Audio: https://connectdot.connectsolutions.com/ptclvhignjuh/
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Ladies and gentlemen, thank you for standing by and welcome to the Federal Highway administration capture risk webinar and at this time all participants are in a listen only mode and we will conduct a question-and-answer session later and instructions will be given. If you should require assistance during the call, press the * and the zero. The conferences recorded and I will turn it over to your host, Pepper Santalucia. Please go ahead.
Thank you and hello. And on behalf of the Federal Highway administration I want to welcome you to today's webinar on assessing value capture risks. My name is Pepper Santalucia and I worked at the USDOT Volpe Center in Cambridge, Massachusetts in support of that and facilitating webinar and you can see on the screen we have some great presenters lined up to present to you today and share their experiences and expertise on the topic of assessing and mitigating value capture risks and we will introduce you to them in more detail in a few minutes. For now, I want to give you a quick orientation to the webinar room. In the top left corner of the screen, you should see a window or box labeled audio information. If you have any troubles through your computer speakers, you are welcome to join us on the phone and there is the phone number and code in that window.
In the lower left corner where it says audience chat, that is where you have the ability to send questions or comments during the webinar. We also give you the opportunity to ask questions by phone by pressing the * and the number 1 and we will remind you of that option as we go along. And with the slides you have the option to enter into full screen mode so the slides will be more visible on your screen and to do that you can look for a button in the upper right corner of the window with the slides. And the button has a colored and rectangle in the corners on it and if you cover your -- hover your mouse over that button, you should see an option that will say go full screen. If you click that you will enter full-screen mode. To leave it you can press the escape key on your keyboard or there will be another button in the same spot that will allow you to exit full screen. The webinar will run until 3:00 p.m. Eastern time and we are recording this session so people can listen and attend the webinar at a later time. That recording, as well as copies of the slides from today's event, will be posted on the website and in addition we will make the presenter slides available for download toward the end of the webinar.
We will be taking questions at the end of each presentation for a few minutes, and we will also have a longer period of time for QA after the last presentation. Finally, if you're interested in applying for a professional development hour are credits for your participation today, we would provide information at the end of the webinar on how to obtain confirmation if you participated today.
I will go back to the opening poll while he introduced the moderators. Terry Regan is the technical advisor for innovative transportation and planning at the USDOT Volpe Center and he has 30 years of experience working at the regional, state, and federal levels on a range of issues involving transportation planning and finance. I will turn it over to you and get your initial reaction to the poll results so far.
Thank you, Pepper. As you can see from the results , between local governments and NPO's we have about 50% of the audience, and that is our intended target for these webinars and we really want to bring information about value capture technique to the local and regional level. So, it is great to see you here and in terms of your knowledge of this, there is only 1% of you who say you are very knowledgeable and 31% somewhat. And well over 50% doesn't have much knowledge over it so we hope this is productive to you in these next few hours. And now I wanted to introduce our presenters. Rafael Aldrete is the author of the primer on assessing value capture risk and as was mentioned, you can download toward the end of this webinar and it will also be posted on the federal highway website. Actually, I apologize. We are still working on the primer and we also have a director of S&P Global Ratings, Kristin Button and we have Julie De Hoyos. As was mentioned, we will have a QA period after each of the speakers presented. If you have any questions during the presentations, please submit it in the chat pod where we can cue them up for the speaker. It would help if you do have a question if you note in your question what slide it was on to better help our participants to respond and in addition we will ask the ATT operator for opening up the telephone line for questions at the conclusion of each presentation. If we Dawn't have time to address all the questions submitted, we will post those received as well as the answered on the value capture website.
Let me first introduce Rafael, who will provide a brief overview which will be available soon on the federal highway website. Is a senior research scientist at the Texas A&M Transportation Institute or TTI as we call it? But he has over 20 years of international experience in transportation research and management consulting working at the federal national, state, local agency, private sponsors and multi-lateral places and prior to joining TTI he worked elsewhere and is infrastructure work is concentrated on structuring value capture for value capture funding and I will turn it over to you, Rafael.
Thank you, Terry. Good morning and good afternoon, everyone. This presentation will provide some highlights of the contents of the upcoming primer on assessing value capture risks. The presentation is divided into seven sections and I will start with a brief introduction of value capture and its relationship with risk and we also talk about the objectives of the primer and in the first sections that follow we deal with different categories of risks that we have to use two group types of risk but we try to capture projects may be subject to and in each of these categories, we will discuss examples the risks and its relationship to value capture and most importantly we will be highlighting some of the risk mitigation that were used in those examples to deal with risk. And in the interest of time, I won't go over the examples I have included in the presentation, but you will get a copy of all the slides.
And then we will present a matrix table that summarizes the general risk categories that are most relevant to the different value capture techniques that these webinar series have covered over the past few months. I will finalize with a brief overview on the concept of developing a resilient capture funding strategy and this is done with the value capture approach according to the risks that are most relevant and most likely to materialize in which stage of the development process.
So, value capture techniques that these webinar series have been covering a lie -- rely on increasing value. And business activity and economic growth that linked to transportation infrastructure to help fund current or future transportation equipment and this slide shows how this works so if the government invests in transportation infrastructure of the area around the corridor experiences and acceleration in development and an increase in property values. Also, in these areas business activity growth and employment growth. In turn these results increase the net worth of property owners and landowners around the transportation movement. And businesses experience an increase in sales. This in turn causes an increase in tax revenue for the government and a portion of this tax revenue can then be reinvested in infrastructure in a sort of sustainable cycle.
