the demise of rda's - larry kosmont

865 South Figueroa Street. Suite 3500 Los Angeles, California 90017 ph213.417.3300 www.kosmont.com

Real Estate and Economic AdvisoryKosmont Companies Kosmont Realty Corporation

Project Financing & Brokerage

California Golden FundApproved EB-5 Regional Center

public + private transactions

22

This presentation is available online

www.kosmont.comResearch and Production by Matt Goulet, VP, Kosmont Companies

P R E S E N T S:

New Economic Development

For Local Governments

Presented by:

Larry J. Kosmont, CREPresident & CEO, Kosmont Companies

http://www.contractcities.org/

• 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

AGENDA

4

THE CASE FOR ECONOMIC DEVELOPMENT

5









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.

Income, sales, and property tax:

Source: California Legislative Analyst; CA Dept of Finance

California’s Three Main Tax Sources

6

Source: U.S. Census Bureau; IndexMundi.com

Sales Tax per Capita

7

33 Years of “Tax Revolts”

Note: Not to Scale

Effect on Local Tax Base

1977 Revenue Level

1978 1986 1996 2010

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 vote

2011

AB1x26 – Redevelopment dissolved

Prop 22 – Protected local taxes from State

8

Redevelopment was the most powerful tool for local economic development 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.

Cities are in the Real Estate Business

9

Redevelopment was the most powerful tool for local economic 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?

Cities are in the Real Estate Business

10

TOOLBOX FOR TODAY’S ECONOMIC DEVELOPER

11









Newer Tools• Site-Specific Tax Revenue (“SSTR”) Pledges

• EB-5: Immigrant Investor Program

Existing Tools / P3 Structures • 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)

What’s Left after Redevelopment?

12

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

Newer Tools for Economic Development

13

Tax-Exempt Revenue Bonds – utility tax & others; mostly for infrastructure & public facilities

Project Delivery Methods: CM At-Risk & Design-Build coupled with public financing

Community 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. 36600-36671

Ground Leases• Retain ownership of property/development after lease term is over• Enables public agencies to achieve long-term cash flow• Reduces developers financing cost

Lease-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

Existing Tools & P3 Deal Structures

14

Lease-Leaseback: How it works

15

CITY

CITY

New 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 municipality

Parking 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 agreement

Infrastructure Financing Districts (IFDs)

• Existing law• Relatively useless• If revised properly, could deliver broad-based tax-increment financing

Existing Tools & P3 Deal Structures

16

ECONOMIC DEVELOPMENT 2012

17









The Economic Development Menu

18

Financing Vehicles & Structures

• Bond Issuance

• Ground Lease

• Lease-Leaseback

• Site-Specific Tax Revenue Pledge

• EB-5

• Certificate of Participation (COP)

• CFDs/Mello-Roos

• Economic Development Ordinance

• Developer Project Delivery Program

Money Sources

• Taxes

• Bond Holders

• Equity Investors

• Private Lenders

• Federal Money

• EDA Grants

• US DOT Funds

• HUD - CDBG

Case Study #1City of Redondo Beach

Marine Avenue Hotel Project

Case Study #1City of Redondo Beach

Marine Avenue Hotel Project

19

Tools Employed:

• Ground Lease

• Lease-Leaseback

• Site-Specific Tax Revenue Pledge

The 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.

Redondo Beach Marine Avenue Hotel Project

20

Metro Station

• 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

Leaseback-Assignment Agreements

Ground Lease - SNDA

Loan Documents

City Portion of Prop

Tax (16.6%)

Hotel Occ Tax (11/12)

Ground Lease

Payments

Hotel NOI

Cash Waterfall

Hotel Revenu

es

City Portion of Prop

Tax (100%)

Hotel Occ Tax (12/12)

Lender Debt Service

$8.5M City Funded Reserve ($0 funded

initially)

Owner Funded Reserve

($2.5M funded at hotel opening)

City Distributions

Owner Distributions

Ownership CANNOT take any distribution if there is an outstanding balance with the City – Ownership funding in excess of $16,000,000 into deal

The 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 #2Starwood Hotels

W Hotel, Hollywood California

Case Study #2Starwood Hotels

W Hotel, Hollywood California

25

Tools Employed:

• EB-5 Funding

EB-5 Basics

EB-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, Hollywood

The 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

Jobs are Created within 2 years

Project Entitlement(completed before EB-5 investment)

Project Construction Cycle Completed (2 years)

