CDFP Maguire 2104 P3 8 6-2014 final

Financing Public Infrastructure

through Private Investment

CDFA Texas Financing RoundtableAugust 6, 2014

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Discussion Agenda

� State of the financing landscape:

� Public sector

� private sector

� Partnership mechanism

� Public Improvement Districts

� Tax Increment Reinvestment Zones

� Municipal Utility Districts

� Other tools

� Questions to Consider

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Source: ASCE, Texas Chapter (2012)

Grading Elements: capacity, condition, funding, future need

operation/maintenance, public safety and resilience

� Increasing population places greater

demand on existing infrastructure

� Current condition of public infrastructure

not that great

� Public resources to replace, renovate or

construct new public facilities face

funding constraints (local, state, federal)

� Emphasis on “resilient development” –

appropriate density, environmental

stewardship and public amenities

� Up-tic in backfilling, renovating and

constructing new private real estate –

both residential and commercial

(sales tax and property tax revenues)

Category 2008 2012

Roads D D

Bridges B- B-

Transit C C+

Aviation C+ C+

Schools D- D-

Drinking Water D D-

Wastewater C- C-

Dams D- D-

Solid Waste B- B+

Navigable Waterways D C

Flood Control D- D

Energy B+ B+

GPA C- C

Report Card for Texas Infrastructure

Public Perspective of Financing Infrastructure

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Private Perspective for Financing Infrastructure

OPM = other people’s money

Highest risk

Hardest to fund with OPM

Upfront critical path

Revenue at the back end

� Debt (most risk averse):

� Lenders mitigate risk by requiring more

equity, personal guarantees, signed

contracts or leases

� Banks face regulatory constraints on the

amount of construction lending

� Equity (most expensive):

� Greater equity requirements than pre-

recession (30-40%)

� Return is only from that development

although public infrastructure wider benefit

� Market prices sets the limit on tax/fees in

the district that can recover capital costs

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Public-Private Partnerships through Development

OPM = other people’s money

� Spread risk

� Align interests (control)

� Lessen the total cost of capital

� Capture created future value

� Public Improvement Districts (“PIDs”)

� Tax Increment Reinvestment Zones (“TIRZs”)

� Municipal Utility Districts (“MUDs”)

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Public Improvement Districts

Authority: Local Government Code Chapter 372 (1987/ 2011 revisions)

Entity: City or County managed by governing board of jurisdiction

Uses: � Streets and sidewalks;

� Public safety and security services;

� Water, wastewater, health and sanitation, and drainage facilities

� Acquisition of rights of way;

� Art;

� Creation of pedestrian malls;

� Erection of fountains;

� Landscaping and other aesthetics;

� Library facilities;

� Mass transit;

� Park, recreation and cultural facilities;

� Parking facilities; and,

� Acquisition, renovation and/or construction of affordable housing.

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Bond

� Construction Bonds – Up front proceeds secured by a lien on the

benefitted land as is but entitled and improved with proposed public

improvements

� Reimbursement Bonds – Secured by lien on the benefitted project at

the time of bond issuance

� Debt service of the bonds paid through an assessment (not a tax!)

allocated fairly across the benefitted property owners

Pay-as-you-go

� Assessment based on share of front foot, value or other

� Primarily for maintenance and beautification

� PID enters into contracts to carry out the work

Public Improvement Districts (cont.)

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Risk:

Control: City/County appoints the Board, approves PID petition and issuance of bonds

No public bidding requirements

Capital Cost: Tax-exempt bonds

No pre-payment penalty for early pay off of assessments

Can be combined with other economic development incentives

Value Capture: Benefited property owner pays an assessment (not a tax)


� Non-recourse to the Developer and City/County

� Conservatively underwritten (3:1 value to lien)

� Tax lien (superior to mortgage)

� No pledge needed for City/County to credit enhance bonds

� No reduction in City/County bonding capacity

� Only benefitted property owners pay assessment

� Magnitude of assessment fairly constant for property owner

� Assessment does not increase as value increases

Legislative body

commences Proceedings

1. Detailed staff &

consultant analysis of

PID

2. Preparation of service

and assessment plan

(SAP)

