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Public-Private Partnerships: Evolving Resources

Counselors of Real Estate Mid-year Meeting New York, NY. Public-Private Partnerships: Evolving Resources. March 30, 2009 Stephen B. Friedman, CRE, AICP. Overview . 1. The Stimulus and Development 2. New Markets Tax Credits 3. Low Income Housing Tax Credits 4. The Local Tool Kit

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Public-Private Partnerships: Evolving Resources

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  1. Counselors of Real EstateMid-year Meeting New York, NY Public-Private Partnerships: Evolving Resources March 30, 2009 Stephen B. Friedman, CRE, AICP

  2. Overview • 1. The Stimulus and Development • 2. New Markets Tax Credits • 3. Low Income Housing Tax Credits • 4. The Local Tool Kit • Tax Incremental Financing • Business Improvement Districts • Other Tools • Sales Tax Sharing • Special Assessments • Infrastructure Bonding

  3. 1. The Stimulus and Development • Not your Grandfather’s Keynesian Economics • Several Major Initiatives • Troubled Assets Relief Program (TARP) • Housing and Economic Recovery Act of 2008 (HERA) • Heartland Disaster Tax Relief Act of 2008 • American Recovery and Reinvestment Act (ARRA) • Special Katrina Provisions Holding Over • Pending: Transportation Reauthorization Bill • Push for Integration of Land Use/Transportation Decisions • Confluence of Infrastructure/Land Use/Environment

  4. Stimulus, Cont’d • Tax-exempt Bonds • Recovery Zone/Empowerment Zone • Economic Development Bonds ($10 Billion) • Taxable • Federal Reimbursement to County/Muni of 45% of Interest Paid • Facility Bonds ($15 Billion) Tax Exempt Private Activity Bonds • Heartland Disaster Tax Relief Act of 2008 (Arkansas, Illinois, Iowa, Indiana, Missouri, Nebraska and Wisconsin Counties) $14.1 Billion • Multi-family Rental Housing • Public Utility Property • Mortgage Financing • Commercial Development Broadly

  5. Stimulus, Cont’d • Highways and Bridges • 29 Billion • Airport Improvements • $1.3 Billion • Mostly FAA, Safety Improvements • Brownfields and Environment • $100 Million for Clean-Up Grants; $600 Million Superfund Sites • Part of Broader $10 Billion Environmental Infrastructure • Clean Water • Superfund • Watershed and Flood Prevention

  6. Stimulus, Cont’d • Other Public Works including Army Corps and Public Buildings • Transit • $8.4 Billion including New Starts/TOD Opportunities • Intercity Rail • $9.3 Billion, $8 Billion of Which Is for High-Speed Rail • School Funds • Including Modernization

  7. Stimulus, Cont’d • Additional New Markets Tax Credits (NMTC) Authorization • $3 Billion, ½ Added to Each of ’08 and ’09 • Two-year Total: $10 Billion • Housing Provisions • Additional $.20 per Capita LIHTC • Treasury Exchange Window for LIHTC at $.85 • $2.25 B Home Funds for LIHTC Project Gaps • $1 B Additional CDBG • $2 B Additional Section 8 Funding for Rehab • $2 B Additional Neighborhood Stabilization

  8. 2. New Markets Tax Credits • 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 • The New-New Thing • New Markets Tax Credits Support Commercial and Industrial Development in Qualifying Areas • Increases Access to and/or Lowers Cost of Capital • Supplements TIF, EZ and Other Funds

  9. New Markets Tax Credits, Cont’d • Created in 2000 as part of Community Renewal Tax Relief Act • Companion program to Low Income Housing Tax Credit • Administered by CDFI Fund division of U.S. Treasury • Primarily support industrial, community facility, and commercial development in qualifying Census tracts • Can also support direct loans/equity investments to operating businesses

  10. New Markets Tax Credits, Cont’d • 7-year stream of federal income tax credit benefits triggered by the flow of debt or equity capital through a “CDE” • Increase access to and/or lower cost of capital (e.g., lower interest rates, partial loan forgiveness, etc.) • Awarded on a competitive national basis to CDEs

  11. Federal Authorization 2001-02 $2.5 billion 2003-04 $3.5 billion 2005 $2 billion 2006 $3.5 billion 2007 $3.5 billion 2008 $3.5 billion * 2009 $3.5 billion * • *Additional Approved Allocation for 2008 and 2009 per Stimulus Bill: $3 billion for $5 billion total each year

