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The Demise of RDA's - Larry Kosmont
 

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Session #1 the Demise of RDA's: An Opportunity to Restore Fiscal Health with a Vision for Future Economic Development.

Session #1 the Demise of RDA's: An Opportunity to Restore Fiscal Health with a Vision for Future Economic Development.

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    The Demise of RDA's - Larry Kosmont The Demise of RDA's - Larry Kosmont Presentation Transcript

    • public + private transactions Kosmont Companies Kosmont Realty Corporation Real Estate and Economic Advisory Project Financing & Brokerage California Golden Fund Approved EB-5 Regional Center865 South Figueroa Street. Suite 3500 Los Angeles, California 90017 ph213.417.3300 www.kosmont.com
    • This presentation is available online www.kosmont.com 2 Research and Production by Matt Goulet, VP, Kosmont Companies 2
    • P R E S E N T S:New Economic Development For Local Governments Presented by: Larry J. Kosmont, CRE President & CEO, Kosmont Companies
    • AGENDA• The Case for New Economic Development Tools• Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 4
    • THE CASE FOR ECONOMIC DEVELOPMENT• The Case for New Economic Development Tools•   Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 5
    • California’s Three Main Tax Sources  Income, sales, and property tax:    Income tax is CA’s largest revenue source.  Top income earners sway the state budget.  For example, Personal Income Tax was 51% of CA’s total revenue in 2010.  Those making over $200K comprise 50% of all income tax.  Sales Tax is prone to dramatic shifts in customer spending. May Budget Revise: Deficit ballooned to nearly $16 Bil. from $9.2 Bil.Source: California Legislative Analyst; CA Dept of Finance 6
    •  Sales Tax per Capita  Source: U.S. Census Bureau; IndexMundi.com 7
    • 33 Years of “Tax Revolts”1977 Revenue Level Prop 13 – Property Tax reigned in; subject to 2/3 vote Prop 62 – General taxes subject to 2/3 vote Prop 218 – Special assessments to voteEffect AB1x26 – Redevelopment dissolvedonLocalTaxBase Prop 22 – Protected local taxes from State 1978 1986 1996 2010 2011 Note: Not to Scale 8
    • Cities are in the Real Estate BusinessRedevelopment was the most powerful tool for local economicdevelopment in California •   It was based upon property tax, the most stable funding source. • RDA Tax-Increment Financing (TIF) model allowed local agencies access to a significant and long-term source of funds. • Tax increment continued to grow for decades beyond a flat base year, capturing significant value over time. • The economic multiplier effect of new projects meant that “pass- through” taxing entities also benefitted from redevelopment. 9
    • Cities are in the Real Estate BusinessRedevelopment was the most powerful tool for localeconomic development in California •   The TIF mechanism, backed by state law, gave investors confidence in this low-risk, long-term financing vehicle. Thus, cities could borrow against this solid foundation – a promise of future revenue streams. • Redevelopment gave local governments a legal public framework for economic development that allowed them to contract with private entities for real estate projects that would be ultimately owned and operated by private business. So, what’s left after Redevelopment? 10
    • TOOLBOX FOR TODAY’S ECONOMIC DEVELOPER• The Case for New Economic Development Tools•   Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 11
    • What’s Left after Redevelopment?Newer Tools • Site-Specific Tax Revenue (“SSTR”) Pledges • EB-5: Immigrant Investor Program   Tools / P3 StructuresExisting • Ground Lease • Lease-Leaseback • Tax-Exempt Revenue Bonds • Project Delivery Methods • Special Districts – CFD, BIDs • New Market Tax Credits • Certificates of Participation (COP) • Parking Authorities • Infrastructure Financing Districts (IFDs) 12
