Why use the Port Authority in a development deal? Development and company expansion projects can benefit greatly when a Port Authority is involved as a project partner. Port Authorities can borrow funds, purchase property, construct and own facilities and lease property efficiently and cost-effectively, and pass advantages along to the private developer or owner. As a friendly borrower, Port Authority participation provides assurance that financing mechanisms will achieve project goals, achieve favorable terms, and coordinate with all other components of the deal structure for best outcome.
Learn more about our tools by clicking below, or see our Development Finance Toolkit for PDF handouts.
A bond fund is a credit-enhancement vehicle supported by a system of common program reserves
and designed to achieve an investment-grade rating. This tool gives companies access to long-term,
fixed rate financing to fund facility expansion, increase manufacturing capacity, and purchase new
A number of Ohio port authorities operate bond funds. Port authority bond funds achieve investment-grade ratings through a system of pooled reserves – they are also secured by a combination of individual company credits, guarantees, mortgages, and security agreements. Some are also secured by TIF or special assessment revenues.
Learn more about Southwest Ohio Regional Bond Fund
Port Authority lease financings have been used to convey a variety of incentives including:
- Sales tax exemption on building materials used in port authority owned buildings,
- Debt limitation advantages to the lessee/user, and
- Flexibility to the lessee/user in debt amortization and lease purchase options on financial development.
Capital Lease Terms
Capital Lease: Under the lease, the lessee is obligated to pay lease rentals sufficient to pay all debt service on the financing undertaken by the port authority to pay costs of the project. For accounting purposes, the lease would be treated as a debt obligation of the lessee. At the end of the lease term and upon retirement of the related financing, the lessee would have an option to purchase the project for a fixed amount, typically nominal. Depending upon the restrictions of the lenders, the lessee might have the ability to purchase the project for a nominal amount at any time upon retirement of the related financing.
Under a triple net lease, the lessee would be responsible for:
- Any and all costs and expenses in connection with the project, including all taxes, assessments, levies, fees and charges imposed against the project;
- Maintaining and insuring the project;
- Making payment of all insurance premiums and all costs and expenses related to the installation, use, possession, operation, maintenance, and return of the project; and,
- Removal of all liens against the project other than permitted liens.
During the lease term, the lessee would be responsible for any costs and fees associated with the financing and for indemnifying the Port Authority.
Lease Financing Construction Matters
The acquisition, construction, furnishing and equipping of the project is undertaken on behalf of the Port Authority under contracts negotiated by the lessee as construction manager of the Port Authority. The construction manager is responsible for negotiation/documentation of contracts, management/supervision of construction, review/approval of work, certification of completion, and approval of contractor payments (final sign-off by Port Authority representative).
Contractors are expected to follow the Port Authority’s Economic Inclusion Policy. The obligations of the Port Authority under all contracts related to the construction of the project must be limited, and public lien remedies on such funds may apply.
Role of the Port Authority in a Lease
The position of the Port Authority in a lease bond financing transaction is generally similar to that of a city, county, port authority or other public agency in a conduit bond issue (like industrial development or hospital revenue bonds) where the financing is treated as a special obligation of the bond issuer, and none of the bond issuer’s general revenues or assets are obligated for payment of debt service. The Port Authority would issue the lease bond debt (typically under a trust indenture), own the project (typically on a fee or ground leased estate), arrange for the construction (through the construction manager) and lease the project to the lessee; however:
(1) the general resources of the Port Authority are not pledged to debt repayment or any other obligation incurred; and
(2) lenders, bondholders and other contracting parties have recourse only to the project revenues, including funds held by the trustee and lease payments made by the lessee, and to the assets financed and leased (typically through a mortgage on the project).
EB-5 Immigrant Investor Program (EB-5) is a federal program created to encourage overseas investment into approved projects to help drive job creation within the United States. Foreign nationals who make qualifying investments receive priority status for attaining lawful permanent U.S. residency for themselves and family members. Since the creation of EB-5 in 1990, it has emerged as an important source of project capital.
Tax Increment Financing (“TIF”) is a financing tool that allows the future increase in property taxes to be used to finance part of the cost of the improvement that will generate the increased taxes.
A TIF is put in place by an ordinance of the city council or township board of trustees and provides an exemption from property taxes that would be generated from the increased value of a development project. The exemption applies only to the increment. Existing property taxes continue to be paid to the respective government entities. The owner of the property is required to make “service payments in lieu of taxes” (commonly referred to as “PILOTs”) with respect to the exempted real property taxes. The PILOTs are then used to pay debt service on bonds issued.
In Ohio, school districts often receive all or a portion of the tax revenue which would have otherwise been received out of the PILOT payments. Some school districts have arrangements with their local city or township that govern all TIFs while others decide on a case-by-case basis.
TIF bonds may be issued on a taxable or tax-exempt basis. The bonds are non-recourse to the municipality and the Port Authority, and do not count against the city’s general obligation bond cap unless the city specifically agrees to provide credit support.
TIF bonds are also frequently backed by some form of security in addition to the TIF proceeds. The form of this security varies depending on the structure of the deal, but it can take the form of a reserve fund, a minimum service payment agreement with the developer, a letter of credit provided by a bank and/or a special assessment. A special assessment is a charge levied upon a property especially benefited by a public improvement for the purpose of paying for part or all of the cost of the improvement. It is possible to finance infrastructure improvements using a special assessment without also using a TIF.
GC-PACE is an innovative program by which commercial and industrial building owners finance energy efficiency and renewable energy building improvements, by placing a special assessment on the property. GC-PACE financing works for a variety of upgrades and installations, such as solar panels, HVAC and boilers, insulation, geothermal projects, and energy efficiency improvements. It is increasingly being embraced by municipalities throughout the United States as an economic development program that encourages the modernization and “greening” of commercial buildings without involving government subsidy.