The Demise of RDA's - Larry Kosmont

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
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


•
Toolbox for Today’s Economic Developer



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 vote

Effect AB1x26 – Redevelopment dissolved
on
Local
Tax
Base

Prop 22 – Protected local taxes from State

1978 1986 1996 2010 2011
Note: Not to Scale
8

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 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 Business

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?

10

TOOLBOX FOR TODAY’S ECONOMIC DEVELOPER


•



11

What’s Left after Redevelopment?
Newer Tools
• Site-Specific Tax Revenue (“SSTR”) Pledges
• EB-5: Immigrant Investor Program
Tools / P3 Structures
Existing
• 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 Structures
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

14

Lease-Leaseback: How it works

CITY

CITY

15

Existing Tools & P3 Deal Structures
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

16

ECONOMIC DEVELOPMENT 2012


•



17

The Economic Development Menu

Financing 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 Project

Tools Employed:
• Ground Lease
• Lease-Leaseback
• Site-Specific Tax Revenue
Pledge

19

Redondo Beach Marine Avenue Hotel Project

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.

Metro
Station

20


• 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 Funded
Ownership CANNOT take any Reserve ($0 funded Reserve
($2.5M funded at hotel
distribution 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


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 #2
Starwood Hotels
W Hotel, Hollywood California

Tools Employed:
• EB-5 Funding

25

Starwood Hotels - W Hotel, Hollywood

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


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

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 Created
investment) (I-526) (Permanent Visa
Approved: I-829)

EB-5 & Other
Takeout
Debt & Equity
Financing
Sources

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 #3
City of Norco
“Silverlakes” Equestrian
Sports Park
Tools Employed:
• Ground Lease
• Bond Issuance
• Developer Project Delivery
Program

30

Norco – Silverlakes Equestrian Sports Park
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.

31

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

The 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

The 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)


•



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 IFDs

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

39

Proposals to Amend IFD Law
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
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 entity
4 May not be used in former RDA No Fix Fix Fix
project areas
5 No remediation powers similar to No Fix Fix Fix
Polanco Act

41

Other 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

Other 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


•



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

A Call to Action for CCCA
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.
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

The Demise of RDA's - Larry Kosmont

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