1. Washington Economic Development Association 2010 Spring/Summer Conference Financing Tools for Economic Renewal Stacey Crawshaw-Lewis, Attorney, K&L Gates LLP Deanna Gregory, Attorney, K&L Gates LLP

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3. 3 Tools available to finance economic development Tax-exempt financing under federal law Taxable financing under federal law State law updates Questions Overview

4. 4 First … the bad news...  Recession  Credit crunch…availability of bank credit  Bond insurance….all but gone  Decrease in tax revenue  Declining assessed values  Decreased sales, lodging and other excise taxes

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6. 6 Tax-Exempt Financing  Traditional taxable commercial loan from a lender (bank) to a borrower:  the borrower pays interest, and  interest is included in gross income of the lender  Tax-exempt financing:  bonds are issued by a governmental entity  the proceeds are loaned to a qualifying borrower  borrower is responsible for paying principal and interest on a tax-exempt bond  interest received by the lender is not included in gross income for federal tax purposes

7. 7 Why bother?  Tax-exempt financing is a benefit provided under the Internal Revenue Code  Lower interest rates  Lender does not pay federal income tax on interest received  So willing to accept a lower interest rate  Access to broader investor base through public offering by governmental issuer  Access to long-term financing

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9. 9 Types of tax-exempt financing  “Tax-exempt governmental bonds”:  Used by general governments for governmental purposes  Examples  “Tax-exempt private activity bonds”:  Finance capital projects used by private business  Examples

10. 10 Tax-exempt Private Activity Bonds  Qualified 501(c)(3) bonds  Qualified student loan bonds  Qualified redevelopment bonds  Qualified small issue bond  Qualified mortgage bonds  Exempt facility bonds

11. 11 The American Recovery and Reinvestment Act of 2009 (“ARRA”) ARRA introduced new or enhanced financing tools Tools to make borrowing cheaper Tools to borrow for new types of projects Tools to stimulate economic development

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13. 13 ARRA Tools Tools include: Build America Bonds (“BABs”) Recovery Zone Economic Development Bonds (“RZDevs”) Recovery Zone Facility Bonds (“RZFBs”) Expansion of tax-exempt funding for manufacturing facilities Qualified School Construction Bonds (“QSCBs”) Qualified Zone Academy Bonds (“QZABs”) New Clean Renewable Energy Bonds (“New CREBs”) Qualified Energy Conservation Bonds (“QECBs”)

14. 14 ARRA Tools - Recovery Zone Facility Bonds (“RZFB”)  New category of tax-exempt bonds  For privately owned and/or privately used projects that would have previously been financed on a taxable basis

15. 15 Recovery Zone Facility Bonds (“RZFB”)  Eligible projects only include depreciable property if:  Constructed, reconstructed, renovated or acquired by purchase after the recovery zone was designated;  Original use of the property in the recovery zone commences with the user; and  Substantially all of the use of such property is in the recovery zone in the active conduct of a qualified trade or business.

16. 16 Recovery Zone Facility Bonds (“RZFB”)  A qualified trade or business is broadly defined to include:  any trade or business  except residential rental property  and except certain other businesses such as private golf courses, massage parlors, hot tub facilities, suntan facilities, gambling facilities or liquor stores  The property may be privately owned and operated  Examples

17. 17 RZFBs – Who Can Issue?  Issuers need an allocation to issue RZFBs  Allocated to counties and municipalities with populations larger than 100,000 based on employment declines  used by a recipient directly,  suballocated within the recipient’s jurisdictions for use, or  waived and sent to the state for reallocation  Projects must be within the jurisdiction of both:  the issuer of the RZFBs and  the entity that provided the allocation  Allocations must be used by December 31, 2010  Proposals to extend deadline

18. 18 Washington State RZFB Allocations Area RZFB  City of Bellevue $3,736,000  City of Seattle$19,918,000  City of Spokane$156,000  City of Tacoma$4,979,000  City of Vancouver$2,459,000  Asotin County$14,000  Clallam County$1,209,000  Clark County$3,940,000  Cowlitz County$5,502,000

19. 19 Washington State RZFB Allocations (cont.) Area RZFB  King County$34,754,000  Kitsap County$11,290,000  Lewis County$740,000  Pacific County$870,000  Pierce County$14,612,000  Skagit County$7,914,000  Skamania County$149,000  Snohomish County$19,816,000  Spokane County$204,000  Whatcom County$2,738,000

20. 20 Designating a Recovery Zone  A recovery zone may include:  An area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress;  An Empowerment Zone or Renewal Community; or  Certain distressed areas affected by military base closures  Issuers have broad discretion in designating recovery zones (can be made in any reasonable manner so long as made in good faith)

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22. 22 ARRA Expansion of Tax-Exempt Financing for “Manufacturing Facilities” (“IDBs” or “IRBs”)  Tax-exempt financing is available for certain small manufacturing facilities  Before ARRA:  only manufacturing facilities used in the manufacturing or production of tangible personal property  After ARRA:  also includes facilities used in the manufacturing of intangible property  E.g. software, format, process, patent, copyright, design, intellectual property associated bio-tech and pharmaceuticals

23. 23 Related and Ancillary Facilities  Before ARRA:  only 25% of the bond proceeds could be used for costs of “directly related and ancillary” facilities  (as opposed to the “core” manufacturing areas of the facility)  After ARRA:  removed 25% restriction for bonds issued in 2009 and 2010  So, tax-exempt financing can be used for facilities that are functionally related and subordinate to the manufacturing facility as long as those facilities are located on the same site as the manufacturing facility

24. 24 ARRA Tools – Qualified Energy Conservation Bonds (“QECBs”)  Energy Improvement and Extension Act of 2008; amount supplemented in ARRA.  QECBs can be used to finance qualified energy conservation projects.  Similar to RZFB, issuers need an allocation to issue QECBs.  Key point for economic development:  Up to 30% of the allocation may be used for private projects (projects used or owned by a private entity)

25. 25 QECBs  QECBs are issued as “taxable” bonds  Initially must have been issued as taxable “tax credit” bonds  Since March 2010, can be issued as taxable super- subsidized direct payment “Build America Bonds”  taxable interest rate  issuer receives direct federal subsidy payment  for QECBs: 70% of interest payable on each interest payment date

26. 26 QECBs  The entire amount (100%) of the “available project proceeds” of the issue must be used for qualified energy conservation purposes.  The legislative history suggests a broad range of energy conservation projects would qualify.

