1 MB 20th Jun 2012 San Gabriel Valley City Managers Association

public + private transactions
Kosmont Companies
Kosmont Realty Corporation
Real Estate and Economic Advisory
Project Financing & Brokerage
California Golden Fund
Approved EB-5 Regional Center
865 South Figueroa Street. Suite 3500 Los Angeles, California 90017 ph213.417.3300
www.kosmont.com
This presentation is available online
www.kosmont.com
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Research and Production by Matt Goulet, VP, Kosmont
Companies
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PRESENT:
New Economic Development
Tools for California
Presented by:
Ken K. Hira
Senior Vice President, Kosmont Companies
AGENDA
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The Case for Economic Development
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Economic Development 2011 How we USED to do it.
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Economic Development 2012 How we can do it today.
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Case Studies
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Summary
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THE CASE FOR ECONOMIC DEVELOPMENT
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The Case for Economic Development
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Economic Development 2011 How we USED to do it.
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Economic Development 2012 How we can do it today.
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Case Studies
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Summary
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The Case for Economic Development
Economic Development is a process that improves quality of
life through an increase in the economic well-being of it’s
constituents.
Primary Goal (end result): improvement in the economic well-being
of the citizens, both people and their businesses
Secondary Goal (means to the end): raise revenue to pay for better
services for constituents and ultimately improve their economic
well-being
A comprehensive economic development strategy with
political leadership and private sector support is essential to
favorably compete with other cities for business, labor, sales
tax dollars, etc.
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California’s Three Main Tax Sources
California has three main sources of revenue:
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
Property
Tax
Sales Tax
Income Tax
 Sales Tax is prone to dramatic
shifts in customer spending
Source: California Legislative Analyst; CA Dept of Finance
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Sales Tax per Capita
Source: U.S. Census Bureau; IndexMundi.com
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ECONOMIC DEVELOPMENT 2011
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The Case for Economic Development
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Economic Development 2011 How w e USED to do it.
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Economic Development 2012 How we can do it today.
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Case Studies
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Summary
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Cities are in the Real Estate Business
Cities targeted real estate for economic development
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Retail – sales tax & jobs (entry level)
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Relocation/Expansion – business tax & jobs
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Rooms – hotel transient occupancy tax (TOT)
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Real Estate Development – new property taxes or tax
increment from “RDA”
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Cities are in the Real Estate Business
Redevelopment was the most powerful tool for local
economic development in California
• It was based upon property tax, the most stable source
• The 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 the growing increment
• The economic multiplier effect of new projects meant that “passthrough” taxing entities also benefitted from redevelopment.
• 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 by private business
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Budget Crisis of 2011
Source: Chief Legislative Office, State of California, 2011.
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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 vote
Effect
on
Local
Tax
Base
AB1x26 – Redevelopment dissolved
Prop 22 – Protected local taxes from State
1978
Note: Not to Scale
1986
1996
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2010 2011
TI F W ent Dow n W ith the Redevelopm ent Ship
California now only one of 2 states w / o tax increm ent
So what’s left after Redevelopment?
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ECONOMIC DEVELOPMENT 2012
•
The Case for Economic Development
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Economic Development 2011 How we USED to do it.
•
Economic Development 2012 How w e can do it today.
•
Case Studies
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Summary
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Economic Life After Redevelopment
Newer Tools
• Site-Specific Tax Revenue (“SSTR”) Pledges
• EB-5: Immigrant Investor Program
Existing Tools / P3 Structures
• Ground Lease
No m ore Pow er Tools,
• Lease-Leaseback
just hand tools!
• Tax-Exempt Revenue Bonds
• Project Delivery Methods (P3’s)
• Special Districts – CFD, BIDs
• New Market Tax Credits
• Certificates of Participation (COP)
• Parking Authorities
• Infrastructure Financing Districts (IFDs)
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Newer Tools for Economic Development
Site-Specific Tax Revenue (SSTR) pledges
• Pledges taxes to enables public agencies to induce private investment
• Reduces developer’s project cost subject to public benefit findings
• Works well in tandem 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
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Existing Economic Development Tools
Project Delivery Methods: CM At-Risk & Design-Build
RFQ/RFP to engage private developer
Infrastructure Financing Agreements – Cost Share for Public
Benefits
Ground Leases
• Retain ownership of property/project after lease term is over
• Enables public agencies to achieve long-term cash flow
• Reduces developers up front financing costs
Lease-Leaseback of public assets (Gov. Code Sect 25371)
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Used to monetize public real estate
Investors lend against equity in existing assets to fund new projects
Municipality leases facilities to non-profit corporation
Then sub-leases facilities and sells Certificates of Participation
Local government owns property after lease term is over
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Existing Economic Development Tools
New Market Tax Credits – 39% investor Federal tax credit to provide additional
equity and debt funding for eligible urban projects.
