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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• Tools available to finance economic development• Tax-exempt financing under federal law• Taxable financing under federal law• State law updates

• Questions

Overview

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First … the bad news ...

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

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”)

• 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

Area RZFB City of Bellevue $3,736,000 City of Seattle $19,918,000 City of Spokane $156,000 City of Tacoma $4,979,000 City of Vancouver $2,459,000 Asotin County $14,000 Clallam County $1,209,000 Clark County $3,940,000 Cowlitz County $5,502,000

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Washington State RZFB Allocations (cont.)

Area RZFB King County $34,754,000 Kitsap County $11,290,000 Lewis County $740,000 Pacific County $870,000 Pierce County $14,612,000 Skagit County $7,914,000 Skamania County $149,000 Snohomish County $19,816,000 Spokane County $204,000 Whatcom County $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 super-

subsidized 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) 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)

General Obligation(LTGO)Bonds

State Contribution(though sales tax imposed by city/county and credited

against states)

Lesser of:● $500k● project award● Local public sources* from precedingcalendar year (excess may be carried forward)

Demo project?Starting July 1, 2010 or later and after bonds issued

Competitive project award?● 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

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

LocalPublic

Sources*

Pledge and use for debt service

Obligateto pay as you go

OR

Encourage private investment andincrease property values

Generate increased tax receipts

75% of increase fromnew constructioninitiated after RA

% specified ininterlocals

Federal source

Private sources

xxxx No state sources

Property TaxesStarting 2nd calendar year

after RA

Local Sales TaxesStarting date specified in

interlocals

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: Stacey.Crawshaw-Lewis@klgates.com Deanna.Gregory@klgates.com Edward.McCullough@klgates.com

ARRA Resource: http://www.klgates.com/practices/stimulus