Recent Success Stories in Alabama Public and Private Sectors Working Together to Lure Major Industry to Alabama 2017
Airbus Mobile 2005 to 2017 Started as joint venture between EADS (now Airbus) and Northrop Grumman for a $105 million/500 FTE KC-30 production facility; City of Mobile, County, State, MAA in 2005; bid process leads to extended timeline $600 million/1,000+ FTE final assembly facility in Mobile; $125 million in state incentives plus $33 million from city and county governments
Magna/KAMTEK Birmingham 2005 to 2017 Magna International is largest Tier 1 supplier in NAFTA, 3 rd largest in world Largest metal stamping facility for Mercedes in Alabama + KIA, BMW, etc. Began with purchase of Ogihara facility in Valley East Industrial Park, now invested > $1B with 900+ jobs, expecting to increase to over 1,200 jobs New aluminum castings plant in Birmingham Birmingham and Jefferson County provided cash, free land; assisted with closure of Sterilite Drive and State industrial access grant
James Hardie Building Products Prattville - 2017 $215 million/220 FTEs - cement siding manufacturing facility in Prattville, Alabama announced in August of 2017 (Governor Ivey s first big announcement) First plant in the United States in over 5 years; Alabama won over NY and Mass Road infrastructure provided through federal and state industrial access grants; railroad infrastructure discussions in process City of Prattville, Autauga County and State of Alabama joined forces to lure JHBP
Yorozu Case Study (Jasper, AL) Jasper Site in 2010 Site Cleared utilizing Alabama Power Spec Building Program
Yoruzu Jasper - 2015 300 new jobs and $100,000,000 investment for Japanese automotive supplier 50-acre site in 400-acre Jasper Industrial Park with new spec building through program funded by Alabama Power Economic and Community Development, leading to over 25 plans and creating over 1,500 jobs in Alabama
Remington Arms Huntsville - 2014 2,000 new full-time jobs and $110,900,000 capital investment in mfg facility City of Huntsville/IDB conveyed 144.9 acres, existing 843,715 sf facility Madison County, Morgan County, Limestone County, Athens, Limestone County Economic Dev Partners combined to provide $12,500,000 in cash to support the acquiring land and building
Aerojet Rocketdyne Huntsville - 2017 Advanced manufacturing facility for production of AR1 rocket engine and defense headquarters (HQ moved from Sacramento, California); in competition with Blue Origin (a Jeff Bezos/Amazon company) for United Launch Alliance contract $27.5MM investment / 800+ new FTEs in two facilities; approved 9-28-17 Unique structure with Huntsville IDB issuing bonds for construction of base facility guaranteed by City of Huntsville (first-ever such financing structure)
Summary of Topics Economic Development Tools: Improvement Districts and Cooperative Districts Tom Brinkley Maynard Cooper & Gale PC Improvement districts and cooperative districts as alternative methods of economic development Examples of the improvement district and cooperative district structures Common participants in improvement district/cooperative district deals Public Infrastructure/Public Services as Economic Development Tools Public Infrastructure as an Economic Development Tool: A city s power to build (or assist in the building of) airports, bridges, hospitals, utilities, roads, schools, etc. is a potent economic development tool Public Services as an Economic Development Tool: A city s power to provide basic public services like water/sewer service, police/fire protection, and public education is a potent economic development tool Public infrastructure and public services are the foundation on which the economic development house is built Two Key Questions: Who pays for public infrastructure and public services? Who owns/operates public infrastructure and public services? o Cities traditionally have financed public infrastructure and public services through generally applicable taxes (for example, property taxes and sales taxes) and revenues from government-owned utilities (for example, water and sewer utilities) General Business Incentives as Economic Development Tools In the current marketplace, companies frequently decide to locate their operations in locales that offer not only good public infrastructure and services but also business incentives Business incentives include property tax abatements, sales tax exemptions and credits, corporate income tax exemptions, credits for investment or jobs, business grants, loans, and loan guarantees Cities that fail to offer business incentives frequently will lose out on economic development opportunities Numerous statutes govern business incentives under Alabama law, but historically Section 94 of the Alabama Constitution of 1901 greatly limited cities ability to grant business incentives 1
