Transcript LIFT - Economic development

Washington Economic
Development Association
2010 Spring/Summer Conference
Financing Tools for Economic Renewal
Stacey Crawshaw-Lewis, Attorney, K&L Gates LLP
Deanna Gregory, Attorney, K&L Gates LLP
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Overview
• Tools available to finance economic
development
• Tax-exempt financing under federal law
• Taxable financing under federal law
• State law updates
• Questions
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First … the bad news ...
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Recession
Credit crunch…availability of bank credit
Bond insurance….all but gone
Decrease in tax revenue
 Declining assessed values
 Decreased sales, lodging and other excise taxes
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Tax-Exempt Financing
 Traditional taxable commercial loan from a lender (bank)
to a borrower:
 the borrower pays interest, and
 interest is included in gross income of the lender
 Tax-exempt financing:
 bonds are issued by a governmental entity
 the proceeds are loaned to a qualifying borrower
 borrower is responsible for paying principal and interest
on a tax-exempt bond
 interest received by the lender is not included in gross
income for federal tax purposes
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Why bother?
 Tax-exempt financing is a benefit provided under
the Internal Revenue Code
 Lower interest rates
 Lender does not pay federal income tax on interest
received
 So willing to accept a lower interest rate
 Access to broader investor base through public
offering by governmental issuer
 Access to long-term financing
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Types of tax-exempt financing
 “Tax-exempt governmental bonds”:
 Used by general governments for governmental
purposes
 Examples
 “Tax-exempt private activity bonds”:
 Finance capital projects used by private business
 Examples
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Tax-exempt Private Activity Bonds
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Qualified 501(c)(3) bonds
Qualified student loan bonds
Qualified redevelopment bonds
Qualified small issue bond
Qualified mortgage bonds
Exempt facility bonds
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The American Recovery and Reinvestment Act
of 2009 (“ARRA”)
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ARRA introduced new or enhanced financing
tools
• Tools to make borrowing cheaper
• Tools to borrow for new types of projects
• Tools to stimulate economic development
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ARRA Tools
Tools include:
• Build America Bonds (“BABs”)
• Recovery Zone Economic Development Bonds
(“RZDevs”)
• Recovery Zone Facility Bonds (“RZFBs”)
• Expansion of tax-exempt funding for manufacturing facilities
• Qualified School Construction Bonds (“QSCBs”)
• Qualified Zone Academy Bonds (“QZABs”)
• New Clean Renewable Energy Bonds (“New CREBs”)
• Qualified Energy Conservation Bonds (“QECBs”)
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ARRA Tools - Recovery Zone Facility Bonds (“RZFB”)
 New category of tax-exempt bonds
 For privately owned and/or privately used projects that
would have previously been financed on a taxable basis
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Recovery Zone Facility Bonds (“RZFB”)
 Eligible projects only include depreciable property if:
 Constructed, reconstructed, renovated or acquired by
purchase after the recovery zone was designated;
 Original use of the property in the recovery zone
commences with the user; and
 Substantially all of the use of such property is in the
recovery zone in the active conduct of a qualified
trade or business.
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Recovery Zone Facility Bonds (“RZFB”)
 A qualified trade or business is broadly defined to
include:
 any trade or business
 except residential rental property
 and except certain other businesses such as private
golf courses, massage parlors, hot tub facilities,
suntan facilities, gambling facilities or liquor stores
 The property may be privately owned and operated
 Examples
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RZFBs – Who Can Issue?
 Issuers need an allocation to issue RZFBs
 Allocated to counties and municipalities with populations
larger than 100,000 based on employment declines
 used by a recipient directly,
 suballocated within the recipient’s jurisdictions for use, or
 waived and sent to the state for reallocation
 Projects must be within the jurisdiction of both:
 the issuer of the RZFBs and
 the entity that provided the allocation
 Allocations must be used by December 31, 2010
 Proposals to extend deadline
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Washington State RZFB Allocations
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Area
City of Bellevue
City of Seattle
City of Spokane
City of Tacoma
City of Vancouver
Asotin County
Clallam County
Clark County
Cowlitz County
RZFB
$3,736,000
$19,918,000
$156,000
$4,979,000
$2,459,000
$14,000
$1,209,000
$3,940,000
$5,502,000
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Washington State RZFB Allocations (cont.)
