In today’s economy, where rehabilitation and new development is scarce, traditional avenues of financing are often not possible or enough. Many properties remain in an unimproved or blighted condition due to the lack of financing. In order to spur development and clean up some of these areas, public private partnerships are a necessary part of the capital stack.
The purpose of this client bulletin is to briefly describe the more common types of financing available for public private partnerships. Each deal is unique and multiple programs can be combined to achieve the requisite level of financing. Common types of financing include:
- Municipal Bonds. Municipal bonds are bonds issued by a city or other local government (or their agencies). The bonds can be issued as either general obligation bonds of the issuer or revenue bonds. Revenue bonds are more common for use with a public private partnership and the proceeds are used to fund the project for which they are issued and are secured by revenues generated from the completed project. Additional credit enhancement for these bonds may be made by parties such as Freddie Mac, Fannie Mae or other sources.
- Private Activity Bonds. Private activity bonds were previously known as Industrial Revenue Bonds. These bonds are intended to encourage the relocation and expansion of companies that provide jobs and expand economic opportunities for residents and the community.
- Enterprise Zone Facility Bonds. Enterprise Zone Facility Bonds may be available if the project qualifies as an “Enterprise Zone Facility.” These bonds are issued by state and local governments to facilitate projects located in certain areas that include high levels of unemployment, a high poverty rate or certain other patterns of economic distress.
- Tax Increment Financing. Tax Increment Financing or “TIF” is a method of using the future gains in property taxes anticipated from a project upon completion to finance current improvements. TIF is designed to provide funding for blighted areas or projects that are unlikely to obtain financing. A project must be located in a TIF district which is either existing or created to qualify for these funds.
- Historic Tax Credit Equity. Historic tax credits offer a 10% or 20% federal tax credit for qualified rehabilitation expenses on historic properties.This program is intended to promote historic preservation and community revitalization. In many cases, the capital to complete the renovations is generated by selling the historic tax credits to an investor through the use of a “sandwich lease” or other structure to bring the investor into the project as a “tenant” for purposes of obtaining the tax credits.
- Low-Income Housing Tax Credits. Low Income Housing Tax Credits (“LIHTC”) are a dollar for dollar tax credit given for affordable housing investments which allow a taxpayer to take a federal tax credit equal to a large percentage of the cost incurred for the development of low-income housing units in a rental housing project. The capital to complete the development is raised by selling the credits to an investor which will make a capital contribution into the project in exchange for being allocated the LIHTCs over a 10-year period.
- New Market Tax Credit Equity. New market tax credits are a relatively new federal initiative which targets projects located in a “low-income community” or benefits a “targeted population” designated by the Treasury Department that cannot otherwise obtain conventional financing. This program is facilitated by the Community Development Financial Institution Fund (CDFI Fund). The likelihood of obtaining this type of financing increases with the community impact and primarily the assistance of low-income people and communities through job creation and the provision of goods and services. This program provides tax credits over seven years.
- Sales Tax Rebates. Sales tax rebates are used as a method of bringing retail or sales tax generating entities into a community. The sales tax generated by the municipality from the particular occupant is used to reimburse or subsidize infrastructure improvements or other costs incurred to locate in that municipality. Payments are typically made on an annual basis and can either be capped or uncapped.
- Neighborhood Stabilization Programs. The Neighborhood Stabilization Program (“NSP”) provides targeted assistance to state and local governments to acquire and rehabilitate foreclosed residential properties that might otherwise become a source of blight within communities. The NSP is part of the Community Development Block Grant. At least 25% of the funds appropriated for the purchase and redevelopment of abandoned or foreclosed homes or residential properties must be used to house individuals or families whose incomes do not exceed 50% of the area median income. Additionally, all activities must benefit low and moderate income persons whose income does not exceed 120% of area median income.
- Hope VI Program. The Hope VI Program provides grants up to $35 million to substantially revitalize the worst public housing projects into mixed-income developments. Any public housing authority that has severely distressed public housing units in its inventory is eligible to apply, unless it administers the Housing Choice Vouchers (Section 8) program. Hope VI revitalization grants fund capital costs of major rehabilitation, new construction and other physical improvements; demolition of severely distressed public housing; acquisition of sites for off-site construction; and community and supportive service programs for residents, including those relocated as a result of revitalization efforts.
Each of these programs contains a complex set of requirements to qualify for the program. Creating the proper structure to accommodate multiple levels of financing of the type described above requires an organization of multiple special purpose entities, special classes of ownership, leases, sale-leasebacks, contractual and fee arrangements, in order to accommodate the financing scheme and maximize the economic efficiencies while still satisfying regulatory, statutory and federal and state income tax provisions. The attorneys at Wildman Harrold have experience in handling all of the issues involved in structuring a public private partnership.