Development Financing Tools:
Public Improvement Districts
Tax Increment Development Districts
Industrial Revenue Bonds
Peter Franklin
Modrall Sperling Roehl Harris & Sisk, P.A.
(505) 984-2856
1.
The Public Improvement District
(“PID”) Act
• Sections 5-11-1 through –27, NMSA 1978
• 2001 Legislative initiative for development to
“pay its own way” for public infrastructure with
public finance tools
Basic Features of the PID Act
• Creation of PID is requested by property owners
(usually by developer)
• PID is created pursuant to hearing process by
municipality or county- at least 2 hearings
required
• PID can issue revenue bonds to finance wide
variety of infrastructure and improvements for
benefit of property within the PID
• PID can fund “enhanced services” to property
within the PID
Basic Features of the Act, cont’d
• Financing secured from levy of ad valorem
property taxes or benefit assessments
imposed on property within the PID
• Eligible PID infrastructure includes:
Public Buildings, Landscaping, Water and
Sewerage, Streets, Parking, Drainage, Flood
Control, Recreational Facilities, Electric and
Gas Facilities, Cultural Facilities
Developer Interest in PIDs
• Ability to finance infrastructure at tax-exempt
rates for up to 30 years
• Pass through debt service obligations on PID
Bonds to homeowners or other end-users of the
infrastructure
• Costs of formation and issuance of bonds payable
from bond proceeds
• PIDs are not subject to the Procurement Code
Local Government Response
• Several local governments have adopted PID policies
intended to provide a vetting process for applications
• Reflects the recognition that the PID Act has very broad
potential scope, as well as potential development and
bondholder risk
• Projects that would be authorized under the literal
language of the statute may not be successful land
development projects or marketable as bond transactions
Rio Rancho’s PID Policy
• Establishes minimum requirements, including:
– Evidence of property owner consent to formation of
PID
– Minimum financing size of $3 million
– Maximum overlapping tax burden of 1.99% of FMV
– Value to lien ratios of 3 to 1
– Debt service reserve requirements
– Credit support from developer (letters of credit,
contribution agreement) or Capitalized interest
Rio Rancho PID Policy features, cont’d
– PID Board composition (initially, mix of local
government and developer representatives)
– Evidence of Developer’s ability to complete the proposed
project
– Additional contribution by Developer (infrastructure in
addition to PID-financed improvements)
– Investor suitability requirements (if not investment grade,
$100,000 minimum denominations and sale to qualified
institutional buyers or accredited investors; other investor
protections may be considered)
Recurrent Issues
• PID improvements serving property outside
district boundaries: how should financing
cost be allocated?
– Could be offset by utility extension fees paid by
property owners outside district
– Impact fees paid by property owners outside
district might be another possible source of
offset
Cabezon PID
(Rio Rancho)
• Approved in November, 2004
• $11,050,000 bond financing of drainage channel
improvements
• 1 year construction schedule for PID improvements
• 4.3:1 value to lien ratio
• Approximately ½ of PID was sold or under contract at
time of bond sale
• Nearly 100% built out within first 2 years after formation
Mariposa East PID
(Rio Rancho)
• Formed in 2006
• Issued $16,000,000 General Obligation Bonds to
finance state of the art wastewater treatment plant
• Absorption was initially strong but has encountered
challenges due to the housing market
• Developer and PID are working on revised
development plan and financing structure
2.
Tax Increment Development Districts
• Like a PID, a TIDD is a special purpose governmental
entity authorized to issue bonds for infrastructure financing
• Infrastructure must be public, i.e. owned by governmental
entity and, although serving a specific area, available for
general public use
• TIDDs are not subject to the Procurement code
TIDD vs PID, cont’d
• Unlike a PID, a TIDD does not generate revenue by
imposing additional taxes or assessments on land, but by
redirecting the growth in tax revenue that results from a
development project as a special fund source to finance
public infrastructure that serves that project.
• While possible to use TIDD for residential projects,
statutory limitation on property tax increases also limit
financing capacity
• TIDDs are more suited to commercial projects that
generate GRT
TIDD REVENUE SOURCES
• Unlike a PID, a TIDD does not impose additional tax or
charge on land.