    • Newer Tools for Economic Development  Site-Specific Tax Revenue (SSTR) pledges • Enables public agencies to induce private investment • Reduces developer’s project cost   • Retain ownership of property/development after lease term is over (if done with ground lease)EB-5 Immigrant Investor Program • Federal program that offers citizenship to immigrants whose investments in real estate and/or businesses in US meet minimum level of job creation • Created in 1990 by the United States Citizenship and Immigration Service (USCIS), an agency of the Department of Homeland Security • An EB-5 Regional Center is a legal entity, authorized and approved by the USCIS to deploy funds from foreign investors to stateside projects • Regulatory Investment requirements: • minimum investment of $1M or $500,000 for projects located in high unemployment area (Targeted Employment Area / TEA) • Creation of 10 permanent jobs in the economy per investment • Funds typically invested for five years with low interest rate costs 13
    • Existing Tools & P3 Deal StructuresTax-Exempt Revenue Bonds – utility tax & others; mostly for infrastructure & public facilitiesProject Delivery Methods: CM At-Risk & Design-Build coupled with public   financingCommunity Facilities District (Mello-Roos & other Special Districts) Private sector leverages property tax payments for infrastructure & services • Community Facilities Act of 1982 • California Gov’t Code Section 53311-53317.5 • Business Improvement Districts: Gov’t Code Sec. 36600-36671Ground Leases • Retain ownership of property/development after lease term is over • Enables public agencies to achieve long-term cash flow • Reduces developers financing costLease-Leaseback Arrangements (financing public assets) • California Govt. Code Section 25371 • Investors lend against equity in existing assets to fund new projects • Ownership of leased property reverts to the local government after lease term is over 14
    • Lease-Leaseback: How it worksCITYCITY 15
    • Existing Tools & P3 Deal StructuresNew Market Tax Credits – 39% investor Federal tax credit to provide additional equity and debt funding for eligible urban projects.Certificates of Participation (COP) • Used to monetize public real estate   • Municipality leases facilities to non-profit corporation (“Trustee”) • Trustee then sub-leases facilities to other private organizations by selling Certificates of Participation • The Trustee apportions monies back to the municipalityParking Authorities • Local cities can create for parking and circulation improvement districts • Can issue debt (bonds/lease-leasebacks) and enter into project agreements • Authority can manage parking operations and collects parking fees • Landlord for parking leases and concession agreementInfrastructure Financing Districts (IFDs) • Existing law • Relatively useless • If revised properly, could deliver broad-based tax-increment financing 16
    • ECONOMIC DEVELOPMENT 2012• The Case for New Economic Development Tools•   Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 17
    • The Economic Development MenuFinancing Vehicles & Structures Money Sources•   Issuance Bond • Taxes• Ground Lease • Bond Holders• Lease-Leaseback • Equity Investors• Site-Specific Tax Revenue Pledge • Private Lenders• EB-5 • Federal Money• Certificate of Participation (COP) • EDA Grants• CFDs/Mello-Roos • US DOT Funds• Economic Development Ordinance • HUD - CDBG• Developer Project Delivery Program 18
    • Case Study #1 City of Redondo Beach   Marine Avenue Hotel ProjectTools Employed:• Ground Lease• Lease-Leaseback• Site-Specific Tax Revenue Pledge 19
    • Redondo Beach Marine Avenue Hotel ProjectThe Challenge• City would like to better utilize area near 20-year old Metro station   that has yet to attract transit-oriented development.• Odd lot size & shape; multiple ownership; and low-intensity uses deterred private development.• Developer Proposes 147 room Hilton Garden Inn and a 172-room Marriott Residence Inn located adjacent to the Metro station. Metro Station 20
    • Redondo Beach Marine Avenue Hotel Project• Total Project - ~$56.5m•  Developer Equity - ~$16.5m• Private Lender Financing - ~$40m• Term – 7 Years• Rate – 10%• Amortization – First 3 years interest only, then 37  years on a 40-year amortization schedule• Prepayment possible after 3 years 21
