Urban Redevelopment: Public Financing Options · Urban Redevelopment: Public Financing Options...

Urban Redevelopment:Public Financing Options

National Business InstituteMadison, WI

August 11, 2008

Public Financing Options

– TIF– Business Improvement Districts– NMTC– Affordable Housing Tax Credits– Historic Tax Credits– Other Districts and Tools

Tax Increment Financing (TIF) Overview

• Allocates Future Increases In Property Taxes To Pay For Improvements

• Takes Place Within A Specific, Limited Geographic Area

• Lasts Up To 27 Years From Date The TIF District Was Created For Blight And Conservation; 20 Years For Industrial, Or Less

TIF Chart

How TIF WorksNormal Property• Taxed At Specific Rates By Several Different

Government Jurisdictions• Increases In Value Are Taxed At The Same Rate; Extra

Revenue Accrues To The Taxing BodiesProperty Within A TIF• All Taxing Jurisdictions Continue To Receive Taxes

Based On The Base, Or “Frozen” Assessed Values• Taxes Generated By Increases In Value Are Allocated

To The Municipality For Improvements In The TIF District

Why Use TIF?

• Municipality Only Jurisdiction For Redevelopment – Protect Long-term Fiscal Condition

• Financially Powerful• Leverages Private Investment

Business Improvement Districts

• Designated Sub-area Of Community

• Additional Tax To Pay For Facilities Or Services Beyond Usual

• Owners Representing 40% Of Property Value Can Block

Uses and Issues• Downtown District

Improvements & Marketing

• “Greenfield” Infrastructure In IL And CA

• Back-up For Developer Commitments In Redevelopment And Town Center Projects

Issues

• Issue: Tax Rate/Market Competition• Issue: Necessity re Market Conditions –

Windfall• Issue: Equity• Issue: Political Impact on Referenda

New Markets Tax Credits

• The New-new Thing• New Markets Tax Credit Supports

Commercial And Industrial Development In Qualifying Areas

• Increases Access To And/Or Lowers Cost Of Capital

• Supplements TIF, EZ And Other Funds


• NMTC: a tax credit for equity investments in CDEs

• Community Development Entities (CDEs): Mission to serve low-income communities

• Low-Income Communities (LICs): 20% poverty or where median family income is below 80% of AMI

CDFI Fund(U.S. Treasury)

Private Investors

Qualifying Project/Business

(QALICB)

QEIQLICICommunity

Development Entity(CDE)

Allocation of NMTCs

7-yearStream ofNMTC Benefits


New Markets Tax Credit

• Cdes Use Investments To Make “Qualified Low-Income Community Investments” (QLICIs)

• QLICIs Include:– Capital or equity investment in, or loan to any “Qualified

Active Low-Income Community Business” (QALICB),– Equity investment in, or loan to, any CDE– Purchase of a loan from another CDE – Financial counseling and other services to businesses located in

LICs

Enhancing Conventional Debt

QALICB(Project)CDE

Tax Credit Benefits($3.9 MM over 7 Yrs)

7-Year Mini-Perm Loan@ Low Blended Rate

($9.5MM)

NMTCInvestor

Lender

Cash Up-Front($2.5-$3MM)

Interest-Only Debt Service w/Balloon In Year 7

7-Year Loan at Conventional Market Terms ($7-$7.5MM)

•$500k in CDE fees and other transaction costs

(placeholder amt)Sinking Fund

for Loan Repayment

Year 7

QALICB(Project)CDE

Return on and of capital provided via tax credits

NMTCInvestor

LenderPrincipal Repayment

($7-$7.5MM)

Principal Repayment($7-$7.5MM)

Remaining $2-$2.5MMcan be forgiven or

restructured

Increasing Available “Soft Money”

QALICB(Project)CDE

Nominal InterestForgivable Loan

($9.5MM)

NMTCInvestor

CharitableDonations

GovernmentGrant

Pooling in Upper-Tier Investment

Fund

$10MM

$5MM

$2.5 MM

$2.5 MM

Tax Credit Benefits($3.9 MM over 7 Yrs)

•$500k in CDE fees and other transaction costs

(placeholder amt)

QALICB(Project)CDE

Forgiveness ofOutstanding Debt

($9.5MM)

CharitableDonations

GovernmentGrant

Year 7

Return on and of capital provided via tax credits

NMTCInvestor

NoRepayment

Needed

Sample Retail Project

Project Cost $16 million

Maximum Supportable Debt*

$9.7 million

Required Equity $6.3 million

Projected IRR on Equity

9.4%

Project cannot provide a market-rate level of return and is unlikely to be feasible

*Based on minimum required debt coverage assumption of 1.25



$11.5 million

Required Equity $4.5 million

Projected IRR on Equity

17.4%

NMTC-supported loan with reduced interest rate and more flexible terms allows project to achieve reasonable rate of return. Total credits used: $11.5 million

Without NMTC With NMTC

Sample Mixed-Use Project with NMTC Subordinate Debt and Gap $



$24.3 million

Equity** $8.7 million

Up-Front Gap Need $17 million

In order to allow a market level of equity return, up-front TIF of $17 million needed

Project Cost $50 millionMaximum Supportable Debt*

$24.3 million

NMTC Subordinate Debt

$12.5 million

Equity** $7.2 millionUp-Front Gap Need $6 millionNMTC Subordinate Loan of $12.5 million reduces up-front TIF need by $11 million***. Total credits used: $50 million.