• Instead, establishes a "tax base" for the TIDD, which is the
estimated collections of AV property taxes or gross receipts
taxes (or both) collected from each location in the TIDD in
the calendar year prior to the year in which the TIDD is
formed
• Under the TIDD Act, up to 75% of the "tax increment" or
growth in revenue above the tax base may be dedicated to
the TIDD for infrastructure financing purposes.
TIDD REVENUE SOURCES, CONT’D
• Each taxing entity (municipality, county or state) must
formally dedicate the portion of tax increment derived
from a tax imposed by that taxing entity.
• Developer negotiates amount of increment with each
taxing entity
• Dedication of State GRT requires approval by the State
Board of Finance, recommendation and findings by the
New Mexico Finance Authority, and legislative
authorization (i.e. a legislative appropriation).
TIDD FORMATION
• Landowner petition submitted to local governing body;
unlike under PID Act, a local governing body may, on its
own motion, hold a hearing on formation of a TIDD.
• Formation hearing is held
• Governing body may determine that TIDD should be
formed based on interest, convenience or necessity of
affected land owners, residents and municipality or county
• Election or consent of all landowners is then required
(unlike PID, only simple majority is required to form
TIDD)
TIDD FINANCING
• TIDD may issue tax increment revenue bonds (property
tax, GRT or both
• Unlike PID, no authority to fund infrastructure costs
directly from accumulated TIDD revenue
• However, non-recurring GRT increment generated from
construction activities can be used to reimburse eligible
construction costs through “sponge bond”
• Sponge bond is very short term bond purchased by
developer and paid with accumulated increment revenue
TIDD FINANCING, cont’d
• Bond proceeds received by TIDD reimburse developer for
eligible costs
• Accumulated tax increment revenue repays bond purchaser
(developer’s affiliate)
• Once the development project is generating recurring GRT
or property tax increment, long-term bonds can be issued
• Maximum term of TIDD bonds is 25 years from the date
that bonds are first issued by the TIDD
• I.e. subsequent series of bonds must mature within 25
years after first series was issued
Rio Rancho TIDD Policy
Objectives
• Expand and diversify the City’s economy and tax base
• Create job opportunities for the unemployed and
underemployed residing within the City
• Attract and expand new and existing services, projects and
employers that will position the City competitively within
the state and region
• Provide housing choices, including affordable housing,
that meet the needs of current residents and attract new
residents to the City
Rio Rancho TIDD Objectives, cont’d
• Support neighborhood retail services, commercial
corridors and employment hubs;
• Support public school creation and improvement, including
the creation and improvement of facilities for charter
schools;
• Support businesses and suppliers within the City and
increase the City's gross receipts tax base by encouraging,
purchase of materials; goods and services from such
businesses and suppliers for the construction of Public
Improvements serving a tax increment district
Rio Rancho TIDD Policy-Application Requirements
• TIDDs will generally not be approved to finance less than
$5,000,000 in Public Improvement costs
• Application Requirements:
--Legal description of land proposed for TIDD
--Evidence of consent of owners and qualified electors
--Tax Increment Development Plan
--Preliminary Financing Plan/Construction Schedule
--Financial Feasibility Study
--Market Demand Study
--Proposed TIDD Development Agreement
City TIDD Application Requirements, cont’d
Contents of a Tax Increment Development Plan:
--map depicting geographical boundaries of the area proposed for the
TIDD;
--estimated time necessary to complete the tax increment
development project;
--description of the Public Improvements proposed to be financed by
the TIDD;
--proposed plan of finance for the TIDD, describing type of tax
increment bond financing and providing debt service coverage
requirements, debt service reserve fund requirements, proposed
marketing plan, investor suitability standards and secondary
market restrictions, additional credit support features
Contents of Tax Increment Development Plan,
cont’d
--GRT increment and ad valorem property tax increment estimated to
be generated by the project, and percentage requested for the project
(not to exceed 75%)
--number and types of jobs expected to be created
--amount and characteristics of workforce housing to be created, if
applicable
--innovative planning techniques, including mixed use, transit oriented
development, traditional neighborhood design or sustainable
development techniques to be incorporated
City TIDD Application Requirements, cont’d
• Feasibility Study is to analyze:
--direct and indirect benefits to employment, tax base,
transportation, parking, environmental cleanup and historic
preservation
--costs of proposed project to the City during the expected
life of the project (not just during tax increment dedication)
--impact on project with dedication of 75%, 50%, 35% and
25% of increment generated
City TIDD Application Requirements, cont’d
• Market Demand Study, estimating revenue to be generated
by the private development and absorption period
• Proposed TIDD Development Agreement:
--negotiated by applicant and City Staff, to become effective upon
formation of TIDD
--describes obligations of Developer and TIDD concerning bond
financing, construction, inspection, dedication, acceptance and
operation of TIDD infrastructure
--addresses TIDD governance and administration
--provides for rescission of tax increment dedication and recoupment
of unexpended increment revenue as remedy for nonperformance
3.
