Village of Oswego: Village Board Municipal Incentives 9-17... · 2018-01-19 · Why Use Development...

VISION | ECONOMICS | STRATEGY | FINANCE | IMPLEMENTATION

Using Municipal Development Finance Tools

September 17, 2013

Village of Oswego: Village Board


Presentation Outline Why Use Development Finance Tools? Principles for Public-Private Financing Partnerships Oswego’s Development Issues Municipal Tool Kit

• Tax Increment Financing (TIF) • Business Districts • Special Service Areas • Economic Incentive Agreements (Sales Tax Sharing)

Best Practices for Public-Private Partnerships Process – Achieving Success Conclusions Example Projects Discussion

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Why Use Development Finance Tools? To Achieve Key Public Goals Enhancing Local Tax Base/ Fiscal

Balance Enhancing Employment Base Affordable Housing/ Community

Facilities Catalytic Infrastructure Remediation Greater Public Benefit Amenity/Character

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When Should Government Assist? Public Infrastructure/

Improvements Extraordinary Costs Proposed Project Is “Above Market”

or “Non-Market” • Market not yet established (not yet

financeable) • Desirable features that market won’t

fully “pay for” • Publicly desired use is not the highest

and best economic use

Limited Circumstances: Incentive to Attract or Retain Investment in a Strategic Area

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Principles for Public-Private Financing Partnerships Development Finance Tools (“Incentives”) Are Used to Help Achieve: Key Community Goals and Implementation of Plans Market and Financially Feasible Projects(with assistance) Community Benefits Fiscal Cost-Effectiveness/Return on Public Investment Closing a Gap/Need (But for…) or Competitive Challenge Appropriate Risk Sharing , Limiting Public Sector Risk

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Oswego’s Development Issues Downtown

• Old Village Hall Site • Potential Redevelopment Sites • Former Lumber Company Site • Parking? Rt. 34 Corridor

• Economic Incentive Agreements • Market Factors

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Municipal Tool Kit

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Tax Increment Financing (65 ILCS 5/11-74,4-1 et seq)

Revenues diverted for TIF-eligible

purposes (state law)

Revenues continue to flow to normal

taxing bodies

Fund

Pledged to support bond debt service

Pledged to developer note

Used to fund infrastructure

Within a defined geographic area…

PV @ 5% discount rate of TIF with 7% tax rate = 20 to 25% of development’s value

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Where and How Has TIF Been Used? Downtown Redevelopment

Uses • Land Acquisition and

Writedown • Infrastructure/ Streetscape • Site Prep/ Remediation • Parking • Building Rehabilitation/

Historic Preservation • Developer Assistance • Affordable Housing

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VISION | ECONOMICS | STRATEGY | FINANCE | IMPLEMENTATION 10


TIF Basics

Paths to Eligibility Eligibility Factors Improved Areas

• Blighted Area Five eligibility factors must be present to

a meaningful extent, and reasonably distributed

• Conservation Area More than 50 percent of the buildings

are 35 or more years old Three eligibility factors must be present

to a meaningful extent, and reasonably distributed

Vacant Land with Certain Combinations of Conditions

Environmentally Contaminated Area Industrial Park Conservation Area Industrial Jobs Recovery Law Vacant Industrial Buildings

Dilapidation Obsolescence Deterioration Presence of Structures below Minimum Code

Standards Illegal Use of Individual Structures Excessive Vacancies Lack of Ventilation, Light or Sanitary Facilities Inadequate Utilities Excessive Land Coverage and Overcrowding of

Structures and Community Facilities Deleterious Land Use or Layout Environmental Clean-Up Needed Lack of Community Planning EAV Declined or Is Growing Slowly

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TIF Designation

Other Requirements Redevelopment Plan and Project

Eligibility Factors • Reasonably distributed • Meaningfully present • Appropriately documented • Support a finding by corporate

authorities

Required Findings and Tests • Lack of growth and private investment • “But for…” • Conformance to municipal plans • Dates of completion • Financial impact of redevelopment

project • Demand on taxing district services • Program to address financial and service

impacts on other jurisdictions

1.5 Acres Minimum 23 Years (Can Be Extended by

Legislature) Goals and Objectives

• Project-specific or general

Housing Impact Study Future Land Use Development/Redevelopment/

Rehabilitation Activities Budget

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Using TIF

Eligible Costs

Property Assembly Site Preparation and Environmental

Cleanup Building Rehab Public Infrastructure/Improvements Affordable Housing Construction Interest Costs Job Training Site Marketing and TIF

Administrative/Professional Costs Payments to School and Library

Districts to Offset Increased Fiscal Burdens

Audit Annual Report to Comptroller Annual JRB 10 Year Standardized Application Process Payment Requisition and

Documentation

Reporting and Compliance

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Why Are School Districts Concerned? Levy Limits Squeeze Schools Questions:

• Is TIF Needed to Make the Development Occur? • Is the School District Better Off with the TIF-Funded

Redevelopment?

