Revenue-Based Development Incentives

Property Tax RevenuesBob Rychlicki

Kane, McKenna and Associates, Inc.

I. “Upfront” Review

Review Project Economics Basic assumptions:

Background of applicant, experience, track record, etc.

Review of market information – feasibility studies, commitments, etc.

Detailed sources and uses of funds Project pro forma review Review Need for TIF Assistance

I. Review the Assumptions

Developer Background: Demonstration of prior experience or track

record. Can references be provided including

credit references or evidence of financial capacity?

Identify other team members or support personnel and their experience.

What is their experience in other municipalities?

I. Review the Assumptions

Market Analysis: Compare project assumptions regarding rents,

absorption, sales prices, etc. to project market studies. Determine if independent studies are needed.

Is appraisal data available to support acquisition prices or costs, are the amounts in line with the data?

Are there leases or other commitments in place – what are the relevant provisions regarding timing, occupancy, anchor tenants, etc.?

I. Review the Assumptions Need for TIF Assistance Is the amount of TIF assistance reasonable in

relation to the total project costs and private financing?

Is the project TIF request supported by incremental revenues?

Can the project be implemented in a timely manner?

Are “benchmarks” or criteria negotiated that protect the municipality (redevelopment agreement)?

I. “Upfront” Review: Municipal Needs

What are the municipal costs/constraints? Identify:

Ongoing TIF administration or project review Any new or additional services Needs for infrastructure or utilities Other taxing districts – any new services? Impacts of assistance on current or

projected credit position of the municipality.

II. TIF Financing Options

Starting Point in TIF Financial Analysis

Basic options: Bonds are issued upfront “Pay as you go” or Notes -

performance based structure is utilized Combination of the above

II. TIF Financing Options

Identify Project Financial Requirements

Timing for TIF financing – when are the dollars needed ?

Sizing – how many TIF dollars are needed? Need for TIF Dollars – identify true public

and private funding requirements and compare to TIF dollars

II. TIF Financing Options

Preparation of the TIF Analysis Prepare TIF revenue projections Identify community needed public

improvements Complete “but for” or gap analysis Identify critical project assumptions related to

the receipt of TIF revenues Identify other sources of revenues or funds

that could complement the financing

II. TIF Financing Options

Other Requirements: Review/calculate any school district

payments or intergovernmental agreements, if applicable

Identify other TIF obligations or liens Identify any administrative or ongoing

monitoring requirements that need annual funding

III. Refining the Analysis Risk Assessment What is the financial position of the

municipality- can bonds be issued and not negatively impact ongoing or future financings ?

What are the municipal policies and fiscal position relating to G.O. debt financing ?

What is the likelihood that TIF revenues will be available: has sensitivity analysis (with any coverage requirements) been factored into the analysis ?

Are any guarantees necessary, and if so, what are the implications for tax exempt or taxable financing?

III. Refining the Analysis Risk Assessment ( continued) What is the track record of the developer or

entity that is responsible for the project implementation ?

Has the redevelopment agreement included adequate protections and timetables for performance ?

Have the valuation estimates been compared to market data or similar uses in the area ?

Will the financing establish a precedent for future developments, will criteria be identified ?

Upfront Financing OptionsGeneral Obligation vs. Revenue Bonds

The different interest rates, coverage requirements, and other purchaser requirements will affect the net financing amounts supported by the project.Taxable vs.Tax Exempt Interest Rates

What is the trade off in interest cost compared to the greater certainty of repayment through letters of credit, insurance, or other forms of guarantee ?