3. Prepare PID formation &

optional bond financing

documents

4. Publish notice of PID

formation hearing

City approving PID

formation

Optional: Levy PID

assessment and approve

land sale

1. Close bond issue

2. Record any levy PID

assessment

3. Commence

Construction

1. Initial Construction or

acquisition

2. Commence activities to

administer debt, levy

and collect special

taxes and comply with

continuing disclosure

requirements

1. Staff “global” review to

determine City/Issuer

benefit

2. Preliminary

legal/financial overview to

approve steps to proceed

1. 50% of the Land Owners

2. Payment of Pre-

Formation Costs


PETITIONED INTIATED PID

PUBLIC HEARING

SUBSEQUENT ACTIONS

Typical Steps in Formation

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5

2

1

1

1

2

1 2

Tessera On Lake Travis Case Study

Project Overview

� 877 Gross Acres/558 Net

Acres

� 2,000 Single Family

Residential Units

� Supporting Commercial

� Amenities Include

Swimming Pool,

Clubhouse, Hike and Bike

Trails, and Parks

The Challenge� Major upfront infrastructure requirements:

- $3.2m offsite water

- $1.2m offsite sewer

- $5.7m arterial roadway

- $1.7m drainage

- $2.5m parks, landscape, amenities

- $3.8m engineering, construction management, other

- $18.1m Total

� Banks unwilling or unable to lend at terms acceptable to developer

� Infusion of additional equity would significantly reduce returns to developer

Tessera On Lake Travis Case Study (cont.)

The Solution

Negotiated Development Agreement with City:

� Provide City with “Superior Development”

� Install Amenities Desired by City Upfront

� Public Improvement District (“PID”)


PID Structure Major Improvement Area Bonds

� Bonds secured by Major Improvement Area land only

� Contractors paid directly from PID bonds

� Non recourse to Developer or City� 3.39:1 Value to Lien Ratio� 15 Year Term� 6.76% interest rate

Improvement Area #1 Bonds� Bonds secured by Improvement Area

#1 land only� Contractors paid directly from PID

bonds� Non recourse to Developer or City� Builder contracts in place� Developer guaranteed completion of a

portion of the finished lots in IA#1� 3.00:1 Value to Lien Ratio� 30 year Term� 5.88% interest rate


Future PIDs for

Internal Costs


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Tax Increment Reinvestment Zones

Provisions: New development or redevelopment

Proof of blight

“But for” or petition

Residential and appraised value limitations

Source: Craig Johnson, Indiana University (2002)

� Purchase of land for public infrastructure

� Relocation of public utilities

� Water, watewater, drainage systems

� Parks and landscape

� Public roads and buildings

� Façade improvements (public – easement or dedication)

� Environmental remediation

� Demolition of existing structures

� Debt service reserve, capitalized interest, cost of issuance

� Administration fees and marketing

Authority: Tax Code Chapter 311

Entity: Related City or County local government entity managed by Board of Directors

Uses:

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Tax Increment Reinvestment Zones (cont.)

Source: Craig Johnson, Indiana University (2002)

Bond TIFs

� Issuance of revenue bonds

backed against the

increment generated

Pay-as-you-go TIF

� Expenditure through

contracts from the annual

increment of the TIF

Participating taxing entities

forego use of the increment,

dedicating it to the District

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Risk: Bond: Entity if increment not sufficient to pay debt

City/County if it pledged credit to credit enhance bonds

Pay-as-you-go: Whoever up-fronts cost of infrastructure (Developer)

Control: City/County - appoints the Board, approves plan, delegates authority to Board,

approves the issuance of bonds

TIF Board – recommendations to City/County, carries out plan

Capital Cost: Bonds: Tax-exempt bonds; Upfront bonds usually requires credit enhancement

Pay-as-you-go: Interest rate (if any) and length of reimbursement period

Value Capture: Increment of the ad valorem and/or local option sales tax within district

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As of FY 2012:

� About 231 designated zones in

Comptroller’s Registry

� 159 (~70%) have detailed reports available

� Only 27 report outstanding debt

� Outstanding debt: $1.36 Billion

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Municipal Utility Districts

Authority: Water special districts have existed since 1917;

Texas Water Code Chapter 54 (1971) new development

Vehicle: Political subdivision in ETJ that taxes property in the district

Use: Water, watewater, drainage systems, parks, streetlights, fire prevention and

certain types of roads for new development

Risk: Developer pays for upfront cost of infrastructure (debt, equity)

MUD Bonds reimburse developer

Tax on property owners not capped – tax rate fluctuates to service M&O/Debt

City/County only impacted by debt if annex MUD before bonds paid off

Control: Developer / MUD Board of Directors

TCEQ oversight and approval

Capital Cost: Tax-exempt bonds; proven and robust bond market

Value Capture: MUD Board levies an ad valorem tax on all taxable improvements

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Municipal Utility Districts (cont.)

