Enhancing Project Profitability Utilizing Public Financing Central Texas Commercial Association of Realtors October 25, 2017

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1 Enhancing Project Profitability Utilizing Public Financing Central Texas Commercial Association of Realtors October 25, 2017 Rick Rosenberg Bob Springer, CCIM

2 About Us Financing public improvements Reducing public infrastructure costs Mitigating Risk Enhancing project profitability Quantifying fiscal and economic impact Related entities: Urban Design, Construction Management, Business Advisory, Capital Placement 25 Year Track Record Established 2,200 special taxing districts Facilitated $15 billion in bond financing Completed over 100 redevelopment projects Performed over 600 project feasibility analyses National footprint: 60 employees 11 Offices 8 States (AZ, CA, CO, FL, ID, NC, NV, TX)

3 About Us Over 40 years in the industry and a proven track record of achieving success for our clients Experience and depth of knowledge in every aspect of commercial real estate Without question, the most respected market research available, headed by the foremost expert in the market Dedicated Research and Marketing team We value the Old School method of personal face-to-face interaction Real estate is local and we are local experts

4 Presentation Overview Overview of Public Financing Mechanisms Why use a PFM? Public Improvement Districts (PIDs) Municipal Utility Districts (MUDs) Tax Increment Reinvestment Zones (TIRZ) Economic Development Grants and Incentives Type A/B Corporations 380/381 Agreements Hotel Occupancy Tax Tax Abatement & Value Limitations Compare & Contrast Pros and Cons for all stakeholders

5 Why use a PFM? Public-Private Partnership Reduces overall costs Banks dislike lending for infrastructure Long term exposure Cost of equity is expensive Increases project risk

6 Public Improvement Districts (PIDs) Definition Economic Development tool created by the State of Texas to finance the construction of public improvements Purpose Facilitates attracting private investment to finance public improvements by replacing funding traditionally provided by public entities. Cost responsibility entirely on district Funding Method PID Bonds provide up front and/or reimbursement financing capability; secured by a lien on the benefitted land Pay-As-You-Go provides an on-going revenue source for recurring reimbursement and/or operation and maintenance needs

7 Eligible Improvements for PIDs Streets and sidewalks Public safety and security services Water, wastewater, health and sanitation, drainage Acquisition of right of way Landscaping Mass transit Public libraries Park, recreation and cultural facilities Parking facilities Acquisition, renovation and/or construction of affordable housing Formation expenses

8 Municipal Utility Districts (MUDs) Definition Political subdivision authorized by the Texas Commission on Environmental Quality to provide publicly beneficial infrastructure financing to developers Purpose Provides developers alternative way to finance infrastructure by utilizing property tax revenues and user fees to repay the debt Funding Method Ad Valorem Taxes User Fees

9 Eligible Improvements for MUDs Water Sewer Drainage Right of Ways Arterial Roads (if granted Road District Powers) Recreational Facilities Formation Expenses

10 Pros & Cons - City MUD Zoning Authority City able to serve as retail sewer provider without a CCN City collects ad valorem taxes Annexation of property expands city s ETJ City population grows more quickly, allowing the city to achieve home rule status sooner MUD issues debt to fund infrastructure required for new development Pros for the City PID Zoning Authority City able to serve as retail sewer provider without a CCN City collects ad valorem taxes Annexation of property expands city s ETJ City population grows more quickly, allowing the city to achieve home rule status sooner Cons for the City City must provide emergency services upon annexation Within 4.5 years of annexation, city must provide full municipal services at its cost City maintains infrastructure at its cost Citizens may not support growth/change inside corporate limits MUD is separate taxing jurisdiction with the ability to issue debt and condemn property City must provide emergency services upon annexation Within 4.5 years of annexation, city must provide full municipal services at its cost City maintains infrastructure at its cost Citizens may not support growth/change inside corporate limits Must also consider TIRZ and/or 380 agreement to alleviate double taxation issue Financing may require city staff involvement and city council time (although city can recover admin. costs under PID & TIRZ statues)

11 Pros & Cons - Developer MUD Legislative risk of future city denial eliminated MUD interest rates may be lower than PID s Site-Specific Pro: Maintains similar financing mechanism compared with adjacent developers Pros for the Developer PID Only available tool to provide bare land up front financing of infrastructure (eliminates interim construction financing) Requires developer to fund infrastructure with high cost equity and/or private construction loans then seeks reimbursement from MUD bonds once TCEQ rooftop regulations are satisfied Cons for the Developer Cost of issuance dictates projects must be shovel ready PID bonds interest rates may be higher than MUD debt Legislative risk of future city denial of PID bonds cannot be mitigated

12 Tax Increment Reinvestment Zone (TIRZ) Definition Political subdivision of a municipality or county that allocates part of ad valorem taxes and sales tax into a Tax Increment Fund that reimburses developers over time or repays holders of TIRZ Bonds Purpose To reimburse the developer for public improvements via property and sales tax increments Funding Method All or a portion of property taxes All or a portion of sales and use taxes

13 Eligible Improvements for TIRZ Street Lights Flood and Drainage Parking Parks Pedestrian malls and walkways Sewer Utilities Water Interest Formation Costs

14 TIRZ

15 PFM Comparison

16 Economic Development Grants & Incentives Type A Corporations Type A EDCs are typically created to fund industrial development projects such as business infrastructure, manufacturing and research and development. Type A EDCs can also fund military base realignment, job training classes and public transportation. Type B Corporations Type B EDCs can fund all projects eligible for Type A, as well as parks, museums, sports facilities and affordable housing. However, Type B EDCs are subject to more administrative restrictions than Type A.

