PILOT, TIF & Manufacturing Bond Options

Transcript

1. Overview of PILOT, TIF and Manufacturing Bond Options for Companies Locating in Tennessee Alfred E. Smith, Jr. 423-785-8223 | asmith@millermartin.com Mark W. Smith 423-785-8357 | msmith@millermartin.com
2. Primary Local Incentives • PILOTs • Grants, land, spec buildings • TIFs – Property tax increment – Sales tax increment (limited) • Tax exempt bonds for manufacturing operations
3. A “PILOT” – What is it? • Payment in lieu of tax agreement – The mechanism under Tennessee law to lower real and personal property taxes • There is no standard PILOT arrangement • Communities take different approaches, but most consider – Number of jobs – Wages – Investment
4. PILOT Payments – How do they work? • Community A – Years 1 & 2: 0% – Years 3 & 4: 25% – Years 5 & 6: 50% – Years 7 & 8: 75% • Community B – School taxes only for PILOT period • Community C – No taxes for PILOT period • Community D – Year 1: 0% – Year 2: 10% – Year 3: 20% – Year 4: 30% – Year 5: 40% – Year 6: 50% – Year 7: 60% – Year 8: 70% – Year 9: 80% – Year 10: 90%
5. PILOTs – How are they structured? • Tennessee Constitution – All property must be subject to taxation, with limited constitutional exceptions – This prohibits cities and counties from granting tax abatements directly to private industry – But, the legislature is authorized to exempt governmentally owned property • Industrial Development Boards – Statutory property tax exemption – Broad powers relating to specified “projects” – Authorization to enter into in lieu of tax agreements • Other authority: Housing & education projects
6. Simple PILOT Transaction Company Industrial Development Board Lease Agreement •Term = PILOT term •Obligations to construct and operate project and to make PILOT payments •Purchase option at end of lease term PILOT Agreement •Specifies ILOT payments •Performance requirements Deed Bill of Sale
7. Simple PILOT Transaction with Secured Lender Company Industrial Development Board Lease Agreement PILOT Agreement Deed Bill of Sale Secured Lender Fee Deed of Trust and/or Leasehold Deed of Trust Non-recourse Fee Deed of Trust
8. Advanced Concepts • Expansion of existing facility • Performance requirements and clawbacks • 20+ year PILOTs require best interest determination
9. Advanced Concepts - Leasehold Taxation • Leasehold interests in real property are taxable interests in TN • Less of an issue in areas that limit PILOTs to new investment – PILOTs offered for new expansions only – Existing property on tax rolls is not eligible for reduced PILOT (i.e., existing property is effectively taxed at 100%) – Imputed rent from new improvements counts • Manage through re-opener provisions in PILOT agreements? • Manage through bond or “phantom bond” issues
10. Simple PILOT Bond Transaction Company Industrial Development Board PILOT Agreement Lender (Company for phantom bond) Lease Agreement •Construct and operate project and to make PILOT payments •Loan bond funds for project expenses •Purchase option at end of lease term •Minimum rent payments = debt service on bond Bond Mortgage, Security Agmt & Assignment Assignment may provide for direct payment of rent
11. TIFs - Tax Increment Financing • To induce development without issuance of city or county debt • Designate specific development area and dedicate projected incremental tax revenues toward payment of IDB debt for infrastructure improvements within area • Adoption of economic impact plan by city and county after public hearing • Division of property taxes into “base tax amount” and “excess tax amount”
12. Simple TIF Structure Tax Increment County City Industrial Development Board Bank or Bondholder Developer Development Agreement Developer Guaranty or Other Credit Enhancement Loan Agreement $ for road, sewer and water infrastructure
13. TIF Process • Preparation of economic impact plan – Proposed area – Project description – Expected benefits – Plan for distribution of incremental (new) taxes • Public hearing before IDB • IDB submits plan to County and City • County and City must approve • Following approval, approved incremental growth amount is paid into a fund of the IDB and used for approved purposes (typically paying off the TIF bond)
14. TIF Statutes Revised Public Chapter 605 (2012) • General limitation of allocation of tax revenues for IDB TIF to 20 years – Commissioner of ECD and Comptroller can extend with “best interest” determination • IDB TIF proceeds generally limited to public infrastructure costs, improvements to a project site and related infrastructure – Commissioner of ECD and Comptroller can extend with “best interest” determination
15. Additional TIF Tools • Tourism Development Zones (sunset) • Border Region Tourism Development Act (2012 sunset) • Chapter 384 of Public Acts of 2011 – urban redevelopment / brownfield projects – Provides non-school portion of local sales tax increment in addition to property tax increment – Redevelopment zones limited to RC and NMTC areas in counties > 80,000 as of 2000 – Plan must cover at least 100 acres and contain either TDEC brownfield site or large unused building – Expands “project” definition for TIFs as well as PILOTs
16. Simple TIF Structure with Chapter 385 Increment Property Tax Increment County City Industrial Development Board Bank or Bondholder Developer Development Agreement Developer Guaranty or Other Credit Enhancement Loan Agreement $ for approved costs Sales Tax Increment
17. Manufacturing (Small Issue Exemption) Bonds • 75% for core manufacturing space • $10 million in bonds plus $10 million in additional capital expenditures • State allocation • Fits well with PILOT for property tax abatement
18. Why Do Tax Exempt Bonds? Taxable Interest Rate X (1 - marginal tax rate) = equivalent tax exempt rate e.g., 5% X (1 - .3) = 3.5%
19. Inducement Concept Get “official action” at least 60 days before money is spent
20. Structure of Private Activity Bonds (formerly Industrial Development Bonds) Borrower Issuer Trustee Bondholders Loan or Lease Agreement Trust Indenture
21. 7-day Floaters (Variable Rate Demand Bonds) Borrower Issuer Trustee Bondholders LOC Bank Reimbursement Agreement + Security Letter of Credit
22. Questions? Alfred E. Smith, Jr. 423-785-8223 | asmith@millermartin.com Mark W. Smith 423-785-8357 | msmith@millermartin.com