Debt Financing


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Debt Financing

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