Potential Redevelopment Project of $40 Million in Taxable Value Starting Year 3

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School District’s Perspective

Projection over 35 Years

Scenario 1: No TIF + No

Redevelopment

Scenario 2: No TIF;

Redevelopment Occurs Anyway

Scenario 3: TIF +

Redevelopment Total Taxes Collected- on School District Portion of Tax Rate

$6.1 MM $55.6 MM $55.6 MM

School District Tax Revenues $6.1 MM $55.6 MM $27.8MM

Present Value of School District Future Revenues in Today’s Dollars (@ 4%)

$ 3.3 MM $26.5 MM $9.9 MM

“But for…” Analysis Can Address this Question 15


Business Districts (65 ILCS 5/11-74.3) Contiguous area (Can Overlay/Overlap at TIF) Impose additional general merchandise sales and/or hotel taxes in .25%

increments up to 1 % (not on food or drugs or autos) 23 years Eligibility

• Defective, non-existent or inadequate street layout • Unsanitary or unsafe conditions • Deterioration of site improvements • Improper subdivision or obsolete platting • Conditions that endanger life or property

One or more to extent that it “retards the provision of housing accommodations or constitutes an economic or social liability, an economic underutilization of the area or a menace to the public health, safety, morals, or welfare.”

Use of eminent domain authorized consistent with eminent domain act

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Costs and Tests

Eligible Costs Findings and Tests

Professional Fees Property Assembly Site Preparation Public Infrastructure Building Rehabilitation New Private Construction Financing Costs Relocation Costs

One Eligibility Factor Lack of Growth and

Development through Private Enterprise

Contiguous Parcels that Benefit Conform to Comprehensive

Plan or in Municipality over 100,000 a Strategic ED Plan or Approved by PC

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Opportunities and Issues Relatively Easy Criteria Can Be Used for Greenfield

Projects Can Separate Designation and

Imposition of Tax Hotel Tax for All Cost Categories Quite Robust: Full 1% Can Equal

15% to 20% of New Project Cost (PV at 5% over 23 years)

More Broad List of Eligible Costs than TIF – New Construction

Retail Competitive Position Realistic Plan to Overcome

Problems Developer Share Actual Gap/But For… Dollars for Defined Costs – Not

for Retailers Cost-Benefit to Municipality A Tax Is Still a Tax – It Is Public

Money

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Example: Dempster/ Waukegan Business District

Same Boundary as the Proposed Dempster/ Waukegan TIF District

Boundaries: West: Village boundary East: Cook County Forest

Preserve North: ComEd easement South: Public Storage

134 Acres 55 Parcels, 24 Buildings

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Special Service Areas (SSAs) (35 ILCS 200/27-5) Area Subject to Additional Tax on a Property Basis to Support Specific

Services and Investments—usually Ad Volorem Types

• Support Services (often in business districts) • Infrastructure • Back-Up to POA Commitments

51% of Electors and Owners Can Block Exempt from Levy Limits/Tax Caps Infrastructure and Back-Up Often Established at Time of Development Expenditures Must Be Public and/or Specified in Act Finite Period of Time (10 Years in City of Chicago Lately) Maximum Tax Rate Required; Hearing for Increase of more than 5% Services SSA Can Zero Out the Budget Year to Year, So No Long-Term Risk If

It Isn’t Working

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What Do SSAs Do?

Support Service SSAs Infrastructure SSAs

Downtown Marketing Special Events Seasonal Decorations Promotion/Advertising Leasing Support Transportation Such as Trolleys Enhanced Snow and Trash Removal Security Parking Enforcement Planning Administration Public Relations

Street, Water and Sewer Infrastructure (New Development)

Streetscape and Street Furniture Lighting Re-Paving/Special Paving Parking Lots and Garages Redevelopment Storefront Improvements Rehabilitation

Back-up SSAs would step in if POA fails to maintain public improvements or improvements in which there is deemed to be a public interest such as certain features in conservation subdivisions.

