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Debt Financing
 

Debt Financing

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    Debt Financing Debt Financing Presentation Transcript

    • Public Debt Financing of Sport Facilities Sport Finance
    • Debt Financing
        • Most public agencies finance major capital projects in the same way people buy homes: Loans from financial institutions.
        • Loan is referred to as a Government Issued Bond.
        • The loan is re-paid through various funding sources such as hard or soft taxes.
        • Interest costs for this type of financing are relatively high.
    • Public Sector Funding
      • Average Amount of Public Contribution to Stadium and Arena Financing = 78%
          • Public Funding Sources
        • Taxes Bonds
      • Much attention given to government issued bonds used for stadiums.
      • More bond dollars used for other investments:
        • Parks
        • Golf Courses
        • Convention Centers
        • Schools
        • Highways
      Debt Financing
    • Debt Financing
        • Bonds: “A promise by the borrower to pay back the lender a specified amount of money plus interest within a specified period of time”.
        • Using taxes to re-pay bond debt is preferred :
          • Less visible impact of taxpayer burden;
          • Elected officials appear to be successful in creating a facility (and its impact);
          • Equity for population.
      • Fundamental Rule:
      • Do not issue bonds for a maturity longer than the life of the facility.
      • The length of maturity should be the length of the lease agreement.
      Debt Financing
    • Debt Financing
      • The 1986 Tax Reform Act
      • Government Issued bonds not exempt from Federal taxes if:
      • More than 10% of the stadium’s useful service consumed by private business (unless it is a “qualified private activity”).
      • More than 10% of the bond payment comes from sport franchise revenues.
        • Use of other revenues for bond payment.
        • Owners are prohibited from providing revenue.
    • Debt Financing
      • The 1986 Tax Reform Act
      • Changed the financing structure of sports facility construction.
      • This change was designed to discourage local governments from investing large amounts of public money in sports facilities.
      • Instead, it prompted the creation of a whole new set of incentives (or subsidies).
    • Debt Financing
      • General Obligation Bonds
        • Government makes an unconditional promise to re-pay the loan.
        • Usually secured by property taxes (local) or sales/income taxes (state).
        • Borrowing costs (interest rates) are lower
            • 1-2% less than non-guaranteed bonds
    • Debt Financing
      • General Obligation Bonds
      • Usually requires voter approval (taxation);
      • Voters are less willing to approve this bond;
      • Many teams and cities are using funding alternatives.
    • Debt Financing
      • Non-guaranteed Bonds
          • Not backed by the full faith and credit of the government.
          • Repayment based on other sources of revenue.
          • Many sources of revenue to use:
            • Revenue bonds
            • Tax increment bonds
            • Certificates of participation
      • Non-guaranteed Bonds
      • Does not require voter approval;
      • Does not count against the government’s debt ceiling;
      • Generally, if revenue is used to pay debt, the debt is being paid by those using the facility .
      Debt Financing
      • Revenue Bonds
      • Repaid from income produced by the facility. Including:
        • Ticket sales
        • Parking
        • Advertising
      • Lease Revenue Bonds
      • Bond agreement includes specific revenues used for repayment.
      • Contractually Obligated Income (COI) from:
        • Luxury suites
        • PSL’s
        • Concessions contracts
        • Sponsorship agreements
      Debt Financing
      • Revenue Bonds
      • Advantages:
          • Reflects a user pay philosophy
          • Voter approval not needed
          • Does not count against the debt ceiling
      • Disadvantages
          • Higher interest rates
          • Restricted to profit-making ability
          • May restrict participation because of higher user fees
      Debt Financing
    • Private Placement Bonds
      • Sold privately by the team, its owner, or a development corporation.
      • Secured by a lien on future facility revenue, especially from contractually obligated income.
      • Income to bond holders is fully taxable.
      • Relieves the municipality of some of the debt.
    • Asset-Backed Securitization Bonds
      • Another way to direct debt to the team.
      • Also taxable to holder, and sold privately by the team, its owner, or a development corporation.