    • Site Specific Tax Revenue Mezzanine Pledge• Project Tax Revenues (12% TOT Rate) – Est. $1.25m in year 1, $1.5m year 2, $1.7m year 3, (grows ~3%)   – $8.5m SSTR Reserve will likely take 4-5 years to fully fund – 1% of the 12% TOT (1/12th) for Visitors Bureau• Proposed terms – City owned land leased for 60 years – SSTR Pledge of TOT & Property Tax from Hotels are first used to fund City  SSTR Reserve (“SSTR Reserve”)   – SSTR Reserve of up to $8.5m of TOT & property tax for 40 years, held in  trust account – No General Fund guarantee – SSTR Reserve used to guarantee current year debt service 22
    • City Hotel Occ Portion of Hotel Tax Prop Tax Revenues (12/12)   Leaseback- (100%) Ground Lease - Assignment Loan Documents SNDA Agreements City Hotel Occ Ground Portion of Tax Lease Hotel NOI Prop Tax (11/12) Payments (16.6%) Lender Debt Cash Waterfall Service $8.5M City Funded Owner FundedOwnership CANNOT take any  Reserve ($0 funded Reserve ($2.5M funded at hoteldistribution if there is an  initially) opening)outstanding balance with the City – Ownership funding in excess of $16,000,000 into deal City Owner Distributions Distributions
    • Redondo Beach Marine Avenue Hotel ProjectThe Outcome  • Brings two quality hotel operations to the City’s “front door”• City will install a high tax-yielding and job-generating facility on an  underutilized site• $2 million per year in TOT tax revenues • Site Specific Tax Revenue Pledge was the key public assistance, without it  the project would not have received commercial financing• Reinforced transit-oriented development along the Metro Green Line 24
    • Case Study #2 Starwood Hotels  W Hotel, Hollywood California Tools Employed: • EB-5 Funding 25
    • Starwood Hotels - W Hotel, HollywoodEB-5 BasicsEB-5 Financing is a low cost source of financing for public and private projects   which can easily be combined with other forms of project financing: • Funding ranges from $5 Million to $100 Million per project; can be phased  and financed with no minimum LTV  • Short-term; typically structured as a 5-year repayment program • Flexible - will subordinate to other equity and debt • Streamlined source of front-end money not burdened by “public purpose”  requirements (such as bonds) • Compatible with City economic development goals to promote job growth  and private sector investment   • If City is involved, no general fund guarantees; can pledge tax increment or  site specific tax revenue to secure investor interest 26
    • Starwood Hotels - W Hotel, HollywoodThe Challenge• Premier hotel project in Hollywood with a prestigious national flag –   upgraded hospitality offerings for Hollywood• Lobby Restaurant and Bar (Delphine) and Rooftop Restaurant/Nightclub (Drai’s) needed gap funding• Project Components: – W Hotel tower: 305 keys – W Residences condominium tower: 143 units – Street-level retail: 15,960 SF – Three subterranean levels containing 600 parking spaces – Advertising signage rights: 19,500 SF  – Above MTA Rail Station (TOD) 27
    • EB-5 Timeline for Public / Private Projects EB-5 Investment Deposit into  Escrow Jobs are Created within EB-5 Investors Taken Out (within 2 years 5 years) Project Stabilized Project Temporary &Entitlement Visa Jobs & Tax Project Construction Cycle (completed Approval Increment Completed (2 years)before EB-5 Process Createdinvestment) (I-526) (Permanent Visa Approved: I-829) EB-5 & Other Takeout Debt & Equity Financing Sources 28
    • Starwood Hotels - W Hotel, HollywoodThe OutcomeFunding Target: $200M  total project capitalization   $16.5M funded by EB-5 (33 investors: I-526 visa applications approved)Investment Level:  $500,000 per Investor   plus processing costsInvestment Placement:   Drai’s Restaurant and Nightclub  Delphine RestaurantJob Creation Required: Minimum 10 jobs per $500,000  (established and validated by  economic study)Repayment Period: Five yearsStatus: Restaurant loans funded in 3Q & 4Q 2011.  Permanent jobs created in Jan 2012. 29