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Issues

Commercial District SSAs Infrastructure SSAs

Consensus Building Defining Services Implementing Organization Level of Tax/Tax Rate

• 1% Not Unusual

Reduced Revenue in Decline

Potential Value Capture Tool • Large SSA Provides Stable

Revenue • Financeable

In New Development • Tax Rate Can Be High • Timing/Market Certainty • Market Reputation in Collapse

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Economic Incentive Agreements (aka Sales Tax Sharing) Used to Capture Municipal

Revenue Robust: Auto Dealers $30

to $50 Million in Sales @ 1% = $300K to $500K Competitive Factor with

Adjacent Communities Retailers Expect a Deal But – Law has “But for…”

Requirement

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Economic Incentive Agreements

65 ILCS 5/8-11-20 Standards

Finite Period of Time: 10 - 20 Years Typical 1) If Vacant

• At least one year, or • Demolished building would have

qualified 2) If Developed

• Code or Underutilized 3) Create or Retain Jobs 4) Further Adjacent Development 5) Not Possible without Agreement (But for…) 6) Creditworthy, Financially Strong Developer

7) Strengthen Commercial Sector 8) Enhance Tax Base 9) Best Interests of Municipality

65 ILCS 5/8-11-21 Provides Some Limitation on Point of Sale Issues 1) Absent Agreement Tax Would Have Been Paid to Another Locality 2) Retailer Delivers to Customers from Warehouse in the Other Locality

PA 097-0976 -- New Reporting Requirements

Litigation on issue by RTA currently

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Economic Incentive Agreements

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Retailers Occupation Tax and Service Occupation Tax

Type Total/ Range Municipal Share Typical

General Merchandise 6.25% 1.00%Titled Items 6.25% 1.00%Food & Drug 1.00% 1.00%Local Option * --Home Rule Increments 0.25% - Unlim All 1.00% - 1.50%Local Option * -- Non-Home Rule ** 0.25% -1.00% All 0.50% - 1.00%Business District * 0.25% - 1.00% All 0.50% - 1.00%

* General Merchandise Only** For Infrastructure normally; Legislative allowance for other purposes fromtime to time. Would typically not be shared.

Municipal Share Available for EIA

Home Rule Typical

General Merchandise, Autos and Food 1.00%Home Rule General Merch Additional 1.00% W/Business District 1.00%

General Merchandise Total, Up to 3.00%

Non-Home Rule

General Merchandise, Autos and Food 1.00%Non-Home Rule General Merch Additional NA W/Business District 1.00%

General Merchandise Total, Up to 2.00%


In Practice… Drives Land Use Decisions

• Auto Dealers -- $30 to $50 million in sales = $300,000 to $500,000

• Target -- $40 million • CostCo – Over $100 million = $1

million plus Plus Local Option on General

Merchandise Often Incentive, Not Gap Filler Zero-Sum Game Usually Share % of Increase and Limit to

10 to 15 Years “But for…” Is in This Law; Recently More

Underwriting Sharing among Localities May Better

Protect, But Politically Unlikely

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Best Practices for Public-Private Partnerships Achieves Key Community Goals Project Is Market and Financially Feasible (with assistance) Community Benefits Cost-Effective Fiscally Gap/Need (But for…)

• Extraordinary Costs of Remediation • Public Infrastructure • Land Assembly – Public Value vs. Market Value • Public Quality Upgrades • Competitive Locations

Appropriate Risk Sharing – How Much Public Sector Risk? • Private Debt and Equity • Pay-As-You-Go • Developer Securitization • Timing, Triggers and Forms/Guarantees for Public Funds • Clawbacks/Stops/Upside Sharing

Avoids over-subsidizing and demonstrates to other taxing bodies why use of public funds is justified

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How Much Help? (But For…) Primary Ways to Determine:

• Financing gap in order to achieve reasonable rates of return

• Amount readily explained by extraordinary costs

• Cost of providing true public improvements

• Incentive deal: incremental cost of locating at proposed site or to compete with alternative site

Other Factors Often Considered (but not recommended as primary decision-making tool): • Subsidy as % of project increment • Subsidy as % of project cost (public

funds “leverage” private) • $ Amount per job attracted/ retained

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Legal Eligible Cost Limits vs. Feasibility and Policy Considerations

$-

$2

$4

$6

$8

$10

$12

$14

$16

TIF-Eligible Costs Financing Capacity ofProposed District

Demonstrated TIF Need toBecome Feasible ("but for"

test)

(in m

illio

ns)

Appropriate Level of TIF participation

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Market Analysis- A Critical and Underemphasized Component Market Feasibility vs.