Without NMTC With NMTC

*Based on minimum required debt coverage assumption of 1.25**Based on minimum required IRR assumption of 17.5%***NMTC subordinate debt assumed not to be a dollar-for-dollar replacement for TIF because of small interest payback requirements

Affordable Housing Tax Credits• Section 42• Credit Up To 90%

Over 10 Years• Discounted Value

About 70 Cents Currently

• Multiple Layers

Affordable Housing Tax Credits• Allocated by

WHEDA• Bonus in Housing

Bill• Targets HH at 40 to

60% of AMI • Families and

Seniors

Historic Tax Credits

• 20% of Eligible Basis

• SHPO and Dept. of the Interior Approvals

• Up to 100% Value• 5-Year Hold• Can be Layered

Other Special Wisconsin Tools

• Lake Associations and Lake Districts• Sanitary Districts

The Interplay Between Public and Private Financing

• Debt, Equity And Financing Gaps• Types Of Financing• Measuring Returns• Appropriate Returns

Is it Debt or Equity?

• If It’s Not Debt, Its Equity• Debt: Must Be Paid Back First Before Cash

Flows To “Owners”• Multiple Layers: 1st, 2nd, N-th – All Have

Priority And Typically Lien On Property• Public Funds: Can Be Debt Or Equity

Depending On Terms

Types and Sources of FinancingRisk-Reward-Time Horizon Matching

Partial List:• Construction Loan—Commercial banks• Mini-Perms—Commercial banks or other construction

lender• Mezzanine Debt—Various such as Cohen Financial• Permanent Financing (Mortgage)—Life insurance

companies, REITs, pension funds• Equity—Developer funds, syndication (LP or LLP), joint

venture, corporate, REITs, pension funds• Tax Credit Equity—Syndicators/Corporate buyers

Financing Parameters• Debt based on value and/or cash flow• Typical private debt/equity 75% to 85% debt depending on

property type• Developers seek to minimize equity• Seek to substitute public $ for equity• Tax credits also available• Mezzanine debt substitutes for equity -- participating• Typically: 20% of non-public funds as equity, but often

will be less– Mezzanine debt– 2nd or 3rd position public debt– Grants/reimbursements

Definitions of Return

• Net Operating Income• Cash Flow From Operations• Return On Investment Or Cost (Stabilized Annual)• Return On Equity (Stabilized Annual)• Internal Rate Of Return On Cost• Internal Rate Of Return On Equity• Profit Margin On Sales

What Are Appropriate Returns?

• Risk-adjusted Rate Of Return• Returns On Total Cost Of 8% To 13%• Returns On Equity Of 15% To 25%• Profit On Sales Of 9% To 14%• Annual Cash-on-cash (Equity) Returns Of

8% To 12% (Stabilized Year)

Residential Project Profit Benchmarks

• Profit After General And Administrative: Margin On Sales Of 9% To 14%– Developers seek 14% plus 5% development fee or G & A– Public-private deals around 9% plus 3-1/2 to 4-1/2% G & A– Average homebuilder around 5%

• General Contractor Profit Layer– Mid-rise and higher– Separate overhead and profit around 8% to 10%– General conditions is a hard cost– Developer profit should be lower

Why Assist a Development Project?

• TIF Should Be• Need-based/Financing Gaps and Extra-ordinary

Costs• Competitive

• Benefits Should Exceed Assistance• Contributes to Community Goals• Accurate Estimates of Fiscal Benefits• Secondary Economic Impacts• “Intangible” Benefits• Policy and Practical Limits

What Drives Financing Gaps?