27. 27 QECBs  The following projects are specifically allowed:  capital expenditures incurred for the purpose of: (i) reducing energy consumption in publicly-owned buildings by at least 20 percent, (ii) implementing green community programs, (iii) rural development involving the production of electricity from renewable energy resources, or (iv) certain renewable energy projects.  May also be used for expenditures with respect to research into specified energy technologies; mass commuting facilities, green demonstration projects and public education campaigns to promote energy efficiency.

28. 28 QECBs – Who can issue?  Similar to RZFB, issuers need an allocation to issue QECBs  Allocation can be used by a recipient directly, suballocated to eligible issuers within the recipient’s jurisdictions for use, or waived and sent to the state for reallocation  Projects must be within the jurisdiction of both the issuer of the RZFBs and the entity that provided the allocation

29. 29 QECB Additional Considerations  Federal Davis-Bacon prevailing wage rules apply  Maximum maturity for bonds. Maximum maturity is set monthly by the U.S. Treasury, currently 17 years

30. 30 Other Items to Consider  No accelerated depreciation  Tax-exempt bond financed property is subject to “alternative depreciation system”  Issuance process  Complex packaging  Largest hurdle for conduit transactions  $$$ bank credit

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32. 32 State Law Opportunities for Economic Development  Traditional “TIF” Not Available  Leonard v. Spokane, 127 Wash.2d 194, 897 P.2d 358 (1995)  Redirected incremental property taxes, including the state property tax, to pay for public infrastructure.  Diversion of state property tax inconsistent with Article IX, Section 2.  Requires application of such taxes to the support of the common schools.  Rejected the city’s argument “in the absence of the Act the tax dollars allegedly diverted would not have been generated.”

33. 33 So where does this leave us?  Constitutional prohibition addresses only the state property tax for the common schools  So the Legislature and municipalities have tried to achieve TIF-like financing by focusing on:  Local property taxes  Excise taxes

34. 34 101% and TIF  101% cap on increased property taxes disrupts the TIF mechanism.  Can only capture increased property taxes from the new construction  Cannot capture increased property taxes from resulting appreciation in the property values of neighboring properties.

35. 35 Three TIF-lite statutes  Ch. 39.89 RCW, which permits local jurisdictions to agree to divert local property taxes to finance public infrastructure.  Local Infrastructure Financing Tool (“LIFT”), which provides a state sales tax credit for qualifying local tax increment districts.  Community Revitalization Areas (“LRF”) also provides a state sales tax credit for qualifying local tax increment districts

36. 36 Local Revitalization Financing  2009 Legislation; Expanded in 2010  Projects  Public infrastructure projects  Planning, analysis, retail promotion, maintenance and security of common areas  State contribution through state sales tax credit

37. 37 Sources of Funding…  Local match through local tax increment  75% of increased property taxes from new construction  Sales taxes (percent determined by interlocal)  Plus federal sources and private sources  Helpful features:  Can carry forward excess local match  Local match can be used for debt service or pay as-you-go

38. 38 2009 LRF Applications  DOR received applications from the 7 demonstration projects (annual awards); all were approved  Whitman - $200k  University Place - $500k  Tacoma - $500k  Bremerton - $330k  Auburn - $250k  Vancouver - $220k  Spokane - $250k

39. 39 2009 Competitive LRF Applications  Competitive Pool - $2.5m in annual awards  DOR received 12 applications  As of September 15, 2009, the following were approved:  Wenatchee - $500k  Clark County - $500k  Bellevue - $500k  Kennewick - $500k  Federal Way - $100k  Renton - $500k (pending)

40. 40 2010 LRF Projects Added  (2010 Wash. Laws Chapter 164)  Richland Revitalization Area ($330,000 per year),  Lacey Gateway Town Center ($500,000 per year),  Mill Creek East Gateway ($330,000 per year),  Puyallup River Road Project ($250,000 per year),  Renton South Lake Washington Project ($500,000 per year) and  Newcastle Downtown Project ($40,000 per year).

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42. 42 State law updates: Transportation Benefit Districts  TBDs may finance transportation improvements that are contained in:  a city, county or certain other local transportation plans,  not only in state and regional transportation plans.  Voter-approved sales tax  may now be imposed by TBD for longer than ten years  if the tax is initially imposed after July 1, 2010, and if the tax revenues are pledged to bonds.

43. 43 State law updates: Community Facilities Districts  New type of special purpose district  To finance community facilities and public infrastructure.  Special assessment financing  Similar to local improvement district ("LID") financing  But with a few differences  formed by petition to the city and/or county  signed by 100 percent of the property owners  CFD board implements the financing

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45. 45 Questions?  Email:  Stacey.Crawshaw-Lewis@klgates.com Stacey.Crawshaw-Lewis@klgates.com  Deanna.Gregory@klgates.com Deanna.Gregory@klgates.com  Edward.McCullough@klgates.com Edward.McCullough@klgates.com  ARRA Resource:  http://www.klgates.com/practices/stimulus