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Development Financing Tools: Public Improvement Districts Tax Increment Development Districts Industrial Revenue Bonds Peter Franklin Modrall Sperling.

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Presentation on theme: "Development Financing Tools: Public Improvement Districts Tax Increment Development Districts Industrial Revenue Bonds Peter Franklin Modrall Sperling."— Presentation transcript:

1 Development Financing Tools: Public Improvement Districts Tax Increment Development Districts Industrial Revenue Bonds Peter Franklin Modrall Sperling Roehl Harris & Sisk, P.A. (505) 984-2856

2 1.The Public Improvement District (“PID”) Act Sections 5-11-1 through –27, NMSA 1978 2001 Legislative initiative for development to “pay its own way” for public infrastructure with public finance tools

3 Basic Features of the PID Act Creation of PID is requested by property owners (usually by developer) PID is created pursuant to hearing process by municipality or county- at least 2 hearings required PID can issue revenue bonds to finance wide variety of infrastructure and improvements for benefit of property within the PID PID can fund “enhanced services” to property within the PID

4 Basic Features of the Act, cont’d Financing secured from levy of ad valorem property taxes or benefit assessments imposed on property within the PID Eligible PID infrastructure includes: Public Buildings, Landscaping, Water and Sewerage, Streets, Parking, Drainage, Flood Control, Recreational Facilities, Electric and Gas Facilities, Cultural Facilities

5 Developer Interest in PIDs Ability to finance infrastructure at tax-exempt rates for up to 30 years Pass through debt service obligations on PID Bonds to homeowners or other end-users of the infrastructure Costs of formation and issuance of bonds payable from bond proceeds PIDs are not subject to the Procurement Code

6 Local Government Response Several local governments have adopted PID policies intended to provide a vetting process for applications Reflects the recognition that the PID Act has very broad potential scope, as well as potential development and bondholder risk Projects that would be authorized under the literal language of the statute may not be successful land development projects or marketable as bond transactions

7 Rio Rancho’s PID Policy Establishes minimum requirements, including: –Evidence of property owner consent to formation of PID –Minimum financing size of $3 million –Maximum overlapping tax burden of 1.99% of FMV –Value to lien ratios of 3 to 1 –Debt service reserve requirements –Credit support from developer (letters of credit, contribution agreement) or Capitalized interest

8 Rio Rancho PID Policy features, cont’d –PID Board composition (initially, mix of local government and developer representatives) –Evidence of Developer’s ability to complete the proposed project –Additional contribution by Developer (infrastructure in addition to PID-financed improvements) –Investor suitability requirements (if not investment grade, $100,000 minimum denominations and sale to qualified institutional buyers or accredited investors; other investor protections may be considered)

9 Recurrent Issues PID improvements serving property outside district boundaries: how should financing cost be allocated? –Could be offset by utility extension fees paid by property owners outside district –Impact fees paid by property owners outside district might be another possible source of offset

10 Cabezon PID (Rio Rancho) Approved in November, 2004 $11,050,000 bond financing of drainage channel improvements 1 year construction schedule for PID improvements 4.3:1 value to lien ratio Approximately ½ of PID was sold or under contract at time of bond sale Nearly 100% built out within first 2 years after formation

11 Mariposa East PID (Rio Rancho) Formed in 2006 Issued $16,000,000 General Obligation Bonds to finance state of the art wastewater treatment plant Absorption was initially strong but has encountered challenges due to the housing market Developer and PID are working on revised development plan and financing structure

12 2.Tax Increment Development Districts Like a PID, a TIDD is a special purpose governmental entity authorized to issue bonds for infrastructure financing Infrastructure must be public, i.e. owned by governmental entity and, although serving a specific area, available for general public use TIDDs are not subject to the Procurement code

13 TIDD vs PID, cont’d Unlike a PID, a TIDD does not generate revenue by imposing additional taxes or assessments on land, but by redirecting the growth in tax revenue that results from a development project as a special fund source to finance public infrastructure that serves that project. While possible to use TIDD for residential projects, statutory limitation on property tax increases also limit financing capacity TIDDs are more suited to commercial projects that generate GRT

14 TIDD REVENUE SOURCES Unlike a PID, a TIDD does not impose additional tax or charge on land. Instead, establishes a "tax base" for the TIDD, which is the estimated collections of AV property taxes or gross receipts taxes (or both) collected from each location in the TIDD in the calendar year prior to the year in which the TIDD is formed Under the TIDD Act, up to 75% of the "tax increment" or growth in revenue above the tax base may be dedicated to the TIDD for infrastructure financing purposes.

