Development Financing and the Art of Making the Deal

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Development Financing and the Art of Making the
Deal
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Overview

• Make your community attractive to prospects by
  laying the groundwork for offers
• Be aware of your communitys strengths,
  weaknesses, opportunities, and threats
• Have an incentive program prepared in advance
• Conduct a meaningful cost-benefit analysis
• Be communicative and flexible
• Many thanks to The University of Georgia
  Fanning Institute, whose collection of scholarly
• articles in the Georgia Development Authority
  Handbook form the basis for much of this
  presentation.

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Step One Make Your Community A Target

• Prospects are more likely to look at communities
  that market themselves
• A combination of broad marketing (press releases,
  mass media, promotional events) and focused
  marketing (direct contact with companies, ties to
  economic development officers) produces the best
  results
• Be prepared to respond to inquiries quickly and
  completely

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What Marketing Tools To Employ

• Successful
• Updated websites
• E-media
• Concise emails and e-newsletters
• Direct contact and telephone conversations

• Less Successful
• Community Videos
• DVDs and CD-ROM presentations
• Large packets of information, even professional
  brochures

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Before You Create an Incentive Package, Know Your
Community
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Factors to Consider

• Every community has characteristics that make it
  unique
• When developing incentives, be aware of these
  factors that shape your options
• Geography
• Demographics
• Infrastructure
• Government

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GeographyGeography Matters Your Community Has
a Landscape that Will Attract Some Prospects, But
Not Others

• Depending on what the prospect needs, your
  community may be ideal or out of the question
• For example, a power plant or manufacturer will
  be more likely to build on flat land than rolling
  hills
• You must develop an incentive plan with your
  topography in mind

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Geography Environmental Awareness

• Conduct an Environmental Resource Inventory
• An ERI is a comprehensive mapping of the
  community's environmentally sensitive areas (such
  as floodplains or steep slopes) in order to make
  rational decisions about areas best suited to be
  set aside as open space. This should be the first
  step in crafting a local strategy for open space
  preservation.
• It is important to know prior to negotiation what
  land should be preserved and what environmental
  impact the community is willing to sustain

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Geography More Environmental Considerations

• Concerns about water pollution mean that hearings
  on developments near water sources may become
  contentious
• Rather than start that process after a prospect
  expresses interest, the community can address
  those matters in advance

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Geography What Companies Expect

• Most prospects anticipate that the community will
  handle land matters
• In fact, most companies expect part of any
  pre-existing incentive plan to be the land itself
• As one consultant put it, Free land isnt an
  incentive its a given
• Be prepared to have land purchase agreements in
  place before you get to the negotiating table
  with a prospect
• In other words, you must negotiate with the
  original landowners before negotiating with the
  company

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Geography What to Remember

• Secure land as early as possible
• Be aware of environmental concerns
• Understand prospects needs

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Demographics The Human Factor

• While easily overlooked, remember to prepare
  information about the community, who lives there,
  and what it has to offer
• Companies do not just bring buildings. Most
  prospects want to know what their quality of life
  will be if they move to you community
• Prepare information packets on what individuals
  might like to know schools, hospitals, services,
  etc.

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Demographics Factors to Consider

• Labor pool
• Local educational institutions
• Colleges and universities make sites more
  attractive
• If the company plans to bring employees, public
  schools can be a selling point
• Available housing
• Cost of living
• Quality of life

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Infrastructure Access and Travel

• What resources are available in your community
  that would be appealing to prospects?
• Airports
• Ports
• Interstates
• Rail access
• Commuter Transit
• Navigable waters

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Government Community Attitudes

• Do not discount the importance of the communitys
  views
• A protracted hearing process after negotiations
  begin can hamper a projects success
• Early and public planning allows constituencies
  to voice concerns, which will prevent discontent
  over the incentive package arising later
• Community input and awareness of public wishes
  can preempt many complications
• Work to achieve shared goals between city and
  county government leaders

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Now That the Self-Assessment is Complete, What
Next?