Financial Feasibility (or “Financial assistance can’t create a market”)

Supply and Demand vs. Consumption of Supply

Key Supporting Factor for Quality Revenue Projections

Critical Input to Gap Analysis – Drives Project Feasibility Retail Category Discount

Department Store Predicted Annual Sales- Gravity Model $59.0 million Proposed/Typical Store Size (SF) 190,000 Sales/SF equivalent $311 Benchmark Range (Median- Top 10%) $173-306

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Private Pro Forma: Major Items to Review Capital Land Acquisition Site Work Construction Costs Soft Costs Developer Fee Operating Rents/Sales Prices Absorption/Lease-Up Operating Expenses Property Taxes Financing Debt Parameters Equity Parameters Other Special Tools (e.g., tax credits)

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Financing Parameters for Review Loan to Cost/Value Interest Rate Debt Coverage at Stabilization Amount and Source(s) of Equity Mezzanine Debt Tax Credits (e.g., NMTC, HTC) Tax-Exempt Bonds Percent Preleased and Credit Quality of Tenants Developer Fee: Paid or Deferred?

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Analysis Summary Sources and Uses w/o TIF

SOURCES OF FUNDS Construction Loan $ 14,516,174 Equity $ 5,466,208 TIF Assistance $ - TOTAL SOURCES $ 19,982,382

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

10yr IRR on Cost 8.1% IRR on Equity 10.5%

Sources and Uses with TIF-based Grant

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

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

10yr IRR on Cost 10.0% IRR on Equity 18.6%

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Return Measurements Risk-Adjusted Competitive Rate of Return Income/Investment Properties Project Value at Stabilization vs. Cost to Develop Return on Cost (Stabilized Annual) Return on Equity (Stabilized Annual) Internal Rate of Return on Cost Internal Rate of Return on Equity

For-Sale Properties Net Profit Margin at Sell Out

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Structuring the Deal What Is the Financing Problem We Are Trying to Solve?

1. Infrastructure financing needed?

2. Private extraordinary costs keeping site from being redevelopable? (such as land cost; remediation)

3. Fundamentally sound private project unable to raise all the capital needed?

4. Private project has access to all the capital it needs, but returns are insufficient to allow private investors to proceed?

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Key Risks Must Be Understood and Allocated in the Financing Structure

• Construction Risk • Delay Risk (construction, lease-up, payments) • Sale/Lease-Up Risk • Assessment/Taxation Risk • Statutory Risk • Ongoing Operational Risk

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Timing Mismatch


TIF revenues from project

itself

TIF revenues from broader

district(s)

Other municipal revenue sources

(e.g., sales tax, utility tax)

Full municipal faith and credit

Lesser Risk Greater Risk

Municipal Risk Spectrum: Funding Sources

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TIF Financing Options Pay-As-You-Go

• Annual reimbursement starting at project completion

Monetizing Future TIF Revenues from Project Itself • TIF note issued to Developer/Affiliates, incentivizing them to put more equity into

project up-front • TIF note pledged to lender, serving as additional collateral and allowing more debt

to be obtained • Revenue bonds issued based on future flow of TIF revenues from project

Backing Bonds with Other Revenue Pledges • District-wide TIF bonds using existing “proven” TIF cash flow • General obligation – full faith and credit • Sales tax or other municipal taxes (e.g., utility, telecom, etc.)

TIF Loans • Fund source • Junior mortgage

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Sharing the Upside When Is It Appropriate?

• When public dollars are subjected to equity-type risk • Public gap financing is solving a private “capital stack” problem, not a

fundamental project financing gap or public infrastructure issue • Public sector selling land into deal • Public sector advances funds during construction/guarantees debt

How to Implement? • Check-ins on level of assistance for multi-phase deals • Test net operating income at full stabilization against a benchmark • “True-ups” at sale or refinance

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Documenting the Deal Redevelopment Agreement Development Management Agreement for Public

Components on Site Planned Development Documents Simultaneous Approvals

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Process - Achieving Success


Process for Public-Private Partnerships

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Conclusions Tools to Support Public Goals Overcome Extraordinary Costs Deal Making Fundamentals Critical

• What Are Public Benefits and Goals Achieved? • What Is the True Need of the Project?

Can Other Districts Benefit/Be Protected? What Structure Gets It Done, But Limits Public Risk?

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Example Projects


Bartlett Town Center

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Des Plaines Library Plaza

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Courtesy of Des Plaines Public Library


Shops and Residences of Uptown, Park Ridge

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Shops and Residences of Uptown, Park Ridge

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Economic Incentive/TIF Combination Projects

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ALDI Food Market, Geneva

Bill Kay Nissan, Downers Grove

McGrath Acura, Morton Grove


Discussion

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Real Estate Economics Public-Private Partnerships Developer Solicitation Development Management Public Financing Area Plans & Implementation Fiscal & Economic Impact

221 North LaSalle Street Suite 820 Chicago, IL 60601 (312) 424-4250 www.sbfriedman.com

Development Advisors to the Public and Private Sectors

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Village of Oswego: Village Board Municipal Incentives 9-17... · 2018-01-19 · Why Use Development...

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