Parking Authorities
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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
Tax-Exempt Revenue Bonds – utility tax, gas tax, others; primarily for
infrastructure & public facilities
Community Facilities District (Mello-Roos & other Special Districts) Private
sector leverages property tax payments for infrastructure & services
• Community Facilities Act of 1982 (Gov. Code Sect. 53311 et. seq.)
• Business Improvement District Law of 1994:(Gov Code Sect. 36600 et. seq.)
Infrastructure Financing Districts (IFDs)
• Existing law which allows tax increment financing for public works
• Relatively useless
• If revised properly, could deliver broad-based tax-increment financing
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ECONOMIC DEVELOPMENT 2012
•
The Case for Economic Development
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Economic Development 2011 How we USED to do it.
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Economic Development 2012 How we can do it today.
•
Case Studies
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Summary
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Case Study #1
City of Redondo Beach
Waterfront Revitalization
Tools Employed:
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Lease-Leaseback Financing
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Option Agreement
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RFQ
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Redondo Beach Waterfront Revitalization
The Challenge
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Redondo Beach’s aging waterfront increasingly struggles to compete
with neighboring South Bay cities to the north.
City explored ways to revitalize the pier, boardwalk and surrounding
properties
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Redondo Beach Waterfront Revitalization
International Boardwalk
Pier Plaza
Marina Properties
Add’l Properties in RFQ
The Solution
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Int’l Boardwalk and Pier Plaza acquired through 100%+ LeaseLeaseback Financing paid from property cash flow [good credit -> low
interest rates & 100% financing -> positive cashflow & no cash down]
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Option Agreement for Acquisition of Redondo Beach Marina
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RFQ issued for 15+ Acres of Waterside Development
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Redondo Beach Waterfront Revitalization
The Results: RFQ released June 2012, Solid Developer Interest
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Case Study #2
City of South Gate
“azalea” Retail Center
Tools Employed:
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Infrastructure Financing Agreement
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Site Specific Tax Revenue Pledge
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South Gate – “azalea” Retail Center
The Challenge
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City lacks retail options
A former pipe manufacturing plant, the 32-acre northwest corner of
Atlantic Ave & Firestone Blvd lay fallow and blighted for many years.
City purchased land from LACCD to revitalize community with a
“Lifestyle” center including cinema, streaming media, and other
commercial retail.
Developer did not follow through; site in limbo for many years.
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South Gate – “azalea” Retail Center
The Solution
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Kosmont Companies worked closely with the City of South Gate and
Primestor (developer) to fulfill the City’s objectives on achieving a
quality shopping center while minimizing financial support.
Developed a strategic financial plan that involved the City funding offsite improvements and providing a portion of the land in exchange for
various public benefits.
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South Gate – “azalea” Retail Center
The Outcome
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Kosmont Companies negotiated an Infrastructure Financing Agreement
along with the entitlements necessary to allow Primestor Development
to begin construction. Groundbreaking in 2012 with an anticipated
opening in 2014.
The new commercial retail project will attract high-quality national credit
retailers, while providing City public amenities.
Agreement approved on May 29, 2012.
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ECONOMIC DEVELOPMENT 2012
•
The Case for Economic Development
•
Economic Development 2011 How we USED to do it.
•
Economic Development 2012 How we can do it today.
•
Case Studies
•
Summary
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You Need an ED Team
Assemble a capable and trusted team of on-staff and
retained consultants:
• Staff members who understand economic development &
finance
• Private sector real estate and finance advisors needed for
sophisticated public/private transactions
• Underwriters & financial specialists
• Real estate counsel
• Special tax counsel
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Key Takeaways
• Cities are in the economic development & real estate business.
• Public-private deals are essential to maintain quality of life.
• It may be necessary to use a variety of financing tools in the wake
of redevelopment. Some of the more effective tools include:
• Lease-Leaseback
• Site Specific Tax Revenue (SSTR) Pledge
• EB-5 Immigrant Investor Program
• Economic Development is often complex, so you need a skilled
staff and private sector team.
• Cities with favorable credit history can lubricate the development
process. Cities with bad credit may be out of luck in many cases.
Use non-general fund entities (i.e. utility funds with good credit)
to obtain necessary financing for deals accretive to general fund.
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This presentation is available online
www.kosmont.com
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Research and Production by Matt Goulet, VP, Kosmont
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