Project Stabilized & Jobs & Tax Increment Created

(Permanent Visa

Approved: I-829)

EB-5 Timeline for Public / Private Projects

EB-5 Investment Deposit into

EscrowEB-5 Investors

Taken Out (within 5

years)

Takeout Financing

EB-5 & Other Debt

& Equity Sources

Temporary Visa

Approval Process(I-526)

28

The Outcome

Funding 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 costs

Investment Placement: Drai’s Restaurant and Nightclub Delphine Restaurant

Job Creation Required: Minimum 10 jobs per $500,000 (established and validated by economic study)

Repayment Period: Five years

Status: Restaurant loans funded in 3Q & 4Q 2011. Permanent jobs created in Jan 2012.

29


Case Study #3City of Norco

“Silverlakes” Equestrian Sports Park

Case Study #3City of Norco

“Silverlakes” Equestrian Sports Park

30

Tools Employed:

• Ground Lease

• Bond Issuance

• Developer Project Delivery Program

The Challenge:The City of Norco is a small equestrian and recreation 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.

Norco – Silverlakes Equestrian Sports Park

31

The Deal Structure:

1. City created RFQ process for an experienced/well financed partner to deliver quality recreational facility that included public access.

2. City selected Belstarr, an experienced operator of equestrian, soccer, and recreational facilities that entered into a long term ground leases .

3. Belstarr responsible to finance ~$30 mil of improvement costs, construct, operate and manage the facility; and provide public programs.

4. Lease payments include ground rent, cpi increases, and repayment to City for ~$6 million in public improvements.

5. Economic development attraction - Belstarr developing a world class sports and performance event facility that will attract millions of visitors.

6. Operating Agreement allows the City/local constituents use of the facilities.

7. City owns world class facility at the end of the ground lease.


32


• 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

The Outcome: Silverlakes Equestrian Sports Park


The Outcome: Silverlakes Equestrian Sports Park

35

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.

36

Tax-Increment was the Most Powerful tool California had

working for Economic Development

How do we get it back to work for California?

INFRASTRUCTURE FINANCING DISTRICTS (IFD)

37









• Enacted in 1990

• Requires 2/3rd 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

Basics of IFD Law

38

History of Implementation of IFDs

39

IFDs 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

Public 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

Proposals to Amend IFD Law

40

IFD Legislation Scoreboard

41

Fix, Partial fix or No fix?

The Big Five Weaknesses

SB 214 (Wolk)

AB 2144 (Perez)

BizFed

1 2/3 (66%) public vote to establish an IFD district

Fix Partial fix (55% vote)

Fix

2 May only be used for public works projects (expand to private sector jobs)

No Fix Fix Fix

3 Approval by all & veto by any taxing entity

No Fix No Fix Fix

4 May not be used in former RDA project areas

No Fix Fix Fix

5 No remediation powers similar to Polanco Act

No Fix Fix Fix

Other Fixes and Improvements from Private-Sector Proposal (led by BizFed)

A. Modify the Fundamental Purpose / Function of IFDs

1. Implement TIF on a “district” level rather than a “project” level.

2. Add new construction or rehabilitation of private facilities based on job generation.

3. Allow higher density development within an IFD.

B. Include Public-Private Investment and Job Creation

1. Add affordable housing as a beneficiary of IFD-generated funds (to fulfill specific deficiencies in the marketplace).

2. Include adaptive re-use.

3. Enable public-private partnerships (P3s).

4. Add E.D. programs such as (forgivable) loans to business for attraction or expansion.


42

Other Fixes and Improvements from Private Sector Proposal (led by BizFed)

C. Coordinate IFDs with Other Essential Legislation & Regulation

1. Implement a Sustainable Communities Strategy (supporting AB32 and SB375).

2. Provide for seismic and life-safety improvements to both existing public or private buildings.

3. Set jobs creation thresholds in amended IFD legislation similar to

a. EB-5 Program or

b. EDA grant program job-creation formula.

D. Other Technical & Procedural Improvements to Existing Act

1. Require a baseline percentage of taxing entities to affirmatively opt-in (for example, 30% of taxing agencies in a district).

2. Exclude school districts from the opt-in provision to insulate school districts and economic development interests.


43

A CALL TO ACTION

44









Key Takeaways

Key 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

The 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.

A Call to Action for CCCA

46

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.

A Call to Action for CCCA

47

4848

This presentation is available online

www.kosmont.comResearch and Production by Matt Goulet, VP, Kosmont Companies