  12. New Markets Tax Credits, Cont’d CDFI Fund (U.S. Treasury) Allocation of NMTCs Community Development Entity (CDE) QEI Qualifying Project/Business (QALICB) Private Investors QLICI 7-year Stream of NMTC Benefits

  13. What is a CDE? • Community Development Entity, certified by CDFI Fund (division of U.S. Treasury) • Domestic corporation or partnership • For-profit or non-profit • Controlled by private, non-profit, or government organizations • Intermediary vehicle for the provision of loans or other investments in “Low-Income Communities” (LICs) • CDEs are required to demonstrate that they: • Have a primary mission of serving LICs and/or Low-Income Persons • Are accountable to residents of the LICs that they serve

  14. Areas of Eligibility in City of Chicago

  15. New Markets Tax Credits, Cont’d • 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

  16. What Is the Tax Credit Benefit? • For investment (QEI) of $1.00, investor would receive a seven-year federal income tax credit of: TOTAL VALUE OVER 7 YEARS = $0.39 • Up-Front Discounted Value: Generally $0.25 to $0.30 • Above Example Consumes $1 of “Allocation”

  17. Allowable Uses of NMTC Financing • Must be provided to a Qualified Active Low-Income Community Business (QALICB) • Debt, equity, or “hybrid” financings • Commercial, industrial, institutional, not-for-profit projects • For-sale housing (challenging timing issues) • Mixed-use project (provided rental housing is <80% of income stream) • Operating businesses

  18. Qualified Low-Income Community Investments (QLICIs) • Capital provided by a CDE to a “Qualified Active Low-Income Community Business” (QALICB or “Qualifying Project”) • Generally have term of 7 years • Debt or equity with better-than-market terms • Potential for partial forgiveness by CDE at end of Year 7

  19. Who has NMTC Allocations? • Competitively allocated at federal level • Strong competition for the credit – demand exceeds supply by about 10 to 1 • In 2008 round, 239 CDEs applied for credits and 70 received an allocation • Average allocation award per CDE is $50 million • Banks are the dominant recipients of credit to date • City and state agencies • Non-profits

  20. NMTC Investors • Type of Investors: • Banks/Financial Institutions (e.g., US Bank, JPMorgan Chase, Capmark, Bank of America) • Corporations (e.g., Target) • With proper structuring, Investor can also play other roles in the transaction (lender, CDE, borrower) • Credit begins to flow when investor makes the Qualified Equity Investment (QEI)

  21. Allocatees Nationally • 115 Community Development Entities (CDEs) currently have NMTC allocations according to the Community Development Finance Institutions (CDFI) Fund

  22. Allocatees Serving Illinois • Chicago Development Fund • Citibank NMTC Corporation • HEDC New Markets, Inc • Hospitality Fund, II LLC • Local Initiatives Support Corporation • M&I New Markets Fund, LLC • National City New Market Fund, Inc • Urban Research Park CDE, LLC • Chase New Markets Corporation • Fifth Third New Markets Development Company LLC • Gateway CDE LLC • Related Community Development Group, LLC • Urban Development Fund, LLC • USBCDE, LLC

  23. How Deals are Assembled • Project Sponsor identifies a CDE (or Investor) and submits project proposal • CDEs have differing geographic service areas and targeted project types • CDE typically will assist in identifying the Investor or vice versa • Possible to have multiple CDEs for larger projects, but it will drive up transaction costs • Find out CDE and Investor fees up-front. Average fees for 2008 allocatees were 6.75% for for-profit allocatees and 7.25% for non-profit allocatees • Expect Investors to be looking for IRR at 7-9% on non-profit deals and 8.5-10% on for-profit deals • $4MM or larger transactions with high community impact are most attractive to CDEs and Investors

  24. Imperial Zinc • Applicant : Manufacturer of zinc anodes and alloys • Project: 80,000-square-foot production facility to replace building destroyed by fire in March 2008. Project will allow for expansion into two new product lines. • Location: 103rd Street & Woodlawn Avenue, Pullman Community Area

  25. Sample $10 Million Deal Lender Interest-Only Debt Service w/Balloon In Year 7 7-Year Mini-Perm Loan @ Low Blended Rate ($9.5MM) CDE QALICB (Project) 7-Year Loan at Conventional Market Terms ($7-$7.5MM) Cash Up-Front ($2.5-$3MM) $500k in CDE fees and other transaction costs (placeholder amt) NMTC Investor Sinking Fund for Loan Repayment Tax Credit Benefits ($3.9 MM over 7 Yrs)