15 TIDD REVENUE SOURCES, CONT’D Each taxing entity (municipality, county or state) must formally dedicate the portion of tax increment derived from a tax imposed by that taxing entity. Developer negotiates amount of increment with each taxing entity Dedication of State GRT requires approval by the State Board of Finance, recommendation and findings by the New Mexico Finance Authority, and legislative authorization (i.e. a legislative appropriation).

16 TIDD FORMATION Landowner petition submitted to local governing body; unlike under PID Act, a local governing body may, on its own motion, hold a hearing on formation of a TIDD. Formation hearing is held Governing body may determine that TIDD should be formed based on interest, convenience or necessity of affected land owners, residents and municipality or county Election or consent of all landowners is then required (unlike PID, only simple majority is required to form TIDD)

17 TIDD FINANCING TIDD may issue tax increment revenue bonds (property tax, GRT or both Unlike PID, no authority to fund infrastructure costs directly from accumulated TIDD revenue However, non-recurring GRT increment generated from construction activities can be used to reimburse eligible construction costs through “sponge bond” Sponge bond is very short term bond purchased by developer and paid with accumulated increment revenue

18 TIDD FINANCING, cont’d Bond proceeds received by TIDD reimburse developer for eligible costs Accumulated tax increment revenue repays bond purchaser (developer’s affiliate) Once the development project is generating recurring GRT or property tax increment, long-term bonds can be issued Maximum term of TIDD bonds is 25 years from the date that bonds are first issued by the TIDD I.e. subsequent series of bonds must mature within 25 years after first series was issued

19 Rio Rancho TIDD Policy Objectives Expand and diversify the City’s economy and tax base Create job opportunities for the unemployed and underemployed residing within the City Attract and expand new and existing services, projects and employers that will position the City competitively within the state and region Provide housing choices, including affordable housing, that meet the needs of current residents and attract new residents to the City

20 Rio Rancho TIDD Objectives, cont’d Support neighborhood retail services, commercial corridors and employment hubs; Support public school creation and improvement, including the creation and improvement of facilities for charter schools; Support businesses and suppliers within the City and increase the City's gross receipts tax base by encouraging, purchase of materials; goods and services from such businesses and suppliers for the construction of Public Improvements serving a tax increment district

21 Rio Rancho TIDD Policy-- Application Requirements TIDDs will generally not be approved to finance less than $5,000,000 in Public Improvement costs Application Requirements: --Legal description of land proposed for TIDD --Evidence of consent of owners and qualified electors --Tax Increment Development Plan --Preliminary Financing Plan/Construction Schedule --Financial Feasibility Study --Market Demand Study --Proposed TIDD Development Agreement

22 City TIDD Application Requirements, cont’d Contents of a Tax Increment Development Plan: --map depicting geographical boundaries of the area proposed for the TIDD; --estimated time necessary to complete the tax increment development project; --description of the Public Improvements proposed to be financed by the TIDD; --proposed plan of finance for the TIDD, describing type of tax increment bond financing and providing debt service coverage requirements, debt service reserve fund requirements, proposed marketing plan, investor suitability standards and secondary market restrictions, additional credit support features

23 Contents of Tax Increment Development Plan, cont’d --GRT increment and ad valorem property tax increment estimated to be generated by the project, and percentage requested for the project (not to exceed 75%) --number and types of jobs expected to be created --amount and characteristics of workforce housing to be created, if applicable --innovative planning techniques, including mixed use, transit oriented development, traditional neighborhood design or sustainable development techniques to be incorporated

24 City TIDD Application Requirements, cont’d Feasibility Study is to analyze: --direct and indirect benefits to employment, tax base, transportation, parking, environmental cleanup and historic preservation --costs of proposed project to the City during the expected life of the project (not just during tax increment dedication) --impact on project with dedication of 75%, 50%, 35% and 25% of increment generated