A patchwork of local amendments to the Alabama Constitution of 1901 (for example, Amendment No. 429 in Madison County) created exceptions to Section 94 Amendment No. 772 to the Alabama Constitution of 1901 (ratified by Alabama voters in 2004) provided a blanket exemption from Section 94 of the Alabama Constitution for economic development projects Under Amendment No. 772, cities may lend credit or grant public funds and things of value in aid of or to any individual, firm, corporation or other business entity, public or private, for the purpose of promoting economic and industrial development Improvement Districts as an Alternative Way of Financing Public Infrastructure Chapter 99A of Title 11 of the Alabama Code (1975) authorizes Alabama cities to form special improvement districts that have the power to issue bonds to finance public infrastructure improvements within the district Bonds are payable out of special property assessments levied on the owners of the land within the district based on the estimated increase in value of the land resulting from the special benefits derived from the improvements Improvement districts are often important vehicles to facilitate the development of public infrastructure for new residential or mixed-use developments Examples: Residential and commercial developments in Chambers County, Alabama, City of Madison, City of Mobile, City of Sylacauga and City of Chelsea Cooperative Districts as an Alternative Way of Financing Public Infrastructure Chapter 99B of Title 11 of the Alabama Code (1975) authorizes Alabama cities to form cooperative districts that have the power to issue bonds to finance improvements of any nature, type, or description that any member of the cooperative district is authorized by law to own, acquire, construct, or finance Bonds are payable out of revenues derived from payments by members of the district to the district and/or fees or charges for the use of the financed improvements Cooperative district fees may include targeted fees measured as a percentage of gross sales (similar to sales taxes) Examples: Bass Pro Prattville; Celebrate Alabama Project (Opelika); The Shoppes at the Venue (Valley, Alabama); The Landing at the Venue (Lanett, Alabama); Russell Crossroads at Lake Martin; and Morgan Center Business Park (Decatur, Alabama) Amendment No. 772 A Relatively New Hammer in the Economic Development Toolkit Under Amendment No. 772 to the Alabama Constitution of 1901, cities may lend credit or grant public funds and things of value in aid of or to any individual, firm, corporation or other business entity, public or private, for the purpose of promoting economic and industrial development Under Amendment No. 772 to the Alabama Constitution of 1901, cities may incur debt for economic development purposes in principal amount of 50% of assessed value of taxable property 2
Under Amendment No. 772, cities may elect to make contributions to an economic development project by sharing a portion of project tax revenues over time in lieu of issuing bonds for money up-front Combining Amendment No. 772 and Cooperative Districts Since, under Amendment No. 772, cities have the power to finance virtually any type of economic development project, cooperative improvement districts have the same power. By combining the powers of cities under Amendment No. 772 with the powers of cooperative districts, eligible improvements are not limited to public infrastructure, so cities may participate in a wide range of private projects through the use of cooperative districts. Some Caveats Some economic development bond structures might require validation in a court proceeding Some economic development bond structures might not be eligible for tax-exempt treatment under the Internal Revenue Code Some economic development projects will engender public controversy from existing businesses and citizen groups 3
Some Examples: Following examples illustrate how a city can use tax increment districts, improvement districts, and cooperative districts as economic development tools 99A Improvement District Bond Structure Bondholders 99A Improvement District Tax Increments from Property Owners in Tax Increment District 4
99B Cooperative District Bond Structure (License Fee Version) Bondholders 99B Cooperative District License Fees from Sales at Shopping Center in 99B Cooperative District Common Participants in Improvement District/Cooperative District Deals Developer: Plans and develops commercial or residential real estate project Engineer: Prepares report supporting costs of capital improvement program of cooperative district/improvement district Cooperative District: Levies targeted fees and issues bonds Improvement District: Levies special assessments (may issue bonds in straight up special assessment deals) Bondholders: Purchase bonds issued by cooperative district or improvement district. Bond Trustee: Acts on behalf of bondholders Underwriter: Finds purchasers of bonds and structures financial aspects of deal Financial Advisor: Advises issuer on matters pertinent to the bond issue, such as structure, timing, marketing, fairness of pricing, terms, and bond ratings Bond Counsel: Prepares legal documents related to issuance of bonds, structures legal aspects of deal, and renders an opinion in conventional form as to the validity and legality of bonds and the exemption of interest thereon from income taxes Disclosure Counsel: Assists with preparation of offering document related to bonds. 5