• Extraordinary costs• Land assembly• Control density and character

How to Address “But For” at the Project Level

• Have A Formal TIF Application And Review Process

• Require Applicant To Justify The Level Of Assistance Requested Via Analysis Of Profit/Returns, Extraordinary Costs, And Public Costs

• Review In Detail And Challenge Key Assumptions If Needed

ExampleSources and Uses w/o TIF

SOURCES OF FUNDSConstruction Loan $ 14,516,174 Equity $ 5,466,208 TIF Assistance $ ‐TOTAL SOURCES $ 19,982,382

USES OF FUNDSLand $ 3,750,000 Environmental $ 2,500,000Other Site Costs $ 1,853,000 Hard Costs $ 8,692,812 Soft Costs $ 2,562,247 Developer Fee $ 624,322 TOTAL USES $ 19,982,382

IRR on Cost 8.1%IRR on Equity 10.5%

Sources and Uses with TIF‐based grant

SOURCES OF FUNDSConstruction Loan $ 14,516,174 Equity $ 2,966,208 TIF Assistance $ 2,500,000TOTAL SOURCES $ 19,982,382

USES OF FUNDSLand $ 3,750,000 Environmental $ 2,500,000Other Site Costs $ 1,853,000 Hard Costs $ 8,692,812 Soft Costs $ 2,562,247 Developer Fee $ 624,322 TOTAL USES $ 19,982,382

IRR on Cost 10.0%IRR on Equity 18.6%

Returns Analysis (with TIF)Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

SOURCESNOI (less Reserves) ‐ 1,061,875 1,469,769 1,467,664 1,465,517 1,463,327 1,634,344 1,632,066 1,629,742 1,627,372 1,624,955 Reserve Payout 200,000 Reversion 22,047,791TOTAL 1,261,875 1,469,769 1,467,664 1,465,517 1,463,327 1,634,344 1,632,066 1,629,742 1,627,372 23,672,745

USESDebt Service 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 1,245,640 Debt Repayment 11,345,186 Equity Distributions 16,235 224,128 222,023 219,877 217,687 388,704 386,426 384,102 381,732 11,081,919

TOTAL ‐ 1,261,875 1,469,769 1,467,664 1,465,517 1,463,327 1,634,344 1,632,066 1,629,742 1,627,372 23,672,745

Annual Debt Coverage 0.85 1.18 1.18 1.18 1.17 1.31 1.31 1.31 1.31 1.30

Leveraged Cash Flow

Equity Contributions (2,966,208) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐Equity Distributions ‐ 16,235 224,128 222,023 219,877 217,687 388,704 386,426 384,102 381,732 11,081,919

TOTAL (2,966,208) 16,235 224,128 222,023 219,877 217,687 388,704 386,426 384,102 381,732 11,081,919

Annual Cash‐on‐Cash Return 0.5% 7.6% 7.5% 7.4% 7.3% 13.1% 13.0% 12.9% 12.9% 12.8%Leveraged IRR 18.6%

Unleveraged Cash FlowNOI ‐ 1,061,875 1,469,769 1,467,664 1,465,517 1,463,327 1,634,344 1,632,066 1,629,742 1,627,372 1,624,955 Reversion Proceeds ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 22,047,791 TIF Assistance 2,500,000 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Total Project Costs (19,982,382) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

TOTAL (17,482,382) 1,061,875 1,469,769 1,467,664 1,465,517 1,463,327 1,634,344 1,632,066 1,629,742 1,627,372 23,672,745

Annual Yield on Cost 6.1% 8.4% 8.4% 8.4% 8.4% 9.3% 9.3% 9.3% 9.3% 9.3%Unleveraged IRR 10.0%

Common Components of “Gap Analysis”

• Checking Pro Forma Math And Cash Flows• Independent Construction Cost Review• Reviewing Project Debt Capacity• Benchmarking “Top Line” Revenue Sources• Benchmarking Soft Costs, Developer Fees,

Etc.• Estimating Profit And Rates Of Return

Other Considerations

• Detailed review can also help with structuring process

• Avoids appearance of arbitrary assistance• Can save significant municipal resources• Back-end participations/“kickers”/up-side

sharing

Forms of Financing• Direct Reimbursement• Pay-as-you-go

– Interest Writedown– As Sales Taxes

Received From State– TIF (Developer) Notes

• Monetizing Developer Notes– Banks– Special Revenue

Bonds• General Obligation Bonds

Sharing the Upside (But Not the Risk)

• Public Assistance Reduces The Risk• Upside Sharing Common

– Like Waterfalls In Partnership Deals• 1st Dollar Or Margin?• Common Forms

– Junior Loan Instead Of Grant (More WI)– Top Line Share Over Selling Price– Bottom Line Share Over Return Threshold– Sharing In Sales Proceeds And/Or Refinance

Access to TIF Funds• Direct Reimbursement• Tif-supported Bonds - Provides Funding Upfront

And Is Paid Over Time From Future Increment– General Obligation Bonds– Special Revenue Bonds

• TIF Note - Developer Holds TIF Note, Finances The Extraordinary Costs Upfront, And Is Paid Off Over Time From Incremental Revenue Collections

• Redevelopers’ Interest Reimbursement (Annual)