Water District Authority

Tax Supported Outstanding Bond Debt (in $millions)

$11,121 $10,870 $10,718

$10,461

$9,849

$9,101

$7,233

$6,668

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2013 2012 2011 2010 2009 2008 2007 2006

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PIDs MUDs TIRZs MMD's WCIDs

Cost Recovery MethodAdvance of Construction

and/or ReimbursementReimbursement Only Reimbursement Only

Advance of

Construction and/or

Reimbursement

Reimbursement Only

Jurisdiction City, ETJ, or County City, ETJ, or County City or CountyCity/ETJ > 25,000

populationCity, ETJ, or County

Eligible Improvements

Water, Sewer, Drainage,

Right of Ways, Parks,

Streets, Sidewalks, Mass

Transit, Libraries, Street

Lights, Off Street

Parking, Pedestrian

Malls, Affordable

Housing, Formation

Expenses


Right of Ways, Arterial

Roads (only if granted

Road District powers),

Formation Expenses

Sewer, Street Lights,

Streets, Utilities, Water,

Flood and Drainage,

Parking, Park,s

Pedestrian Malls,

Educational Facilities,

Financing, Property

Assembly, Professional

Services, Administrative,

Organizational,

Operating Costs

Water, Sewer,

Drainage, Right of

Ways, Parks, Streets,

Sidewalks, Mass

Transit, Libraries,

Street Lights, Off

Street Parking,

Pedestrian Malls,

Advertising,

Marketing, Formation

Expenses


Right of Ways,

Formation Expenses

Source of repayment Assessments TaxesProperty & Sales Tax

Increment

Assessments/impact

fees/taxesTaxes

Credit Support None NoneSubject to Market

ConditionsNone None

Life of Entity Finite Ongoing Finite Finite Ongoing

Summary Comparison

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PIDs MUDs TIRZs MMD's WCIDs

Contract bid requirements None Public Public Public Public

SecurityAssessments & Land

and Improvements

Land and Improvements

and Unlimited Tax

Obligations

Negotiated

Land and

Improvements and

Unlimited Tax

Obligations

Land and Improvements

and Unlimited Tax

Obligations

Source of funding shortfall in

event of taxpayer default

Limited to defaulting

property owner

Other taxpayers in

districtPer nature of security Per nature of security

Other taxpayers in

district

Tax Status of Debt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt

Approving Regulatory Entity -

Formation and Debt

Issuance

City or County/AG's

Office

City or

County/TCEQ/AG's

Office

City or County/AG's

Office

State

Legislature/TNRC/City

/AG's Office

City or

County/TCEQ/AG's

Office

Debt Status Upon City

AnnexationNone

City Assumes

Debt/Possible Impact

on City Bond Rating

N/A

City Assumes


on City Bond Rating

City Assumes


on City Bond Rating

Residential Use Limitations None None NoneRequires Legislative

ApprovalNone

Ongoing Administration Annual SAP update Monthly Meetings Per TIRZ Agreement Monthly Meetings Monthly Meetings

Administrative Costs Management

Management, Legal,

Assessor, Bookkeeping,

Property Tax, Engineer

Per TIRZ Agreement

Management, Legal,

Assessor,

Bookkeeping, Property

Tax, Engineer

Management, Legal,

Assessor, Bookkeeping,

Property Tax, Engineer

Governing Board City or CountyElected Board of

Directors

Appointed Public

District Board of

Directors

Elected Board of

Directors

Elected Board of

Directors

Summary Comparison (Cont.)

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Other Public Financing Mechanisms

� Economic Development Grants (LGC Chapter 380/381)

� Other types of tax exempt development bonds

� Infrastructure participation agreements

� Partnerships with 4A/4B Corporations

� Federal grants (through public agency)

� Others …..

Whatever it takes to fill the “gap” in the capital stack

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The Dance: Questions to Consider

� How “close” do you want to dance with your

partner?

� Who is going to lead (control over who does what)?

� Marathon – will this match work?

� Do you know what is important all the parties ? Is

there an alignment of interests?

� Are you even in the right dancehall? (Did you

address everyone’s challenge?)

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Christine Maguire, AICP, EDFP

Senior Manger ◊ DPFG

609 Castle Ridge, Suite 310

Austin, TX78746

[email protected]

512-732-0295

Question and Answer

If you ask me anything I don't know, I'm

not going to answer.

--- The Immortal Yogi Berra

Real Estate

CDFP Maguire 2104 P3 8 6-2014 final