25 Market Demand Study, estimating revenue to be generated by the private development and absorption period Proposed TIDD Development Agreement: -- negotiated by applicant and City Staff, to become effective upon formation of TIDD --describes obligations of Developer and TIDD concerning bond financing, construction, inspection, dedication, acceptance and operation of TIDD infrastructure --addresses TIDD governance and administration --provides for rescission of tax increment dedication and recoupment of unexpended increment revenue as remedy for nonperformance City TIDD Application Requirements, cont’d

26 3.Industrial Revenue Bond Financing IRB is a “conduit” transaction in which City issues bonds, usually taxable, on behalf of a developer for an eligible project By statute, eligible projects include general commercial and industrial purposes, but not projects which are “primarily retail in nature” Property taxes are abated while IRB indebtedness is outstanding

27 IRB Basic Features, cont’d Purchases of equipment, fixtures and furnishings for the project can be made with nontaxable transaction certificates, avoiding GRT on those purchases NTTCs are not available for purchases of “ingredients of construction” (e.g. lumber, rebar, concrete, windows, roofing) which remain subject to GRT

28 Basic Structure of an IRB Developer conveys “bare legal title to the project property (real, personal or both) to the City --That mechanism takes the project property off the tax rolls, which is then not subject to ad valorem property tax while “owned” by the local government entity. City leases project property (or, in some cases, sells in stages pursuant to an installment sale agreement) to the developer.

29 Basic Structure of an IRB, cont’d The lease or installment sale agreement provides that the developer has all the benefit and detriment of all economic use of the project property At the end of the term of the lease, title to the property is re-conveyed for no additional consideration to the developer In the case of an installment sale agreement, title is fully re-acquired by the developer upon payment of the final installment.

30 IRB Basic Features, cont’d Self-financed transactions usually include language subordinating the rights of bondholders to prior mortgages and other financing liens, and providing for subordination to future financing liens, so as to enable the developer to obtain outside financing from other sources. The developer is leasing or purchasing the project property from the local government issuer in form, but not in substance.

31 IRB Basic Features, cont’d The substance of the lease or installment agreement is that the local government has no rights to re-take possession upon breach by the developer, no damages remedies or any other rights typical of a lessor or installment seller Breach of the IRB lease or installment agreement results in the termination of that agreement and title to the project property transferring back to the developer, effectively making the property subject to ad valorem tax.

32 Basic Structure of an IRB, cont’d Simultaneously with the delivery of the lease or installment sale agreement, City issues an industrial revenue bond, often issued as a “maximum principal amount” obligation against which advances are taken by the developer. Although occasionally the bond is actually sold to a 3 rd party lender in an arm’s length transaction, more often the transaction is “self-financed,” in which the bond is purchased by a single purpose LLC, created, owned and controlled by the developer.

33 Basic Structure of an IRB, cont’d The only purpose of self-financed transactions is to obtain the ad valorem property tax abatement and GRT relief. Debt service on the IRB is payable only on amounts actually advanced. The security for payment of debt service is a pledge of the developer’s lease or installment sale payments, which are assigned to a trustee or depository bank for the benefit of the bondholder.

34 Rio Rancho IRB Policy Claw-back Provision: 100% of the property tax abated for an IRB are “clawed back” if recipient permanently ceases operation of project property within the 5 years following the issuance of the IRB Payments in lieu of Taxes: --For IRBs issued by the City in an aggregate investment amount less than $100 million, annual PILOT equal to the total real and personal property taxes that would otherwise have been levied for Rio Rancho Public School District for that tax period

35 Rio Rancho IRB Policy- Payments in Lieu of Taxes, cont’d PILOT is not mandatory for IRBs exceeding $100 million --will be considered on a case-by-case basis --if imposed, intended to be commensurate with the nature of the business, length of bond term and amount of the bond PILOT shall not exceed 50% of the total real & personal property taxes which would have been due and payable without IRB tax abatement.

36 Questions?

37 Thank you. Peter Franklin Modrall Sperling Roehl Harris & Sisk, P.A. (505) 984-2856

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