    • Case Study #3 City of Norco   “Silverlakes” Equestrian Sports ParkTools Employed:• Ground Lease• Bond Issuance• Developer Project Delivery Program 30
    •   Norco – Silverlakes Equestrian Sports ParkThe Challenge:The City of Norco is a small equestrian andrecreation oriented community, with a population  of 26,000 located in western Riverside County.• City of Norco desired an equestrian and recreation oriented development to promote the brand of ‘Horsetown USA’.• City purchased deed-restricted 122-acres (Silverlakes site) for ~5 mil. City could not capitalize land investment into a public park without private investment.• Kosmont initiated an extensive RFP process on behalf of City for the Site. 31
    •   Norco – Silverlakes Equestrian Sports Park The Deal Structure:2. City created RFQ process for an experienced/well financed partner to deliver quality recreational facility that included public access.•   City selected Belstarr, an experienced operator of equestrian, soccer, and recreational facilities that entered into a long term ground leases .• Belstarr responsible to finance ~$30 mil of improvement costs, construct, operate and manage the facility; and provide public programs.• Lease payments include ground rent, cpi increases, and repayment to City for ~$6 million in public improvements.• Economic development attraction - Belstarr developing a world class sports and performance event facility that will attract millions of visitors.• Operating Agreement allows the City/local constituents use of the facilities.• City owns world class facility at the end of the ground lease. 32
    • Norco – Silverlakes Equestrian Sports ParkThe Outcome: Silverlakes Equestrian Sports Park • PHASE I – by 2013  – 25 total fields • 15 natural turf/grass fields • 10 lighted synthetic fields – Up to 6 sand rings – Picnic area and pond/water feature – Parking and roadways – RV Parking – Restroom facilities – Lighting  • PHASE II – by 2014 – Multi-purpose event center (between 80,000 sf to 135,000 sf) – Additional restroom facilities – Electronic freeway message sign
    • Norco – Silverlakes Equestrian Sports ParkThe Outcome: Silverlakes Equestrian Sports Park  
    • Economic Development in Post-RDA California• Redevelopment was a bona-fide, state-authorized use of public funds for real estate development (including transfer of real estate assets to private entities).• In 2012, we have fewer tools available to: – use public funds for economic development. – provide a revenue stream that can be borrowed against. – perform real estate functions to attract job-rich private development.• Every public agency must meet a public purpose for the use of public funds. 35
    • Tax-Increment was the Most Powerful   tool California had working for Economic Development How do we get it back to work for California? 36
    • INFRASTRUCTURE FINANCING DISTRICTS (IFD)• The Case for New Economic Development Tools•   Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 37
    • Basics of IFD Law• Enacted in 1990•   Requires 2/3 rd vote of constituents• Requires approval of all tax agencies• Involves a limited use of tax-increment financing to fund: • public works • transportation • libraries • parks • child care centers 38
    • History of Implementation of IFDsIFDs have only been used twice in 22 years to any significant degree:   • Carlsbad, CA • 1998 • Public works for hotel and Legoland Theme Park • Only finished IFD project to date • San Francisco, CA • 2011 • Public works for Rincon Hill Project • In Process 39
    • Proposals to Amend IFD LawPublic Sector Proposals • SB 214 (Wolk) – Introduced 2011, amended twice • AB 2144 (Reyes) – 2012 Spot Bill, amended once  Private Sector Proposal Informal technical committee (led by BizFed) includes: • Los Angeles County Business Federation (BizFed) • California Business Properties Association (CBPA) • California Association of Local Economic Development (CALED) • Kosmont Companies • McKenna Long & Aldridge, LLP • Fulbright & Jaworski, LLP • Latham & Watkins, LLP • Kane Balmer & Berkman 40