• Develop an incentive package
• Evaluate prospects and their potential for the
  community with a cost-benefit analysis
• Tailor the incentive package to meet both
  parties needs
• Draft a Memorandum of Understanding

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Have an Incentive Program in Place Before
Negotiating

• For most companies, time is a critical factor
• Redrafting plans for tax abatements, incentives,
  and performance standards after each proposal is
  time wasting and can deter offers
• As the Georgia Development Authority Handbook
  notes Winning communities usually have their
  incentive agreements in place well before the
  prospect arrives.

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How to Devise an Incentive Package

• Any package depends on three factors

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How to Devise an Incentive Package

• Any package depends on three factors
• The number of jobs the company will create

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How to Devise an Incentive Package

• Any package depends on three factors
• The number of jobs the company will create
• The average wage and benefits that come with
  those jobs

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How to Devise an Incentive Package

• Any package depends on three factors
• The number of jobs the company will create
• The average wage and benefits that come with
  those jobs
• The capital investment the company plans to make
  in the community

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Illustration Property Tax Abatements

• Most companies will expect a community to have an
  ad valorem tax abatement policy as part of any
  incentive plan.
• Many Authorities have worked with their local tax
  assessor and other government officials to
  develop a standing policy for property tax
  abatement plans, which permits them to implement
  the policy with speed and ease
• These plans will require legal analysis consult
  with your counsel!

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Cost-Benefit Analyses

• Computer programs, like the Local Economic Impact
  Analysis Program (WebLOCI) at Georgia Tech
  provide significant insight into short- and
  long-term net costs associated with a project
• Programs like LOCI
• provide information to know how far a community
  can go in granting incentive demands.
• support the communitys side in the negotiating
  process by providing information about how
  government cost may change.
• help communicate how a local economy works.

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Cost-Benefit Analysis Think About the Proposal

• Examine the project and try to get an
  understanding of what it means for your community
• Never engage in selective understanding
• Dont assume that a plan means what you want it
  to mean or that terms are naturally most
  favorable to you
• Find out exactly what the project will do and how
  it aims to do so

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Cost-Benefit Analysis Identify Your Needs

• After examining geography, demographics,
  infrastructure, and government, you should
  identify what the most pressing needs are in your
  community
• Job growth
• Economic development
• Capital infusion
• Industry modernization
• Find your communitys strengths, weaknesses,
  opportunities, and threats

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Cost-Benefit Analysis Prioritize

• While every community has a number of needs, some
  are more immediate than others
• For example, County X has low unemployment but
  low growth caused by inflation, while County Y
  has high unemployment but modest growth spurred
  by local technology companies.
• County X might prefer projects that address
  economic development over job creation, while
  County Y might look for labor intensive projects
  instead.

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Cost-Benefit Analysis Create Time lines

• Determine when the project would begin, how long
  it would take, and what level of participation
  would be required of the Authority, the company,
  and the community
• The Georgia Development Authority Handbook
  provides examples of timeframes for projects

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Cost-Benefit Analysis Examine Other Options

• If, on first glance, the project appears to be a
  net loss for the community, think about whether
  there are other options for generating the same
  sort of benefit
• Municipal bonds
• Tax incentive packages to bring new business
• Creating job tax credits
• Public works projects

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Cost-Benefit Analysis Probability of
Success

• Look at the companys history to better
  understand their interactions with similarly
  situated communities
• Look at the history of similar projects in your
  community
• Factor these calculations into your final
  analysis of whether the project is likely to meet
  the communitys needs and benchmarks for success

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Remember, Time is a Critical FactorDont Delay
in Conducting the Cost-Benefit Analysis
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Negotiation Strategy

• Draw upon the knowledge gained in
  self-evaluations and in preparing incentive plans
• Be willing to work with the company to meet their
  needs
• Be direct about what your community offers and
  dont exaggerate
• Be flexible and recognize where concessions have
  to be made

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Examples of Incentive Options

• State grants
• Land donations
• Ad valorem tax abatements
• Quick Start Training Program
• Jobs Tax Credit
• Sales Tax Exemptions
• Freeport Exemptions

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Draft the Memorandum of Understanding (MOU)

• Once the parties reach a consensus, commit that
  agreement to paper
• Memorializing the agreement prevents
  complications later in the process
• Clear benchmarks allow both sides to understand
  precisely what they are agreeing to
• By defining terms within the memorandum, there is
  little room for major misinterpretations

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What Should Be in the MOU?