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Area
King County
Kitsap County
Lewis County
Pacific County
Pierce County
Skagit County
Skamania County
Snohomish County
Spokane County
Whatcom County
RZFB
$34,754,000
$11,290,000
$740,000
$870,000
$14,612,000
$7,914,000
$149,000
$19,816,000
$204,000
$2,738,000
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Designating a Recovery Zone
 A recovery zone may include:
 An area designated by the issuer as having
significant poverty, unemployment, rate of home
foreclosures or general distress;
 An Empowerment Zone or Renewal Community; or
 Certain distressed areas affected by military base
closures
 Issuers have broad discretion in designating recovery
zones (can be made in any reasonable manner so long
as made in good faith)
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ARRA Expansion of Tax-Exempt Financing for
“Manufacturing Facilities” (“IDBs” or “IRBs”)
 Tax-exempt financing is available for certain small
manufacturing facilities
 Before ARRA:
 only manufacturing facilities used in the manufacturing or
production of tangible personal property
 After ARRA:
 also includes facilities used in the manufacturing of intangible
property
 E.g. software, format, process, patent, copyright, design,
intellectual property associated bio-tech and pharmaceuticals
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Related and Ancillary Facilities
 Before ARRA:
 only 25% of the bond proceeds could be used for costs of “directly
related and ancillary” facilities
 (as opposed to the “core” manufacturing areas of the facility)
 After ARRA:
 removed 25% restriction for bonds issued in 2009 and 2010
 So, tax-exempt financing can be used for facilities that are
functionally related and subordinate to the manufacturing facility
as long as those facilities are located on the same site as the
manufacturing facility
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ARRA Tools – Qualified Energy Conservation Bonds
(“QECBs”)
 Energy Improvement and Extension Act of 2008;
amount supplemented in ARRA.
 QECBs can be used to finance qualified energy
conservation projects.
 Similar to RZFB, issuers need an allocation to issue
QECBs.
 Key point for economic development:
 Up to 30% of the allocation may be used for private
projects (projects used or owned by a private entity)
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QECBs
 QECBs are issued as “taxable” bonds
 Initially must have been issued as taxable “tax credit”
bonds
 Since March 2010, can be issued as taxable supersubsidized direct payment “Build America Bonds”
 taxable interest rate
 issuer receives direct federal subsidy payment
 for QECBs: 70% of interest payable on each interest
payment date
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QECBs
 The entire amount (100%) of the “available
project proceeds” of the issue must be used for
qualified energy conservation purposes.
 The legislative history suggests a broad range
of energy conservation projects would qualify.
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QECBs
 The following projects are specifically allowed:
 capital expenditures incurred for the purpose of: (i) reducing
energy consumption in publicly-owned buildings by at least 20
percent, (ii) implementing green community programs, (iii) rural
development involving the production of electricity from
renewable energy resources, or (iv) certain renewable energy
projects.
 May also be used for expenditures with respect to research into
specified energy technologies; mass commuting facilities, green
demonstration projects and public education campaigns to
promote energy efficiency.
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QECBs – Who can issue?
 Similar to RZFB, issuers need an allocation to issue
QECBs
 Allocation can be used by a recipient directly,
suballocated to eligible issuers within the recipient’s
jurisdictions for use, or waived and sent to the state
for reallocation
 Projects must be within the jurisdiction of both the
issuer of the RZFBs and the entity that provided the
allocation
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QECB Additional Considerations
 Federal Davis-Bacon prevailing wage rules apply
 Maximum maturity for bonds. Maximum maturity is
set monthly by the U.S. Treasury, currently 17 years
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Other Items to Consider
 No accelerated depreciation
 Tax-exempt bond financed property is subject to
“alternative depreciation system”
 Issuance process
 Complex packaging
 Largest hurdle for conduit transactions
 $$$ bank credit
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State Law Opportunities for Economic Development
 Traditional “TIF” Not Available
 Leonard v. Spokane, 127 Wash.2d 194, 897 P.2d 358 (1995)
 Redirected incremental property taxes, including the state
property tax, to pay for public infrastructure.
 Diversion of state property tax inconsistent with Article IX,
Section 2.
 Requires application of such taxes to the support of the common
schools.
 Rejected the city’s argument “in the absence of the Act the tax
dollars allegedly diverted would not have been generated.”
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So where does this leave us?
 Constitutional prohibition addresses only the state
property tax for the common schools
 So the Legislature and municipalities have tried to
achieve TIF-like financing by focusing on:
 Local property taxes
 Excise taxes
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101% and TIF
 101% cap on increased property taxes disrupts the
TIF mechanism.