    • IFD Legislation Scoreboard Fix, Partial fix or No fix? The Big Five Weaknesses SB 214 AB 2144 BizFed (Wolk) (Perez) 1 2/3 (66%) public vote to establish Fix Partial fix Fix an IFD district (55% vote)2 May only be used for public works No Fix Fix Fix projects (expand to private sector jobs)3 Approval by all & veto by any No Fix No Fix Fix taxing entity4 May not be used in former RDA No Fix Fix Fix project areas5 No remediation powers similar to No Fix Fix Fix Polanco Act 41
    • Proposals to Amend IFD LawOther Fixes and Improvements from Private-Sector Proposal (led by BizFed)A. Modify the Fundamental Purpose / Function of IFDs •  Implement TIF on a “district” level rather than a “project” level. • Add new construction or rehabilitation of private facilities based on job generation. • Allow higher density development within an IFD.B. Include Public-Private Investment and Job Creation • Add affordable housing as a beneficiary of IFD-generated funds (to fulfill specific deficiencies in the marketplace). • Include adaptive re-use. • Enable public-private partnerships (P3s). • Add E.D. programs such as (forgivable) loans to business for attraction or expansion. 42
    • Proposals to Amend IFD LawOther Fixes and Improvements from Private Sector Proposal (led by BizFed)C. Coordinate IFDs with Other Essential Legislation & Regulation • Implement a Sustainable Communities Strategy (supporting AB32   and SB375). • Provide for seismic and life-safety improvements to both existing public or private buildings. • Set jobs creation thresholds in amended IFD legislation similar to • EB-5 Program or • EDA grant program job-creation formula.D. Other Technical & Procedural Improvements to Existing Act • Require a baseline percentage of taxing entities to affirmatively opt- in (for example, 30% of taxing agencies in a district). • Exclude school districts from the opt-in provision to insulate school districts and economic development interests. 43
    • A CALL TO ACTION• The Case for New Economic Development Tools•   Toolbox for Today’s Economic Developer• Case Studies using New Tools • City of Redondo Beach – Marine Avenue Hotels • Starwood Hotels - W Hotel Hollywood • City of Norco – Silverlakes Equestrian & Special Events• Tax Increment Replacement – Are Infrastructure Financing Districts (IFD) a Solution?• Key Takeaways & A Call to Action 44
    • Key TakeawaysKey Takeaways: 1. Cities are in the economic development & real estate business. 2. Public-private deals are needed to maintain local quality of life. 3. It is essential to use a variety of financing tools in the wake of redevelopment. Some of the more effective tools include: • Lease-Leaseback • Site Specific Tax Reimbursements (SSTR) • EB-5 Immigrant Investor Program 4. Infrastructure Financing Districts is an existing path to restoring tax- increment financing for job creation & private investment. 5. California needs to bring TIF to be competitive. 45
    • A Call to Action for CCCAThe Objective• California needs a TIF vehicle.• Only states without TIF are California and Arizona.• Infrastructure Financing Districts offer an existing path to restoring TIF- based job   creation & private investment.Business Getting Involved• The BizFed Coalition forming (CALED, CBTA) is submitting its IFD recommendations to Mike Rossi, Senior Advisor to the Governor for Jobs and Development.• More private sector voices need to be heard.• Contract Cities, ICA, and the League must also weigh in.Legislature Mobilizing—Key is the Governor• A Legislative TF has been convened by Senator Wolk.• Business groups and California Contract Cities Association should provide input to the legislative task force.• Ultimately, Governor should collaborate with legislature and resolve changes by modifying AB2144 or find a suitable alternative. 46
    • A Call to Action for CCCA  With the momentum building to re-tool Infrastructure Financing Districts and recapture Tax Increment,We have a golden opportunity before us to restart the stalled engines of local economic development. 47
    • This presentation is available online www.kosmont.com 48 Research and Production by Matt Goulet, VP, Kosmont Companies 48