  26. Year 7 Lender Principal Repayment ($7-$7.5MM) Principal Repayment ($7-$7.5MM) CDE QALICB (Project) NMTC Investor Remaining $2-$2.5MM can be forgiven or restructured Return on and of capital provided via tax credits

  27. CSTLC/Homan • Henry Ford Learning Institute • Charter high school at Homan Square in Lawndale • $41 million project with $22 million of NMTC allocation • LEED Gold • Historic rehab • 450-500 students • NMTCs used to make low-interest forgivable loans

  28. Sample “Non-Economic” Deal Charitable Donations $5MM Loan QLICI $2MM Loan Nominal Interest Loan ($9.5MM) QALICB (Project) Investment Fund CDE Government Grant $10MM QEI $3MM Equity • $500k in CDE fees and other transaction costs • (placeholder amt) NMTC Investor Tax Credit Benefits ($3.9 MM over 7 Yrs)

  29. Year 7 Unwind Charitable Donations No Repayment Needed- Loans Can be Forgiven Loan Can be Forgiven ($9.5MM) CDE QALICB (Project) Government Grant NMTC Investor Return on and of capital provided via tax credits

  30. NMTC Structure with For-Sale Housing Lender Construction Loan Disbursements Construction Home In QCT 7-Year Loan ($7MM) $10MM QEI Home Builder (QALICB) CDE Investment Fund $9.5MM Revolver $3MM Equity Investment Home In QCT Principal Payments w/Sales Proceeds Sales Proceeds NMTC Investor Tax Credit Benefits ($3.9 MM over 7 Yrs) • Principal must stay at CDE level or below for 7-year NMTC compliance period • CDE must re-deploy repaid principal within 1 year

  31. Use of Condo Structure to Combine LIHTC & NMTC • With careful structuring, can create mixed-use building with an NMTC-financed transaction: • NMTC-financed commercial/community facility transaction on lower floors • LIHTC-financed affordable rental transaction on upper floors • Requires division of ownership between the two deals within the same building

  32. States May Create Piggy-Back Credits:Example -- New Illinois NMTC • Limit allocations to amount that will result in max of $10M of tax credits in any fiscal year • Follows Federal program with a couple of exceptions: • Excludes businesses that derive 15% or more of annual revenue from rental or for-sale real estate (carve-out for sponsor lease so long as sponsor passes test) • 7-year credit percentages are different split • QEI can be debt or equity • Max QLICI to any one entity and its affiliates is $10MM • Small and shallow state credit • TOTAL VALUE OVER 7 YEARS = $0.39 • QEI for federal purposes can also be considered QEI for state NMTC purposes

  33. 3. Low Income Housing Tax Credits The Workhorse • Created in 1986 • Credits Allocated to States Per Capita • Allocated Using QAP to Developers • 9% (+/-) of Eligible Basis for 10 Years • Sold to Investors $.70 to $.90 • 4% Option With Bonds • 30 Year Restriction to Low Income

  34. Lasagna Financing • Assuming a $20M deal: • LIHTC Yield $13M • Home Funds $2M • First Mortgage $1.5M • Other Soft $ $2M • TIF $1.5M Tax Credits (assuming 9% credits) typically are between 60% and 70% of total development costs. The 60 - 70% swing ultimately depends on credit pricing and/or if the applicant gets the full amount of credits requested. First mortgages are typically 10% of TDC or less. The rest could be just about anything.

  35. The Process Application Issues • State Housing Agencies • Qualified Allocation Plan • Competitive Process • Multiple Financing Sources • Local Support • Site Control Significant upfront effort to prepare competitive application • Developer Compensation is Upfront with Limited Ongoing Cash Flow • Bank and Corporate Buyers Out of Market • Stimulus Provides Treasury Window and Added Gap The Program for New Affordable Housing Will Increase in Importance

  36. 4. The Local Tool Kit • Tax Incremental Financing • Business Improvement Districts • Other Tools • Sales Tax Sharing • Special Assessments • Infrastructure Bonding

  37. Tax Incremental Financing

  38. TIF in Virtually All States • TIF exists in 49 states and Washington D.C. • Only Arizona does not have TIF legislation • TIF, TAD, RAD, TIRZ…

