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FINANCIAL RISKS OF FAILED PRIVATE DEVELOPMENT PROJECTS.

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Presentation on theme: "FINANCIAL RISKS OF FAILED PRIVATE DEVELOPMENT PROJECTS."— Presentation transcript:

1 FINANCIAL RISKS OF FAILED PRIVATE DEVELOPMENT PROJECTS

2  Private developer – always the eternal optimist Project will be successful Project will be successful It will be a great benefit to the community It will be a great benefit to the community But government assistance and support is needed for success But government assistance and support is needed for success Public – private partnership Public – private partnership

3  Classic example: "Dirt Bonds"  Development project needs public water, sewer (sanitary & storm), streets curbs, gutters, etc. – public infrastructure Municipality establishes a special assessment, issues bonds and constructs public improvements Municipality establishes a special assessment, issues bonds and constructs public improvements Bonds secured by special assessment payments and full faith and credit of municipality Bonds secured by special assessment payments and full faith and credit of municipality Development doesn't happen, special assessment payments not made when due (property taxes also likely not paid) Development doesn't happen, special assessment payments not made when due (property taxes also likely not paid)

4  Consequences: No special assessments payments available to pay debt service No special assessments payments available to pay debt service Special assessments are a lien on property but that's not much help Special assessments are a lien on property but that's not much help time required to "perfect lien"time required to "perfect lien" value of property vs. amount of assessments and unpaid property taxesvalue of property vs. amount of assessments and unpaid property taxes Municipality required to use other funds to make bond payments or default on bonds Municipality required to use other funds to make bond payments or default on bonds Livingston County examples. Livingston County examples.

5  "New" tool available to finance public infrastructure – tax increment revenues Use tax increment generated from project to pay for the project's public infrastructure and other eligible activities Use tax increment generated from project to pay for the project's public infrastructure and other eligible activities  Tax increment available through: Downtown Development Authorities Downtown Development Authorities Local Development Finance Authorities Local Development Finance Authorities Brownfield Authorities Brownfield Authorities SmartZone Authorities SmartZone Authorities Corridor Improvement Authorities Corridor Improvement Authorities

6  Developers are aware that this is a way to pay for public infrastructure related to project and in some cases other private eligible activities Examples: Examples: Parking ramps and lotsParking ramps and lots Barrier free design requirementsBarrier free design requirements  Developers would have a municipality borrow the money upfront and the tax increment will be there to pay it back

7  Protection against risk Due diligence on developer – track record Due diligence on developer – track record Require developer demonstrate need for assistance Require developer demonstrate need for assistance Strong development agreements Strong development agreements Milestones with consequencesMilestones with consequences Reimburse don't advance Reimburse don't advance Limit to project tax incrementLimit to project tax increment Limit reimbursement in amount and timeLimit reimbursement in amount and time Use letters of credits, performance bonds, escrowed funds – 2 nd mortgage useless and guarantees not much better Use letters of credits, performance bonds, escrowed funds – 2 nd mortgage useless and guarantees not much better Demonstrate "solid" financing in place Demonstrate "solid" financing in place Good projects take time Good projects take time Examples: Examples: Relocation of Public FacilityRelocation of Public Facility Gallery on Fulton RampGallery on Fulton Ramp 38 Commerce Ramp38 Commerce Ramp Ionia Surface LotIonia Surface Lot Private Prison FacilityPrivate Prison Facility

8  Solutions for dealing with current problem of meeting debt service requirements Perfect lien Perfect lien Restructuring debt – pending legislation Restructuring debt – pending legislation Judgment bonds Judgment bonds

9 IF IT SOUNDS TOO GOOD IT PROBABLY IS TOO GOOD! Dick Wendt


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