 Can only capture increased property taxes from the
new construction
 Cannot capture increased property taxes from
resulting appreciation in the property values of
neighboring properties.
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Three TIF-lite statutes
 Ch. 39.89 RCW, which permits local jurisdictions to
agree to divert local property taxes to finance public
infrastructure.
 Local Infrastructure Financing Tool (“LIFT”), which
provides a state sales tax credit for qualifying local
tax increment districts.
 Community Revitalization Areas (“LRF”) also
provides a state sales tax credit for qualifying local
tax increment districts
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Local Revitalization Financing
 2009 Legislation; Expanded in 2010
 Projects
 Public infrastructure projects
 Planning, analysis, retail promotion, maintenance
and security of common areas
 State contribution through state sales tax credit
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Sources of Funding…
 Local match through local tax increment
 75% of increased property taxes from new construction
 Sales taxes (percent determined by interlocal)
 Plus federal sources and private sources
 Helpful features:
 Can carry forward excess local match
 Local match can be used for debt service or pay as-you-go
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2009 LRF Applications
 DOR received applications from the 7 demonstration
projects (annual awards); all were approved
 Whitman - $200k
 University Place - $500k
 Tacoma - $500k
 Bremerton - $330k
 Auburn - $250k
 Vancouver - $220k
 Spokane - $250k
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2009 Competitive LRF Applications
 Competitive Pool - $2.5m in annual awards
 DOR received 12 applications
 As of September 15, 2009, the following were approved:
 Wenatchee - $500k
 Clark County - $500k
 Bellevue - $500k
 Kennewick - $500k
 Federal Way - $100k
 Renton - $500k (pending)
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2010 LRF Projects Added
 (2010 Wash. Laws Chapter 164)
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Richland Revitalization Area ($330,000 per year),
Lacey Gateway Town Center ($500,000 per year),
Mill Creek East Gateway ($330,000 per year),
Puyallup River Road Project ($250,000 per year),
Renton South Lake Washington Project ($500,000
per year) and
 Newcastle Downtown Project ($40,000 per year).
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Funding Public Improvements in Revitalization Area
(Under SSB 5045, Passed Legislature 4/20/09)
State Contribution
(though sales tax imposed
by city/county and credited
against states)
General Obligation
(LTGO)
Bonds
Pledge and use for debt service
Local
Public
Sources*
OR
Lesser of:
● $500k
● project award
● Local public sources* from preceding
calendar year (excess may be carried
forward)
Competitive project award?
Demo project?
Starting July 1, 2010 or
later and after bonds issued
● July 1, 2011 or later (if apply after
2009)
● After bonds issued
● When state property and sales tax
increase for prior calendar year ≥
project award
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● When state
Obligate
to pay as
you go
Federal source
Public Improvements:
Competitive project award?
● Infrastructure
--street, road, bridge, rail
--water, sewer
--gas, electric, fiber, other utilities
--sidewalks, street lights, land/street scaping
--parking, terminals, docks
--transit park & ride
--park facilities, recreational areas, environmental remediation
--stormwater, drainage
● Planning/analysis, managing/promoting retail, maintenance/security of
common areas, historic preservation state
Private sources
xxxx No state sources
75% of increase from
new construction
initiated after RA
% specified in
interlocals
Encourage private investment and
increase property values
Property Taxes
Local Sales Taxes
Starting 2nd calendar year
after RA
Starting date specified in
interlocals
Generate increased tax receipts
P:\22166_SC\21266_0YN
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State law updates:
Transportation Benefit Districts
 TBDs may finance transportation improvements that
are contained in:
 a city, county or certain other local transportation plans,
 not only in state and regional transportation plans.
 Voter-approved sales tax
 may now be imposed by TBD for longer than ten years
 if the tax is initially imposed after July 1, 2010, and if the tax
revenues are pledged to bonds.
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State law updates: Community Facilities Districts
 New type of special purpose district
 To finance community facilities and public
infrastructure.
 Special assessment financing
 Similar to local improvement district ("LID") financing
 But with a few differences
 formed by petition to the city and/or county
 signed by 100 percent of the property owners
 CFD board implements the financing
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Questions?
 Email:
 [email protected]
 [email protected]
 [email protected]
 ARRA Resource:
 http://www.klgates.com/practices/stimulus
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