zone under ORC ) No distress requirements But, intrastate relocations only allowed with waiver from ODSA Distress-Based (Full Authority Zone) Six distress criteria outlined in ORC MSA Principal Cities and Appalachian Counties require to meet 1 criteria Other locations required to meet 2 If meet criteria, do not need waiver from ODSA to grant exemptions for intrastate relocations

36 EZ Basics: Pre-1994 EZs Pre 1994 (Senate Bill 19) Enterprise zones existing before July 1, 1994 have limited tax exemption authority Cannot grant exemptions to businesses involved in intrastate relocation Under ORC (E) or (D), must be: Establishing its first Ohio facility or Ohio business establishing a new facility that doesn t reduce employment or assets at the other sites or Relocation of business from another state or Expanding a current Ohio facility or Obtain a waiver from the ODSA Director under ORC (B).

37 EZ Basics Enterprise requirements Must be an enterprise as defined in O.R.C (B), which broadly includes most business entities Must agree to establish, expand, renovate or occupy a facility in the zone and hire new employees, or preserve employment opportunities for existing employees

38 EZ Basics Project eligibility (O.R.C (C)): Must be a facility Facilities are: Place of business in a zone, including land, buildings, machinery, equipment and other materials except inventory used in business. Facility does not include any portion used primarily for making retail sales, unless: The place of business is located in an impacted city as defined in or [NEW!!] the city, local, or exempted village school district within the territory of which the place of business is located waives the exclusion of retail facilities under O.R.C

39 EZ Basics Property eligible for exemption: Tangible personal property: Percentage of assessed value of tangible personal property first used in business at the project site as a result of the agreement Real property: Percentage of the increase in the assessed valuation of real property constituting the project site

40 EZ Basics Exemption parameters Municipality: (1) up to 75% and up to 10 years or (2) average of 60% over term Unincorporated area: (1) up to 60% and up to 10 years or (2) average of 60% over term Exception with school district approval (up to 100% for up to 15 years) Can front load exemption, exceeding allowable percentages in early years as long as average remains under 60%

41 Granting exemptions: EZ Basics Local officials negotiate agreement with business Legislation required for final approval of agreement File with ODSA and ODT within 15 days

42 Annual requirements: EZ Basics Every agreement must be annually reviewed by local Tax Incentive Review Council (TIRC) Local administrator must file annual report with ODSA

43 Why Use EZ? Encourage new business investment Increase jobs, income taxes

44 Monetizing EZ(?) EZ does not itself produce any revenue But governments have been able to negotiate voluntary compensation from developers For municipal corporations, additional income tax from added jobs may be an advantage

45 Combining EZ With Other Tools Special Assessments New Community Authority TIF Note that EZ could take priority for its term, but once over, TIF service payments become payable (O.R.C )

46 Special Assessments Special: in addition to other real property taxes and charges, and for a very specific purpose Assessment: levied against real property for payment with real property taxes Note: unlike other economic development tools, special assessments are very old

47 Special Assessment Basics Governments which may implement Municipal corporations (O.R.C. Chapters 727, 729; charters) Counties (O.R.C. Chapter 6131, 5555, 6117, and 6103) Townships (O.R.C. Chapters 505, 515, 521, 5543, 5571 and 5573)

48 Special Assessment Basics Public improvements for which special assessments may pay (differs for each enacting government): Streets and sidewalks Water and sewer Off-street parking Lighting Trees Special Improvement District plans

49 Special Assessment Basics Amount and term: Aggregate amount generally cannot exceed costs (including soft costs) of public improvements Term generally cannot exceed useful life of public improvements Other limits may apply

50 Special Assessment Basics Apportionment Aggregate amount must be apportioned among all parcels being assessed General methods: Proportion of front footage along improvement Proportion of tax valuation Proportion to special benefits resulting from the improvements

51 Petitions Special Assessment Basics Generally, levying special assessments takes a lot of due process for property owners Petition submitted by the requisite number of property owners can waive some of the procedures otherwise required Petitions also can provide substantive benefits (e.g., ability to pay 100% of project costs under O.R.C )

52 Special Assessment Basics Special Improvement Districts (O.R.C. Chapter 1710) Townships and municipal corporations may form at request of property owners Allows for use of special assessments to pay for all public improvements and public services contained within a plan adopted under O.R.C. Chapter 1710)

53 Special Assessment Basics Energy Special Improvement Districts and PACE Financing Special form or special improvement district Non-contiguous properties allowed Properties may be added Special assessments pay for advanced energy and energy efficiency improvements which may be owned by private property owners

54 Why Use Special Assessments Fund public improvements and public services Properties which benefit from improvements and services pay for them Can support tax exempt obligations

