DATE: December 31, 2014
TO: Board of Mayor and Aldermen
FROM: Eric Stuckey, City Administrator
SUBJECT:
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Update on TIF District and Industrial Development Bonds
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Purpose
The purpose of this memorandum is to provide information to the Franklin Board of Mayor and Aldermen (BOMA) concerning the McEwen Economic Development District, also known as the Tax Increment Financing (TIF) District
Background
Industrial Development corporations ("IDBs") are authorized under Tenn. Code Ann. § 7-53-312 to prepare and submit to cities and counties an economic impact plan with respect to an area that includes an industrial park within the meaning of Tenn. Code Ann. § 7-53-312 or a project within the meaning of Tenn. Code Ann. § 7-53-101 and such other properties that the IDB determines will be directly improved or benefited due to the undertaking of such industrial park or project. Tennessee Code Annotated § 7-53-312 also authorizes cities and counties to apply and pledge new incremental tax revenues, which arise from the area subject to the economic impact plan, to the IDB to promote economic development, to pay the cost of projects or to pay debt service on bonds or other obligations issued by the IDB to pay the costs of projects.
In 2005, the Tennessee Department of Economic & Community Development identified a headquarters relocation project and communicated with elected officials in Williamson County. The project was to be an office building for a major corporation and would be located on an approximately 50-acre portion. The Project Site was located east of I-65, north of McEwen, west of Carothers and south of Cool Springs Boulevard. The site, the corporate headquarters office to be constructed thereon and the furniture, machinery and equipment to be installed therein, are referred to collectively as the "Project." In order to make the Project financially feasible, the Industrial Development Board (IDB) of the City of Franklin engaged in tax increment financing pursuant to Title 7, Chapter 53 of Tennessee Code Annotated to provide funds to pay all of the cost of acquiring the Project Site. The proceeds of the tax increment financing was designated be used exclusively to pay all or a portion of the cost of acquiring the Project Site. The Project was an eligible project within the meaning of Tenn. Code Ann. § 7-53-101(11)(A)(iv).
The City's contribution to the project was the 50 acre land parcel, to be provided through the Industrial Board and financed through a bond issue and a tax increment financing district. Because the TIF funding mechanism develops slowly over time as construction occurs and adjacent properties are developed, two years of interest payments (capitalized interest) were included in the original borrowing by the IDB. Several impediments and delays in construction of the project led to a shortage of funding for debt service in the early years.
During the first five years of the TIF district, debt service was approximately $1 million per year. In 2008, interest rates began to fall and proceeds from the District began to grow. From the base year, when only $33,321 was collected in the entire TIF District, collections grew to reach $678,124 in 2010. Beginning in 2011, the revenues from the TIF district began to exceed the principal and interest payments on the bonds. For the tax year 2013 (fiscal year 2013-2014), revenue exceeded debt service and fees by more than $300,000.
Records from the tax assessor show that revenue from the TIF district will be $1,087,458 in tax year 2014. Those numbers do not include construction projects at Franklin Park, Cool Springs Apartments, or Pinnacle Hotel. The Assessor's office disclosed that $195,120 will be added to tax year 2015 as the projects will be largely complete and go on the tax rolls. With the advent of Vanderbilt Medical, the Venture Building and the massive Ovation project, it is estimated that the TIF proceeds with grow by $200,000 per year for the next five years.
The original term of the IDB bonds was 22 years, with a final maturity in 2027. The bonds are variable rate taxable bonds with a bank letter of credit backing the payment of the debt service. Each year, proposals for the letter of credit are requested from various financial organizations. In 2014, that procurement process was conducted in February and updated in November/December. The IDB is now confronted with an opportunity to refinance the remainder of the project on more favorable terms, include a reduction in the final maturity from 2027 to the year 2022 or possibly 2020. The Industrial Board plans to ask that the City of Franklin endorse the direct bank purchase mechanism recommended by Public Financial Management, the City's financial advisory firm, and by City staff.
Financial Impact
Prior to establishment of the McEwen Economic Development District, a detailed financial impact study was undertaken by Bill Fox of the University of Tennessee Department of Economics and Business, showing a large positive impact from the project. A copy of that report is on file with the City, the University and the State ECD Department. The refunding proposal being recommended has a positive influence on the financing cost and therefore the timing of the final payoff on the TIF bonds.
Recommendation
Staff recommends endorsement of the plan of refinancing recommended by PFM and the staff of the City's Finance Department, subject to approval of the City Administrator and City Attorney.