  39. But the Midwest is the Leader…

  40. Tax Incremental Financing , Cont’d Criteria Vary by State Usual Factors • 1.5-Acre Minimum (IL) • Blight and Conservation Factors • But For… • Industrial and Special Vacant Land Factors • Maximum Length of District • 50% over 35 years • Deterioration • Dilapidation • Excessive Vacancy • Lack of Growth of EAV • Environmental Contamination • Deleterious Land Use or Layout • Obsolescence • Code • Others

  41. Uses of TIF Funds: Vary by State • Property Assembly/Site Preparation/Remediation or Capping of Contaminated Soils • Relocation • Rehabilitation, Reconstruction, Repair, or Remodeling of Existing Structures • Low-income Housing Construction • Public Works or Improvements (Including Parking Facilities) • Interest Subsidy • Studies, Surveys, Planning, Legal, Consulting, and Administration • Job Training/Welfare to Work • Day Care • Financing Costs • Taxing Districts’ Capital Costs • Payment in Lieu of Taxes • School and Library Costs • Park Improvements • Hiking and Biking Trails • Pedestrian Pathways and Bridges Facilitating Intermodal Transportation • Pedestrian Platforms at Transit Stations • Public Golf Courses and Buildings • Hospitals • Community Colleges • Convention Centers 40

  42. Range of TIF Projects Manpower Bryn Mawr/Belle Shore Block 37/Lowes Hotel Uptown at Park Ridge

  43. Deal Criteria and Process Criteria Process • District creation varies • Financing gap • Extraordinary costs • Weak market • High risk • Competitive locations • Project increment vs. District increment • Leverage • Formal application • Market • Gap Analysis • Increment Projections • Ownership Review • Underwriting of pro forma • Public review • Review of parties

  44. Structure and Funding Structure Funding Methods • Grants • Junior Mortgage Loans • Clawbacks • Cessation of Payments • Front Funding from Balances • Alternate Revenue Bonds (G.O. Backed) • Special Revenue Bonds • Developer Notes • Sold at Discount • Held • Annual Payments

  45. Business Improvement Districts • Special Districts Providing Special Services or Infrastructure • Additional Tax Results in Complex Approvals • Both Urban and Greenfield • A Rose by Any Other Name…. • Business Improvement Districts • Business Development Districts • Special Service Areas • Community Improvement District

  46. BIDs and Their Cousins Parameters Issues and Concerns • Designated Sub-area of Community • Additional Tax to Pay for Facilities or Services beyond Usual • Downtown District Improvements & Marketing • Greenfield Infrastructure • Back-up for Owner’s Associations • 51% of Owners & Electors Can Block • Tax Rates (Commercial Districts: .5% To 1.0% Typical) • Shifting Infrastructure Costs – Windfall Profits? • Subsequent Owner Disclosure • Equity Issues • But Can Be Useful

  47. Two Broad Uses Business Districts Greenfield Infrastructure • Special Streetscape and Lighting • Marketing and Promotions • Security/Concierge • Additional Cleaning and Snow Removal • Special Events • Festivals • Small Tax Rate (1%) • Streets, Water, and Sewer • Stormwater facilities • Parks and Open Space Improvements • Other Typical Subdivision Improvements Dedicated or Granted to Public • Substantial Tax Rate (May be ½ up to Equal Other Property Tax)

  48. Back-up for Property Owner Associations Obligations Reasons for Failure • Maintain public infrastructure • Maintain open space • Maintain stormwater facilities • Other responsibilities in which there is a public right or responsibility assumed by POA • Disagreement • Economic distress of members • Refusal of some to pay Allows Public Sector to Step In and Levy Tax to Pay for Missed Obligation

  49. Other Examples • New York City: 60 BIDs; $80 Million • Alliance for Downtown New York • Serves the Wall Street financial district; provides supplemental security and sanitation; economic development; streetscape, design and transportation services  • Center City District in Philadelphia • Encompasses 120 blocks and more than 4,500 individual properties; provides sidewalk cleaning, graffiti removal, landscape maintenance, crime prevention, and advertising and promotion • Downtown D.C. • Approximately 140 blocks and 825 properties; provides services for hospitality, safety, maintenance, public space programming, streetscape, homeless services, and so on • Hollywood Entertainment District • Spans an18-block stretch of Hollywood Boulevard and is funded by 225 property owners; provides security, cleaning, and marketing services • Historic Third Ward Association in Milwaukee • Includes over 350 business and 400 residences; focused on converting various manufacturing and warehousing structures into commercial and residential uses • Downtown BID in Grand Rapids • Located in the Heart of Downtown Grand Rapids; focuses on maintenance and beautification, business development, event programming, and marketing

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