Project Development Financing a Summary

City Attorneys’ Conference March 18, 2004

Project Development Financing – A Summary S.L. 2003-403 (S 725)

David Lawrence Institute of Government

Basic Concept

A city or county establishes a development financing district and determines the current valuation of property within the district for tax purposes; this current valuation is the base value of the district. The city or county then issues debt instruments and uses the proceeds to finance public improvements inside or nearby the district; these public improvements will in turn attract new private investment within the district. Once the private investment has occurred, the tax assessor will revalue property within the district, and the difference between the current value and the base value is the incremental value. Thereafter, each taxing unit whose jurisdiction includes the district continues to levy taxes on property within the district at its regular rate of tax. That portion of the tax proceeds from each property attributable to the district’s base value goes to the taxing jurisdiction; that portion attributable to the district’s incremental value is placed in a separate fund and the proceeds from that fund are the primary security for the debt instruments. (Thus this form of financing is usually called tax increment financing.)

Additional security

A county or city may pledge other revenues and take other steps to enhance the security for the debt instruments issued for the project financing district. 1. The local government may enter into a contract with an owner of property within the district, under which the owner agrees to a minimum valuation of the property, regardless of whether improvements are made to it. Such an agreement is recorded and runs with the land. 2. The local government may pledge other revenues (except local sales tax proceeds) to support the debt instruments, as long as these revenues do not arise from the government’s taxing power. This feature makes the instruments very close to special obligation bonds under current law. 3. The local government may pledge net revenues from facilities built with proceeds of the debt instrument or pursuant to the development financing plan, except for utility revenues. 4. The local government may pledge its taxing power if it follows the procedures for issuing general obligation bonds. Creation of development financing districts

The statute has two alternatives for creation of a development financing district. 1. A city may create such a district in a redevelopment area as defined in the urban redevelopment statute (G.S. 160A-500 et seq.). 2. A city or a county may create such a district in any area that (1) qualifies as a redevelopment area, (2) is appropriate for rehabilitation or conservation activities, or (3) is appropriate for economic development. A county may create such a district only in areas outside of cities. The total acreage of development financing districts within a county or city may not exceed 5 percent of the total land area of the county or city. The maximum life of a district is 30 years. Before a city may create a district, it must give notice of its intention to do so to the county, and the county may veto the district.

Development financing plans

Before the county or city may receive Local Government Commission approval for project development debt instruments, it must adopt a development financing plan. This plan sets out the boundaries of the district, the base and projected incremental revenues, the proposed public improvements and their method of financing, and the projected private development. If the district had been created under the second alternative above, and is not in a city’s central business district, there are limitations on the amount of commercial development proposed except for office space. These limits particularly apply to retail uses, hotels, and retail financial institutions.

Some miscellaneous points

Project development debt instruments can be issued for most, but not all, purposes for which general obligation bonds may be issued. Important purposes for which they may not be issued include: - beach improvements - fire stations - police stations - libraries - parks, arenas, and stadiums - general public buildings, including city halls and courthouses - landfills and transfer stations - community colleges and schools If a city annexes part of a county-created district, it keeps all city taxes on property within the district unless it agrees with the county to surrender some or all of the increment. If the financing plans calls for manufacturing plants, there are wage and environmental requirements that must be met. The bonds permit delay of any principal payments for up to seven years, with capitalized interest for that period.