Industrial Revenue Bond Financing
• IRB is a “conduit” transaction in which City issues bonds,
usually taxable, on behalf of a developer for an eligible
project
• By statute, eligible projects include general commercial
and industrial purposes, but not projects which are
“primarily retail in nature”
• Property taxes are abated while IRB indebtedness is
outstanding
IRB Basic Features, cont’d
• Purchases of equipment, fixtures and furnishings for the
project can be made with nontaxable transaction
certificates, avoiding GRT on those purchases
• NTTCs are not available for purchases of “ingredients of
construction” (e.g. lumber, rebar, concrete, windows,
roofing) which remain subject to GRT
Basic Structure of an IRB
• Developer conveys “bare legal title to the project property
(real, personal or both) to the City
--That mechanism takes the project property off the tax
rolls, which is then not subject to ad valorem property tax
while “owned” by the local government entity.
• City leases project property (or, in some cases, sells in
stages pursuant to an installment sale agreement) to the
developer.
Basic Structure of an IRB, cont’d
• The lease or installment sale agreement provides that the
developer has all the benefit and detriment of all economic
use of the project property
• At the end of the term of the lease, title to the property is
re-conveyed for no additional consideration to the
developer
• In the case of an installment sale agreement, title is fully
re-acquired by the developer upon payment of the final
installment.
IRB Basic Features, cont’d
• Self-financed transactions usually include language
subordinating the rights of bondholders to prior mortgages
and other financing liens, and providing for subordination
to future financing liens, so as to enable the developer to
obtain outside financing from other sources .
•
The developer is leasing or purchasing the project
property from the local government issuer in form, but not
in substance.
IRB Basic Features, cont’d
• The substance of the lease or installment agreement is that
the local government has no rights to re-take possession
upon breach by the developer, no damages remedies or any
other rights typical of a lessor or installment seller
• Breach of the IRB lease or installment agreement results in
the termination of that agreement and title to the project
property transferring back to the developer, effectively
making the property subject to ad valorem tax.
Basic Structure of an IRB, cont’d
• Simultaneously with the delivery of the lease or
installment sale agreement, City issues an industrial
revenue bond, often issued as a “maximum principal
amount” obligation against which advances are taken by
the developer.
• Although occasionally the bond is actually sold to a 3rd
party lender in an arm’s length transaction, more often the
transaction is “self-financed,” in which the bond is
purchased by a single purpose LLC, created, owned and
controlled by the developer.
Basic Structure of an IRB, cont’d
• The only purpose of self-financed transactions is to obtain
the ad valorem property tax abatement and GRT relief.
• Debt service on the IRB is payable only on amounts
actually advanced.
• The security for payment of debt service is a pledge of the
developer’s lease or installment sale payments, which are
assigned to a trustee or depository bank for the benefit of
the bondholder.
Rio Rancho IRB Policy
• Claw-back Provision: 100% of the property tax abated for
an IRB are “clawed back” if recipient permanently ceases
operation of project property within the 5 years following
the issuance of the IRB
• Payments in lieu of Taxes:
--For IRBs issued by the City in an aggregate investment
amount less than $100 million, annual PILOT equal to the
total real and personal property taxes that would otherwise
have been levied for Rio Rancho Public School District for
that tax period
Rio Rancho IRB PolicyPayments in Lieu of Taxes, cont’d
• PILOT is not mandatory for IRBs exceeding $100 million
--will be considered on a case-by-case basis
--if imposed, intended to be commensurate with the nature
of the business, length of bond term and amount of the
bond
• PILOT shall not exceed 50% of the total real & personal
property taxes which would have been due and payable
without IRB tax abatement.
Questions?
Thank you.
Peter Franklin
Modrall Sperling Roehl Harris & Sisk, P.A.
(505) 984-2856