ECONOMIC DEVELOPMENT FINANCING TOOLS
Port Authorities have a broad range of innovative financing capabilities under Ohio law that enable these governmental entities to play a unique role within the community. These tools can be used to supplement the programs and activities of the state and local municipalities, and provide another vehicle for enhanced economic development activity. Types of financings issued by the Port Authority include:
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.
Port Authority lease financings have been utilized to convey a variety of incentives including:
- Sales tax exemption on building materials used in port authority owned buildings
- Accounting and Federal tax advantages to the lessee/user of the project,
- Debt limitation advantages to the lessee/user, and
- Flexibility to the lessee/user in debt amortization and lease purchase options.
Lease bond financings are credit dependent and are typically, but not exclusively, used by investment grade lessees and/or backed by a letter of credit or other structural enhancements.
Categories of Lease Financing
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.
Operating Lease: The lease would be structured as a true lease for tax and for accounting purposes in accordance with Financial Accounting Standards Board Statement 13 (“FASB 13”). This standard is currently under review by FASB. Historically, such a lease would typically be for a term of twenty years or less (renewal options possible). The initial lease term (and any renewals not at fair market rent) must be less than 75% of the estimated economic life of the project. During that term, the lessee is obligated to pay lease rentals sufficient to pay debt service accruing on the financing during that lease term. At lease inception, the present value of all such lease payments may not exceed 90% of the fair market value of the project, leaving a significant unamortized amount (“Balloon Amount”) at the end of the lease term. Upon expiration of the lease, the lessee would have the option to:
(1) subject to any additional lender requirements, renew the lease at a then current fair market rental; or
(2) purchase (or remarket) the project for an amount equal to the greater of (A) the Balloon Amount and (B) the then fair market value of the project; or
(3) surrender its rights under the lease and vacate the project (with no remaining responsibility for the Balloon Amount).
Additional Lease Financing Terms
Both of the lease forms described above utilize triple net leases for which 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
Under either a financing or an operating lease, the acquisition, construction, furnishing and equipping of the project is typically 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 to the funds available to it, typically the proceeds of the revenue bonds, and public lien remedies on such funds may apply.
In an operating lease transaction, the role of the construction manager must conform to accounting rules to prevent the manager from being treated as owner. Those rules relate to paying hard costs, force majeure and indemnification among other things. This role must be accurately reflected in all agreements and construction contracts.
Role of the Port Authority in a Lease Financing
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).
The Port Authority is also working to establish a PACE (property assessed clean energy) program in several jurisdictions in Hamilton County – a new economic development tool in our community to improve the energy efficiency of older commercial and industrial spaces. It helps commercial and industrial property owners finance these energy efficiency improvements on attractive terms with no net out-of-pocket expenses.
The Port Authority frequently partners with the State of Ohio and the City to develop a comprehensive development package.
STATE OF OHIO Business Bonds, Grants, Loans, and Tax Credits:
STATE OF OHIO TAX CREDIT PROGRAMS include:
- Job Creation Tax Credit Program
- Ohio Historic Preservation Tax Credit Program
- Ohio Home-Based Job Creation Tax Credit Program
- Ohio New Markets Tax Credit Program
- Non-Refundable Job Retention Tax Credit Program
- Refundable Job Retention Tax Credit Program
STATE OF OHIO GRANT PROGRAMS:
- 629 (Roadwork Development) Grant Program
- Economic Development (Contingency) Grant Program
- Ohio Job Ready Sites Program
- Workforce Guarantee Program
- SiteOhio Certification Program
- Clean Ohio Revitalization and Assistance Grant
- Economic Development (412) Grants
Job Creation Tax Credits
Cincinnati levies at 2.1% tax on the net profits of firms. If a company is moving to Cincinnati, or creating jobs in Cincinnati, they may be eligible for a job creation tax credit or a reimbursement.
Property Investment Reimbursement Agreement
The City of Cincinnati may offer a Property Investment Reimbursement (PIR) incentive to a company that is considering expanding in or moving to Cincinnati.
Tax Increment Districts
Developers making a large-scale investment that requires substantial public improvements may be able to use tax increment financing (TIF) to offset a portion of those costs. The city has 21 tax increment districts and in some cases will create a TIF specific to a project.
Community Reinvestment Area
The Cincinnati Public Schools, Hamilton County, and the City levy a property tax to meet a wide variety of local service needs. If a company is making an investment that will result in a substantial change to its property tax obligation, and they are creating jobs, they may be eligible for a property tax abatement.