Direct Reimbursement• Municipality Reimburses

Eligible Costs As Incurred• Established TIF With

Balances Or “Ported”• Agree To Use General

Increment Vs. Project Increment (“Out-of-pin” Vs. “In-pin”)

• Not Very Common• Most Likely Used For

Start-up Expenses Or Infrastructure

General Obligation Bonds or Alternative Bonds

• Carry full faith and credit of municipality or other revenue source such as sales tax

• First $10 million per year “bank qualified”

• Best interest rate• Impose levy but can abate

GO & Alt. Rev, Cont’d

• Most Often Used For Infrastructure, Land Acquisition (Tax Exempt)

• Can Be Used For Developer Assistance (Taxable)

• Sometimes Structured As Loan (Wisconsin)

Special Revenue Bonds• Secured By Designated Revenues Such As TIF

Increment And Others• Require Detailed And Substantiated Projections

– Taxes Of Comparable Properties– Timing– Collection Rate– Future Tax Rates And Equalization Factors

• Full Disclosure/OS• Placed Institutionally

Special Revenue Bonds, cont’d– Wm. Blair & Company– Oppenheimer– Stifel Nicholas– A. G. Edwards– LaSalle Bank– Harris Bank

• Structures Include Potential For Construction Funding• Still Reimbursement• May Involve Capitalized Interest Reserve, Etc.• May Be Tax Exempt If Do Not Fail Dual Test

– Private Purpose And– Paid From Other Than General Taxes

• Example– Wheeling Westin Hotel

Wheeling Westin Hotel• Hotel And Retail Project• Very High Profile• $120 Million Plus Project; $23

Million Assistance TIF And Sales Tax

• Eligible Costs Were Land Acquisition And Infrastructure

• Multiple Pledges– Project Property Tax

Increment– District-wide Increment– Adjacent District Increment– Sales And Hotel Tax From

Project• 2005 Issue At 6%, Tax Exempt• Placed By Wm. Blair &

Company

Westin Hotel

Developer Notes• Pledge Of Incremental Revenue, Usually Just From Project

But Can Be Broader• Revenue Received As Available Against Rate And

Principal Amount• Held By Developer, Sold, Or Used As Collateral• Sale Of Note Usually Requires Significant Yield• Use As Collateral Becoming More Common

– Increase Construction Loan– Pledge Notes– Developer Responsible For Loan In Usual Manner

• Harris, Lasalle, And Chase Have All Considered And/OrDone

Interest Reimbursement• Financing Costs For

Obligations Issued To Pay Interest On Debt To Pay Project Costs

• Typically “In-pin” But Can Use District Revenues

• Paid Annually As Funds Available

• May Also Be Used (Or Notes Can Be Used) To Support A Loan Layer With FHA Insurance (20-year Piece)

Some Closing Thoughts

• Projects That “Pencil” – Its tough enough without a public-private partnership

• But, if need help, help is there– TIF is Widespread and Effective– Communities want to do projects– New Markets deals are getting done too

• Public Sector: Need-based Policies

• Private Sector: Expect Thorough “Underwriting”

Resources• Real Estate Market Analysis: A Case Study Approach, Schmitz & Brett, Washigton,

D.C: ULI-the Urban Land Institute• Real Estate Finance & Investments, Brueggeman & Fisher, McGraw-Hill Irwin• Real Estate Development, 3rd Ed, Miles, Berens & Weiss, Washington, D. C.: the Urban

Land Institute• Building Owners & Management Association International. http://www.boma.org• Institute of Real Estate Management. http://www.irem.org• The Business of Building, Measuring Your Success, 2001 Cost of Doing Business Study.

Washington, D.C.: National Association of Home Builders.• Real Estate Research Corporation, Real Estate Report. www.RERC.com• PricewaterhouseCoopers. Korpacz Real Estate Investor Survey

[email protected] • National Building Cost Manual. Carlsbad, CA: Craftsman Book Company• RSMeans Square Foot Costs. www.rsmeans.com• Dollar & Cents of Shopping Centers. Washington, D.C.: ULI-the Urban Land Institute.• Dollar & Cents of Multi-family Housing: A Survey of Income and Expenses in Rental

Apartment Communities. Washington, D.C.: ULI-the Urban Land Institute.• American Council of Life Insurers. 2004. Commercial Mortgage Commitments,

Washington, D.C.: American Council of Life Insurers.

http://www.boma.org/

http://www.irem.org/

• Development Strategies• Public-Private Partnerships• Market & Financial Feasibility• Area Plans & Implementation• Developer Solicitation• Tax Increment Financing• New Markets Tax Credits• Special Service Areas• Fiscal Impact

221 North LaSalle StreetChicago, IL 60601Phone: 312-424-4250Fax: 312-424-4262www.FriedmanCo.Com

Urban Redevelopment: Public Financing Options · Urban Redevelopment: Public Financing Options...

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