• Definition of the Project
• This includes due diligence requirements
• Make sure that both parties understand the terms
• Incentives for the Company
• Jobs and Investment Goals (Benchmarks)
• Termination Standards

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More Negotiation Strategy

• Have several options available in case your
  preferred choice is unacceptable to the company
• For example, if you are unable to acquire land
  before negotiations begin, provide the company
  with alternate plans as to how to acquire it
• Transferring land between public bodies
• Nominal purchase prices
• Using tax-free exchanges between the private
  owner and the company
• Split sale/donations

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What Not to Do

• Dont neglect details
• Dont forget to set parameters and limits on
  incentive
• Dont ignore the companys corporate culture
  Learn what its goals and strategy for succeeding
  in the project
• Dont have unrealistic expectations
• Dont forget to communicate

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Bond Financing

• A Key Tool for Development Authorities

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Bond Fundamentals

• Governmental Bonds vs. Private Activity Bonds
• Taxable Bonds vs. Tax-Exempt Bonds
• Eligible Projects

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Governmental Bonds

• Used to finance governmental projects that serve
  the general public
• General Obligation Bonds
• Supported by General Taxing Power (requires a
  referendum)
• Revenue Bonds
• Supported by System Revenues (such as water and
  sewer systems)

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Private Activity Bonds

• Used to finance projects that serve private
  entities
• May be issued by Development Authorities if
  within the purpose of the Authority
• May be tax-exempt if permitted by the Internal
  Revenue Code

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Taxable Bonds

• May be issued to finance projects for private
  entities
• Why issue taxable bonds?
• Economic development doesnt always come from
  activities promoted by the Internal Revenue Code
• Using a wider array of financing instruments
  gives your community the flexibility to make
  better decisions

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Tax-Exempt Bonds

• Exempt from WHAT taxes?
• Always permissible for Governmental Projects
• Sometimes permissible for Private Projects
• General Rule Private Activity Bonds are not
  tax-exempt unless the IRS says they are!

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What are Eligible Projects?
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Eligible Projects

• Exempt Facility Bonds
• Airports
• Docks and Wharves
• Mass Commuting Facilities
• Facilities for the Furnishing of Water
• Sewage Facilities
• Solid Waste Disposal Facilities
• Qualified Residential Rental Projects

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Eligible Projects

• More Exempt Facility Bonds
• Facilities for the Local Furnishing of Electric
  Energy or Gas
• Local District Heating or Cooling Facilities
• Qualified Hazardous Waste Facilities
• High-Speed Intercity Rail Facilities
• Environmental Enhancements of Hydro-Electric
  Generating Facilities

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Eligible Projects

• Still More Exempt Projects
• Qualified Public Educational Facilities
• Qualified Green Building and Sustainable Design
  Projects
• Qualified Highway or Surface Freight Transfer
  Facilities

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Most of the foregoing projects are narrowly
focused, heavily regulated, and provide limited
options for use by Authorities
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Qualified Small Issue Bonds

• a/k/a Industrial Development Bonds
• Most common type of bond issued by Development
  Authorities
• Used to finance manufacturing facilities
• Subject to 10,000,000 limit on face amount of
  bonds
• Subject to 20,000,000 aggregate bond issuance
  and capital expenditures limit

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Qualified 501(c)(3) Bonds

• Non-profits are frequent users of tax-exempt
  bonds
• Examples
• Hospitals
• Private colleges or lower schools
• Social Service agencies
• Not subject to Industrial Development Bond limits
  on volume

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Closing Thoughts

• Issuance of Private Activity Bonds does not
  involve local taxes or governmental revenues
• The IRS regulates the issuance of Private
  Activity Bonds heavily
• Involve your Bond Counsel early in the process!