17 Economic Development Grants & Incentives Type A/B Corporations Allowable Uses There are some limitations on how sales tax revenues can be used to fund a project. Eligible expenditures include: acquisition of land; machinery and equipment; construction costs; planning and professional services related to the project; financial transactions and reserve funds; and administrative and other necessary expenditures.

18 Economic Development Grants & Incentives Primary Jobs Requirement The main requirement is that the businesses bring new money into the community. In 2003, the Legislature voted to require that certain projects create or retain primary jobs. A primary job is one at a company that exports a majority of its products or services to markets outside the local region, infusing new dollars into the local economy. Primary jobs are further limited to specific industry sectors such as agriculture, mining, manufacturing and scientific research and development. Those industry limitations can be found in Local Government Code, Chapter 501. Performance Agreements EDCs cannot simply give sales tax proceeds to businesses. An EDC must enter into a written performance agreement with any business enterprise that it funds directly or makes expenditures that benefit an eligible project. At a minimum, the performance agreement must contain: a schedule of additional payroll or jobs to be created or retained; the capital investment to be made by the business enterprise; and the terms for repayment of the EDC's investment if the business fails to meet the performance requirements specified in the agreement.

19 Economic Development Grants & Incentives 380 Chapter 380 of the Local Government Code authorizes municipalities to offer incentives designed to promote economic development such as commercial and retail projects. Specifically, it provides for offering loans and grants of city funds or services at little or no cost to promote state and local economic development and to stimulate business and commercial activity. In order to provide a grant or loan, a city must establish a program to implement the incentives. Before proceeding, cities must review their city charters or local policies that may restrict a city's ability provide a load or grant. 381 Chapter 381 of the Local Government Code allows counties to provide incentives encouraging developers to build in their jurisdictions. A county may administer and develop a program to make loans and grants of public money to promote state or local economic development and to stimulate, encourage and develop business location and commercial activity in the county. The county also may develop and administer a program for entering into a tax abatement agreement. This tool allows counties to negotiate directly with developers and businesses.

20 Economic Development Grants & Incentives Hotel Occupancy Tax Put heads in hotel beds Nine Statutorily Designated Categories: Convention and Visitor Centers Convention Registration Advertising the City Promotion of the Arts Historic Restoration and Preservation Sporting Events Upgrading existing Sports Facilities Tourist Transportation Systems Signage directing Tourists to attractions

21 Economic Development Grants & Incentives Property Tax Abatements and Valuation Limitations Chapter 312 Local Government Code Exempts from taxation all or part of the increase in the value of real property and/or tangible personal property Not to Exceed 10 years Chapter 313 Local Government Code Taxpayer proposes to build or install property & create jobs meeting certain wage and other requirements Taxpayer in exchange for a 10yr limit on its taxable value for school maintenance and operations tax (M&O) Any valuation above the limitation is not taxed for that period Limitation amounts are established by statue and vary by school district from $10 to $100 million

22 Bayside South Case Study

23 Bayside South Case Study Project Overview Rowlett, TX (DFW) 119 acre south portion of 314 acre mixed-use master community 500 room Resort Hotel 250 room Limited Service Hotel 2,000 condominiums/rental units 1.4 million sf office, retail and restaurant space Crystal Lagoon Marina Extensive parks, public art and entry monuments $950 million AV at build-out

24 Bayside South Case Study The Challenge Major upfront infrastructure requirements: Banks wouldn t or couldn t lend at terms acceptable to developer Additional private equity would significantly reduce returns for developer

25 Bayside South Case Study The Solution $36.5M PID for qualified costs PID Structure Bonds are non-recourse to the City of Rowlett 30 year bonds at 6.68% Over 3:1 Value to Lean Ratio

26 Bayside South Case Study Benefits of using a PID To developers: Accelerated project development and the related growth in the City s total tax base Enhanced project viability by assuring infrastructure will be in place when needed thereby increasing assessed valuations Facilitated private equity and debt financing To homeowners: Cost certainty over life of property ownership Finite life of obligations Ultimate flexibility due to prepayment option

27 Economic Development Grants & Incentives Georgetown Data Center Recruitment Citi Longhorn Junction 350 acre business park Lack of Utilities Tax Structure Type A Corporation $9M of infrastructure designed and installed Streamline of permitting and development process Tax Exemptions through HB 1223

28 Economic Development Grants & Incentives Round Rock Kalahari Resort 351 acre development Lack of Utilities No city convention center Hotel Occupancy Tax $10M in bonds for Convention Center Chapter 380 Agreement $30M in bonds for Infrastructure Improvements Type B Corporation $4M in fee wavier Tax Abatement $800,000 in tax abatement from County

29 Economic Development Grants & Incentives City of Austin - DOMAIN Retail Chapter 380 Agreement Endeavor Developer City Wants Smart Housing MWBE Local Businesses Taxes Rebated Sales Tax Collection Property Tax Collection

30 Economic Development Grants & Incentives City of Cedar Park HEB Event Center Type A Agreement Hicks Sports Management Developer City Wants Event Center Development Along 183A Infrastructure Improvements

31 Economic Development Grants & Incentives Manor Independent School District Samsung Manufacturing Chapter 313 Samsung Semiconductor LLC $13B investment Two Agreements mm Wafer Plant 2012 Expansion of Wafer Plant Tax Savings $200M over 17yrs

32 Questions & Answers Questions & Answers Rick Rosenberg Managing Principal DPFG 8140 North Mopac Expressway Building 4, Suite 270 Austin, TX (direct) (cell) Bob Springer, CCIM Associate Vice President REOC Austin 9015 Mountain Ridge Drive Suite 100 Austin, TX (direct) (cell)