55 Special Assessment Monetization General obligation bonds O.R.C (A) Bond anticipation notes O.R.C (B) Revenue bonds May require additional security Conduit bonds

56 Combining Special Assessments CRA EZ With Other Tools Replace abated taxes to pay for local improvements Replace abated taxes to pay for local improvements TIF Back up to service payments in lieu of taxes

57 Case Study 57

58 Pinecrest Development Project Tax Increment Financing

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60 Overview - Pinecrest Development Project Upscale Mixed-Use Development A walkable outdoor lifestyle destination conveniently situated on 80 acres with excellent freeway visibility and access near the intersection of I-480 and I-271 in Orange Village, Ohio. L I V E 90 upscale residential apartment units Future adjacent development with over 300 multi-family units W O R K Over 150K sqft. of Class A office space S T A Y On-site 120-key boutique hotel P I N E C R E S T P L A Y Over 400K sqft. of retail & movie theater Variety of dining options State-of-the-art fitness center 60

61 The Capital Stack Filling the Gap Tax Increment Financing is an integral part of the capital stack in the Pinecrest pro-forma that is filling a hole between the amount of private debt and equity that has been raised and the required capital needed to complete the project as contemplated. Total Project Cost >$200 Million Less TIF Bond Proceeds $35 Million The TIF Bonds will provide a much needed more than $35 million of net proceeds for the Project to fund a portion of the cost of public infrastructure throughout the development (i.e. parking garages, sidewalks, lighting, streetscape, etc.) Uses of Funds Sources of Funds (the Capital Stack) 61

62 Establishing the TIF Process & Results The Process A TIF is a common mechanism used to assist real estate developments by monetizing future property tax revenues to fund current development. Since the passage of a TIF means governmental entities forgoing future property taxes in support of the project, certain approvals need to occur before the TIF is enacted. Public Support Village Negotiations School Board Approval Public support was needed to get residents on board with the Project and in support of the TIF Flyers were sent out and calls were made to residents to make them aware of the Project and what was needed to make it happen. The Developer had to negotiate the terms of the TIF and show the need for public assistance for completion of the Project. As a result, the Developer met with Village officials and Council members to garner further support. Per Ohio law, any TIF in excess of 10 years or 75% TIF Exemption must be approved by the School District. Extensive negotiations took place between the School Board, the Village, and the Developer to arrive at a solution that compensated the School District for approving the TIF. The Result (Terms of the TIF) Type of TIF: for public infrastructure improvements that directly benefit the TIF property Term: 30 years from when improvements appear on the tax roll TIF Exemption Amount: 100% of property taxes that would have otherwise been paid Agreement with the School District: Compensation Payments equal to 25% of the property taxes the School District would have received without the TIF Exemption 100% of property taxes from an increase in tax rate levied by the School District Upfront donation to the School District from the Developer of $300, % share of new income taxes received by the Village in excess of $500,000 Projected Financial Benefits*: Council Meetings TIF legislation was prepared for reading and approval by Village Council. After many rounds of negotiations with all of the parties and numerous public hearings, the TIF was passed on May 6, Orange Village Orange City SD Proposed New Income Tax Sharing** 1,387, ,304 New Commercial Phase Property Taxes: Proposed Annual TIF Compensation Payment (25%) - 902,106 Projected New Property Taxes from School Millage Increases (No Assumed AV Growth)*** - 621,664 Lodging Taxes 191,808 - Total Projected Annual New Tax Revenues $1,578,898 / yr $2,153,074 / yr * Represents average annual revenues over the term of the 30-year TIF ** Represents average annual income tax revenue over term of proposed TIF, Income Tax sharing per the Compensation Agreement *** Assumes a 4.0 Mill levy every seven years, beginning in

63 Monetizing the TIF Estimated Valuation and Timing Before structuring and selling any debt, we had to derive what the TIF revenues would be over the life of the exemption. As such, we went straight to the people who will be valuing the Project for tax purposes once it is built, the County Appraisal Group. The Appraisal Group worked with our team in looking at the projected cash flows and design layout, as well as comparable projects in the area in order to arrive at their estimated valuation. Letter from the Appraisal Group Present to County Appraisal Group Receive County Appraisal Group s projections of Assessed Value and timing of TIF Revenues. Develop Pro-forma Cash Flows and Finalize Project Plans The letter from the Appraisal Group contains accompanying analyses and a description of the methodology used to arrive at the values projected in the letter. 63