III. Refining the Analysis

III. Refining the TIF Analysis Upfront Financing Options

(continued) Revenue bond purchasers have more

stringent requirements in relation to G.O. purchasers

The revenue bond market is narrower and may not be available for all projects

G.O. bonds provide a lower interest rate, but additional risks are borne by the municipality

III. Refining the TIF Analysis “Pay as you go” options Shift risk to developer or private entity Private sector financing will need to

include upfront costs that are reimbursed by annual incremental revenues

Interest costs could be higher in relation to municipal borrowings (tax exempt or taxable)

Provide for Developer Note take out, if and when TIF revenues are “seasoned”

Anytown, Illinois TIF - Project AnalysisPreliminary User Assumptions

Avg. Sq. Ft. % SalesComponent Project Class Sq. Ft./ Market Value Generating Avg. Sales Taxable (Local

Name Description Code # Units Sq. Ft./Unit Sales Tax Sq. Ft./Unit Sales Tax)

Parcel 1 Residential Component 4 152 300,000.00 0 0 0%Parcel 2 Retail Component 3 41,000 100.00 41,000 200 100%Parcel 3 Specialty Grocery Store 3 11,000 100.00 11,000 600 100%Parcel 4 Book Store 3 20,000 100.00 20,000 300 100% Parcel 5 Restaurant 3 6,000 70.00 6,000 250 100%

Totals 78,000

IV. Projection Assumptions: Users

Anytown, Illinois TIF - Project AnalysisAbsorption Assumptions

Absorp. Annual Units/Sq. Ft. OccupiedYear Parcel 1 Parcel 2 Parcel 3 Parcel 4 Parcel 5

1 362 36 41,000 11,000 20,0003 36 6,0004 365 867

IV. Project Assumptions: Timing

Anytown, Illinois TIF - Project AnalysisPreliminary Tax Pro Forma

1 2 3 4 5 6

Total EAV All Components 1,736,820 6,608,320 14,203,733 20,792,205 23,828,072 25,008,118

I. Incremental Property Taxes:

a) Base EAV 2,019,268 2,019,268 2,019,268 2,019,268 2,019,268 2,019,268

b) Incremental EAV 0 4,589,052 12,184,465 18,772,937 21,808,804 22,988,850

c) Tax Rate =6.080% 6.080% 6.080% 6.080% 6.080% 6.080% 6.080% d) Total Est. Incremental Property Taxes 0 0 279,014 740,815 1,141,395 1,325,975

e) Incremental Property Taxes (Residential Only) for School District 40.0% 0 0 72,542 189,919 309,210 362,398 f) Est. Incremental Property Taxes Available 0 0 206,473 550,896 832,185 963,578 After Payment to School Districts

g) Cumulative Incremental Property Taxes 0 0 206,473 757,369 1,589,554 2,553,132

IV. Project Assumptions: Increment

IV. Project Assumptions: FinancingPay as you go

or Notes Revenue Bonds G.O. Bonds

Present Value of TIF Flows $7, 067,009

Estimate of Net Financing amount$3,956,945

Estimate of Net Financing amount $6,499,767

Interest Rate: 8.5%

Interest Rate: 7.0%

Interest Rate: 5.0%

No coverage requirements or financing costs

1.35 x coverage plus costs, cap. int., and DSR

1.25 x coverage plus costs and cap. int.

Developer holds note

Bonds sold to investors

Bonds sold to investors

V. Policy Considerations

Prior to finalizing the deal: Review municipal services that may be

required to implement the project on an ongoing basis

Integrate taxing district feedback or requests

Carefully review funding mechanism and municipal fiscal condition

Develop monitoring/feedback process in order to evaluate the project and the financing associated with the redevelopment area

V. Policy Considerations

Prior to finalizing the deal (con’t):

Determine if an independent feasibility report or market studies are required

Review the redevelopment agreement in order to include key business points

Review all necessary project commitments and budgets associated with the redevelopment project

V. Policy Considerations

Follow up Items Monitor revenues and project

performance ( annually or more often)

Prepare TIF annual reports or continuing disclosure reports ( as required by bond documents)

Identify any tax protests or tax collection discrepancies

Monitor development timetable and benchmarks

VI. Summary Important Steps Match financing to revenues after a

thorough examination and testing of all assumptions

Evaluate the proposed financing in relation to the overall municipal fiscal picture

Carefully assess risk in relation to the project characteristics and development variables – how many variables are subject to change ?