      • These bonds have less stringent collateral requirements than private placement bonds.
      • The revenues of selected income streams are bundled into a financial security and sold initially to a “bankruptcy-proof” trust, which sells them to private investors.
    • Repayment Sources
      • Generated by local governments
      • Hard taxes
      • Soft taxes
      • Tax Abatements
      • Appropriations
    • Hard Taxes
      • Hard taxes include:
            • Real estate / Property taxes
            • General sales
            • Local income tax
      • Financial burden falls on the general public.
      • Local citizens absorb costs, may not derive the benefits.
      • Hard taxes usually require voter approval
    • Hard Taxes
      • Property Taxes:
        • Tax base : The aggregate value of all assessed property within a jurisdiction
        • Tax Rate : Then, once the tax base is determined, the local government sets a tax rate to meet its revenue needs .
      • Local budget + extra projects costs- anticipated income from other sources
    • Hard Taxes
        • Sales Tax:
            • 2nd largest source of tax revenue. Usually ranges between 3-10%.
            • Services usually exempt from sales tax.
    • Soft Taxes
      • Soft taxes are borne by a select and relatively smaller portion of taxpayers.
      • Often, the costs are placed upon non-residents.
      • Easier to levy.
      • Soft taxes include:
        • car rental
        • hotel-motel
        • player
        • restaurant
        • sin
        • taxi
    • Sin Taxes
      • Alcohol
      • Tobacco
      • Gambling
      • Prostitution (Nevada only)
    • Player Tax
      • Tax imposed on income earned by visiting players.
      • 43 states have imposed player taxes
      • Based on the right for states to tax non-residents on income received for services performed within their boundaries.
    • Tax Abatements
      • Abatement exist in approximately 2/3 of the states.
      • Often part of a government agency’s incentive package for a facility.
      • Exempts an organization’s assets from property taxation for a given period of time.
    • Appropriations
      • Funds set aside for specific purposes.
      • Usually used as a supplement to the debt financing (bonds).
    • Certificates of Participation
      • Third-party transactions
      • Involves a non-profit public benefit organization
      • Borrows funds from a lending institution
      • Agency leases facility to public or private operator
      • Operator in turn makes lease payments to retire certificates
      • Certificates of Participation
      Debt Financing Facility Builder Financial Institution Intermediary Organization Facility Operator 2 1 7 3 4 5 6
      • Certificates of Participation
      • Despite not being a general obligation bond, typically the municipality pays off the debt if revenues from the facility fall short.
      • COPs have higher interest rates and lower bond ratings.
      Debt Financing
      • Tax-Increment Bonds (TIF)
      • A mechanism allowing local government to capture the increased tax revenues generated by real estate development.
      • The key test for its use is that ‘but for’ the TIF assistance, development would not occur.
      • TIF can enhance the development of other businesses that will increase tax revenues.
      Debt Financing
      • Tax-Increment Bonds (TIF)
      • The steps involved in TIF are as follows:
        • A redevelopment district is defined and a base tax value is established;
        • Development occurs and a new tax value is realized;
        • The taxes collected on the incremental increase in tax value are captured to pay for public costs (e.g. infrastructure).
      Debt Financing
      • Bond Ratings
        • Estimates the level of risk investors incur when making a loan.
        • Rating level depends upon the ability of the tax base or revenue source to generate the required money to make bond payments while continuing to fund existing operations.
        • Lenders use the ratings to determine cost of loan.
      Debt Financing
      • Bond Ratings Factors
            • Existing revenue streams
            • Historical (financial) performance of the community
            • Risks associated with the project
            • Political volatility
            • Whether the project is economically viable
      Debt Financing
      • What issues must be addressed when financing a stadium?
      • In addition to developing a financing plan:
        • Is the site appropriate for the stadium?
        • Does it have environmental or geotechnical issues ?
        • Is the land available for acquisition?
        • Are there existing residents/businesses that must be relocated?
        • Does related infrastructure already exist or does it need to be built?
        • What opportunities exist for ancillary development?
      Debt Financing