64 Monetizing the TIF (continued) TIF Analysis Considerations for TIF Debt Structuring Base Valuation (existing value and property taxes) Projected Valuation (upon completion of the Project Appraisal Group) Incremental Value (difference between base and projected valuations) Tax Rates (of all taxing districts) Timing (when the improvements will hit the tax roll) Terms of the TIF Agreement (e.g. duration and exemption amount) Net TIF-PILOT revenues available for debt service (right-most column) is a function of all of the above metrics, as well as the agreements with the Village and the School District (i.e. 100% TIF with a 25% Compensation Payment to the School District). Investor Negotiating Points Debt Service Coverage Requirements Debt Service Reserve Requirements Interest Rate Amortization Structure Treatment of Excess Revenues TIF-PILOT Revenue Analysis: Tax Year Collection Year Total Incremental Annual TIF- School District School District Net Annual TIF - Assessed School District PILOT Revenue Portion of Allocation - PILOT Revenues Valuation on Tax Allocation (%)** (100%) PILOT Revenue 25% for 30yrs** Available for DS Duplicate* % ,710, , , % 90, , ,827,750 2,091,350 1,335, % 333,777 1,757, ,609,500 4,768,465 3,044, % 761,041 4,007, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750, ,102,500 5,652,337 3,608, % 902,106 4,750,231 Total $160,038,115 $102,167,538 $57,870,577 $134,496,230 * Dev eloper / Fairmount Prop EST (May 2015) - - Cuy ahoga County Appraisal Div ision PRELIM Projections (May 2015) ** Pay ment to Orange CSD per TIF Compensation Agreement 64

65 Debt Structuring Maximizing Project Proceeds Once we had the TIF Revenues Available for Debt Service, we were able to structure the debt with the goal of maximizing proceeds for the Project, all while working within the structural confines of no additional security for the Bonds (i.e. Tax Increment Revenues / Minimum Service Payments only, resulting in a nonrated, high yield bond transaction). In structuring the debt, the following steps took place: Identify Costs of Issuance and any Annual Fees Determine necessary Capitalized Interest (until TIF revenues are sufficient to cover debt service) Identify a potential conduit issuer (City, County, Port Authority, etc.) Identify and educate the potential investor(s) on legal mechanics and protections of the TIF. Investor Negotiating Points Debt Service Coverage Requirements Debt Service Reserve Requirements Interest Rate Amortization Structure Treatment of Excess Revenues Year TIF Revs Available for DS Coverage TIF Revs After DS Coverage Principal Capitalized Interest DSRF Net Debt Service Cap-I , Period ,178, ,178, No Principal ,065, % 2,065,862-2,098,144 14,884* 2,065, ,174, % 4,174, ,750 4,174,140 - Excess Revs Project ,750, % 4,750, ,000-4,750 4,749,140 1,091 Stabilized ,750, % 4,750, ,000-4,750 4,749, ,750, % 4,750, ,000-4,750 4,745,930 4, ,750, % 4,750, ,000-4,750 4,749,060 1, ,750, % 4,750, ,000-4,750 4,747,900 2, ,750, % 4,750, ,000-4,750 4,747,450 2, ,750, % 4,750, ,000-4,750 4,747,320 2, ,750, % 4,750, ,000-4,750 4,747,120 3, ,750, % 4,750,231 1,045,000-4,750 4,746,460 3, ,750, % 4,750,231 1,130,000-4,750 4,749, ,750, % 4,750,231 1,215,000-4,750 4,746,810 3, ,750, % 4,750,231 1,310,000-4,750 4,747,040 3, ,750, % 4,750,231 1,410,000-4,750 4,744,860 5, ,750, % 4,750,231 1,520,000-4,750 4,744,880 5, ,750, % 4,750,231 1,640,000-4,750 4,746,320 3, ,750, % 4,750,231 1,770,000-4,750 4,748,400 1, ,750, % 4,750,231 1,905,000-4,750 4,745,340 4, ,750, % 4,750,231 2,055,000-4,750 4,746,750 3, ,750, % 4,750,231 2,215,000-4,750 4,746,460 3, ,750, % 4,750,231 2,390,000-4,750 4,748,690 1, ,750, % 4,750,231 2,575,000-4,750 4,747,270 2, ,750, % 4,750,231 2,775,000-4,750 4,746,420 3, ,750, % 4,750,231 2,995,000-4,750 4,749, ,750, % 4,750,231 3,225,000-4,750 4,746,360 3, ,750, % 4,750,231 3,480,000-4,750 4,749, ,750, % 4,750,231 3,750,000-4,750 4,748,370 1, ,750, % 4,750,231 8,790,000-4,754,981 4,745,639 4,592 65

66 Questions? Matt Stout, Esq Colin Kalvas, Esq Jeffrey R. Rink Managing Director, KeyBanc Capital Markets Inc. 66