Special Assessment Methodology Report Consultant: Prepares report supporting levy and apportionment of special assessments to the parcels within a cooperative district/improvement district Appraiser/Feasibility Report Consultant: Prepares report supporting financial feasibility of commercial or residential real estate project Construction Lender: Provides financing for rooftops of commercial or residential real estate project Letter of Credit Bank: Provides credit enhancement of bonds (common in variable-rate demand bond structures but uncommon in fixed-rate bond structures) Other Professionals: Surveyors, environmental consultants, and other professions typically involved in real estate financings will be included in improvement/cooperative district deals 6
Who receives the credit? Is credit amount subject to volume limit? What type of project/borrower qualifies? COMPARISON AT A GLANCE NEW MARKETS, SOLAR & WIND ENERGY AND HISTORIC TAX CREDITS NEW MARKETS TAX CREDITS Investor making qualified equity investment ( QEI ) in continuing development entity Maximum dollar limit (currently $3.5 billion per year in the U.S. through 2019) Competitive application to U.S. Treasury CDFI Fund Borrower must be qualified active low-income community business ( QALICB ) Project must be in qualified census tract or serve targeted population (employment, sales, services) Can be used with portion of a business Rental of residential property not considered a QALICB TOM BRINKLEY MAYNARD COOPER & GALE PC SOLAR & WIND ENERGY TAX CREDITS Owner of the project Lease pass-through structure credits to master tenant No Solar energy equipment (generate electricity, heat or cool structure, provide solar process heat) Qualified facilities include wind and solar energy facilities Energy credit eligibility subject to construction commencement dates varying with type of qualified facility Not available for tax-exempt use property HISTORIC TAX CREDITS Owner of the project Lease pass-through structure credits to master tenant No Building listed on National Register of Historic Places Qualified Historic building originally placed in service before 1936 Owner-occupied residential properties do not qualify Project must be substantial rehabilitation (cost of rehab exceeds pre-rehab cost of building) Not available for tax-exempt use property How is the credit calculated? Aggregate of 39% of QEI (5% for 30% of capital cost of energy 20% of cost of qualified
NEW MARKETS TAX CREDITS 3 years, 6% for 4 years) Calculated off QEI, with requirement that 85% be used by CDE for loan or equity investment in QALICB SOLAR & WIND ENERGY TAX CREDITS property (FMV) for investment tax credit ( ITC ) Cents per kwh for production tax credit ( PTC ) Phase down for wind facilities (PTC) and solar energy (ITC) Portion of property receiving HTC not eligible HISTORIC TAX CREDITS rehabilitation expenditures ( QRE ) for National Register property 10% of costs of QRE for qualified historic building Entire credit taken in first year placed in service Tax-exempt financed costs eligible for credit What is the compliance period/compliance burden? 7 years Transaction documents will require annual or semi-annual compliance certifications as to QALICB status CDE/Investor reporting to CDFI Fund Community Benefits Agreement in transaction documents (not required by Code) 5 years from date property is placed in service for ITC 10 years for PTC 5 years from date project placed in service Verification of qualified rehabilitation expenditures before eligible for credit by Department of Interior QRE must be made within 2-year period (extended to 5 years if project completed in phases)
NEW MARKETS TAX CREDITS SOLAR & WIND ENERGY TAX CREDITS HISTORIC TAX CREDITS Does change in use, sale, casualty loss, foreclosure or other disposition of credit cause to be subject to recapture? Yes; credits recaptured if (1) 85% of QEI not invested in QALICB, (2) CDE fails to continue to be qualified CDE, (3) CDE redeems QEI Recapture of credits taken to date of event causing recapture, CDE and QALICB indemnify for the full credits taken plus value of expected credits to investor Sale of QEI to another investor does not cause recapture Yes; for ITC, recapture on sale or disposition, assignment, retirement, abandonment or conversion to personal or nonbusiness use prior to end of 5 years after placed in service date For ITC, recapture amount decreases by 20% each year For ITC, only partners admitted prior to date property placed in service, or, for sale leasebacks, within 3 months Yes; recapture upon sale or disposition of property Recapture on conversion of property to personal or nonincome producing property Recapture amount decreased by 20% each of 5 years (lose 100% of credits if dispose of in first year) Sale of QALICB or project financed may not be a recapture if disposition proceeds reinvested within 1 year