Presenter/Contact
Presenter
Jeff Jewell, Economic Development Manager
Contact Info
(830) 221-4621 - jjewell@nbtexas.org
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SUBJECT:
Title
Presentation and direction to staff concerning the formulation of a draft policy for the creation of Public Improvement Districts.
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BACKGROUND / RATIONALE:
Public Improvement Districts (PIDs) are economic development tools authorized by the State of Texas to finance the construction of public improvements that will benefit the area with the PID boundaries. A PID uses bond revenue to immediately fund projects within the PID and assesses PID property owners to repay the bonds. These funds are delivered in advance of construction or on a reimbursement basis. Property assessments are of a fixed amount and terminate when the bonds are repaid. Proceeds from the issuances can be used for the following uses:
• Streets and sidewalks;
• Public safety and security services;
• Water, wastewater, health and sanitation and drainage facilities including both onsite and offsite improvements;
• Landscaping and other aesthetics such as fountains, distinctive lighting and signs;
• Off-street parking facilities;
• Park and recreation facilities;
• Acquisition of real property in connection with an authorized improvement;
• Expenses incurred in the establishment, administration and operation of the district; and
• Other public improvements
PID Bond Issuances
The sponsoring entity is the authorized issuer of PID bonds. However, PID bonds are non-recourse to the issuing entity. The PID bond offering statements would state that even though the bonds are special obligations of the city, they would payable solely from pledged revenues and other revenues assessed within the PID boundaries. The pledged revenues that underwriters will require is the creation of an additional assessment on each individual parcel or lot within the PID boundaries. Assessments are paid annually and the landowner is only responsible for the assessment on his/her property. The PID debt is secured by a special assessment lien on the PID land. The project appraised value (land “as is” plus value of improvements to be constructed with bond funds) is the primary factor in determining bond capacity, which is typically 1/3rd of the appraised value. This limitation is a strength because it does not rely upon future development to create value to support bond issues and debt payments like Water Improvement Districts or Municipal Utility Districts.
Bond offering language also includes provisions stating that the bond owners can never look to the city to demand repayment out of any funds other than the pledged revenues (additional assessment) and that the city has no legal or moral obligation to pay the bonds out of any funds other than the pledged revenues. The issuances are typically of a smaller amount so they tend not to materially reduce the City’s bonding capacity or affect its debt rating.
Discussion
Developers are increasingly deploying PIDs because of changes to the lending environment seen after the 2008-2010 recession. Historically, banks could offer non-recourse financing, accept builder deposits and accept land as an equity contribution to achieve certain loan to value and other lending parameters. The current environment has shifted such that banks have tightened these lending restrictions and are not collateralizing their financing tools as they have in the past. As such, developers have had turn to private equity to close the gap, which often raises the overall cost of capital. In reality, the higher cost of capital requires developers to make tradeoffs to lower overall project costs in order to achieve desired rates of return within a specified time frame. Even though higher quality building construction, amenities and other features generally translate into greater value over the long term, these features are often the first elements jettisoned from a project in order to achieve a lower overall development cost.
PIDs allow for the developer/property owners in the PID to amortize the cost of public improvements over a longer term. This can lead to higher quality infrastructure and amenities than would normally be achievable under traditional lending conditions. It can also lead to a developer delivering a greater amount of infrastructure ahead of when development occurs. This creates some economies of scale in the project but also can translate to faster project build outs because some of the traditional constraints of infrastructure financing are removed (having to sell property that will benefit from the infrastructure and then subsequently constructing the necessary infrastructure, for example).
Cities have begun allowing for the creation of PIDs to facilitate the creation of higher quality developments and to address infrastructure challenges in a particular area. Cities have the ability to negotiate reasonable development standards that will create higher value development. A PID also allows for costs related to the infrastructure to be allocated to the citizens most directly benefitting. The City is also able to select the professionals engaged for the financing and assessment management. They are not without some risks and issues to consider. For example, there is always a perception that the City is subsidizing developers. PIDs also do require some additional staff time and administration. The sponsoring entity must also be sensitive to overlapping debt ratios and other financial considerations. There is also an extensive due diligence process undertaken by the City’s financial underwriters and, if an issue ever arises, the City would need to work with interested parties to mitigate the impact.
PIDs are not separate political subdivisions and are governed by policies and issuance documents set forth by a city council. A city council can also appoint a board to provide oversight and governance of the PID.
Policy Guidelines
The purpose of a policy would be to provide for a petition/creation process and identify those general principles that would attract support from City Council for the creation of a PID. The policy could outline creation and petition criteria, qualified costs, financing criteria, information disclosure standards to property owners and annual plans of services, budgets and assessments, for example. In adopting a PID policy, the City Council should, at a minimum, establish standards for:
• Petition requirements;
• Administration and management requirements;
• Bond size limitations, including maximum years of capitalized interest for each bond issuance, maximum maturity for each series of bonds, minimum appraised value to lien ratio at date of each bond issuance and maximum annual permitted increases in annual assessments;
• Financing criteria;
• Financial reporting requirements;
• Dispute resolution requirements and processes;
• Improvements eligible for PID funding; and
• Indemnification and non-recourse language.
ADDRESSES A NEED/ISSUE IN A CITY PLAN OR COUNCIL PRIORITY:
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Yes |
City Plan/Council Priority: |
Strategic Priorities: 21. Ensure sustainable quality development |
FISCAL IMPACT:
N/A
Recommendation
STAFF RECOMMENDATION:
No formal action needs to be taken; however, staff recommends the creation of a policy to govern PIDs and the formation of an ad hoc City Council committee to draft such a policy.