So, in the primer risk is defined as the possibility of deviation in the actual project outcome as measured by the benefits and costs that occur with each project stakeholder from the expected good project outcomes. So, in this concept, it has unexpectedly good outcomes as well as the possibility of unexpectedly bad outcomes. And value capture depends on creation linked to real estate and economic development, risk is intrinsically intertwined and driven by the project and the demographics of the area and the location of the project as well as economic community by businesses and economics and employment.
So, assessing and managing risks that are associated with value capture is critical to maximize the project value in the funding we expect to assure that value capture remains a sustainable funding source referring back to the initial graphic we showed. So the object of the primer is for local governments to understand typical risks associated with the value capture techniques and learn how to build resiliency by assessing value capture strategy to account for this and when we talk about using resiliency, this is about incorporating means to cost-effectively deal with potential deviations and the outcomes that may affect the ability of the project with the value expected or the ability to capture or use that which is generated.
I will Ming -- move on to the first category and it is on market risks and the first risk type we have our macroeconomic risks. So these are those related to shocks of economic growth and inflation at the national lover -- level and some examples include economic recessions that impact spending, interest rate changes that impact the cost of borrowing and geopolitical events that disrupt the supply chain or catastrophic events that impact certain economic activities. And here I will jump to the second example. And an example of risk that impact the technique is supply imbalance that may be produced by events of national or international scope that disrupt the balance between real estate demand and supply was short and long-term effects and in terms of residential real estate, for example, on the demand side when there is a response for the event private or public employers suddenly have policies for example a shift to work from home rich results in household spending more time at home and in turn that increases demand for housing and that is one phenomenon that could happen at another one is, for example, to reduce interest rates to support the economy and that may also through a different mechanism increased demand to purchase new homes. And then on the supply side, the economic uncertainty that this disruptive event may cause is a discouraging homeowners from selling their homes and reducing housing supply and additionally other impacts of the disruptive events international scope may affect the supply chain which in turn may lead to increasing the cost of construction materials and therefore exacerbating the housing supply issue that has been created by the unwillingness to sell property. So, this disruption may cause a temporary or permanent impact on housing which in turn increases property tax appraisal growth and potentially benefiting value capture techniques reliant on real property taxes such as financing districts or special assessments. On the flipside of the coin, we have the impact of events like this on commercial property. And for example, in the disruptive event affects commercial property owners when the tenants experienced shortfalls in closures or bankruptcy and as a result of retail or enough space as well as hotels with that. And this in turn reduces the demand for resale space and leads to long-term changes on occupancy rates and markets leading to lower property values and in the short term this could have a negative impact on revenues generated by value capture techniques that rely on property or sales taxes and a geographic area such as the affecting the financial district with property economics. So, they may choose to do is allow taxpayers or landowners property owners to apply for plans for missed payments or to [ Indiscernible ] deadline a few months to give the property owners some time to make their payments.
And here is an example. So now moving on to a more localized real estate market risk. These are more regional or local real estate bubbles and boom and bust cycles that happen at the local level that disrupt real estate development and other economic activity in a particular community. This risk affects revenues by value capture techniques that rely on property and feels taxes and make it very difficult -- they delay new development and make it difficult to use value capture techniques that rely on new developments happening. This includes joint development and development contributions, et cetera. The first example we have in this category is this in Columbus, Ohio and it is a development project. It is a retail strip that connects to neighborhoods usually isolated due to the barrier [ Indiscernible ] created and one consequence of this barrier was two different real estate markets developed over time despite opportunity and one neighborhood south of the highway was developing with potential business district and the location of a convention center on the other hand on the north side and that area had real estate value that were much lower. So, they had a [ Indiscernible ] plan for this area and it was one of the main drivers for the city of Columbus to proceed with the project and construction of the project began in 2002 and completed in 2004. The fact that this station was one of the first retail projects that was built over a highway in the United States generated significant risks and uncertainties for the developers involved. The unbalanced nature of the real estate on both sides of the highway raised concerns for developers about the commercial attractiveness for the retail chain and this impacted the expected leasing prices as well as the rates and the leasing revenue for the developer. Nevertheless, the project was very successful commercially as well as in terms of development on both sides and spurring that. This type of risk can be mitigated with the studies that confirm that the location was good, and the nature of the project was good, and the value capture technique was appropriate.
And the next risk in this category are other local economic or demographic risks and these are defined as regional or local economic shocks that result from structural changes from the economy and from natural disasters or other causes. Some examples of these risks include the structural economic shift from manufacturing to services as employment drivers at a national level that may result or have resulted in unemployment with sectors of the workforce and eventual migration as well as other socioeconomic problems. Natural or environmental disasters that impact businesses in general and businesses such as the tourism industry and these affect revenues affected by value capture techniques that rely on property and sales tax.
This example I will skip, and it is very well known when migration happens at the rustbelt. In this was in the 1980s and 1990s.
I will move on to the next category of risks, which is the legal and political risks. The first one that we have here is what we call legal feasibility and legislative risks. These are risk that may impact the ability of the local government to use of particular value capture technique and it's for a particular type of project and some examples include lack of clarity in the enabling legislation that exist prior to implementation and another example are adverse changes enabling legislation that take place prior to project implementation or legislative changes that affect businesses or incentives that may be used to spur development and may happen prior to or during the implementation.
The first example we have here are the legal challenges for implementing transportation reinvestment zones that counties in Texas experienced. So, the legislation in Texas allows counties to establish a TRC to fund a project but the Texas Constitution has not allowed those to do implement a tax revenue for project. And incorporated cities and towns that extend from this requirement and have authority to issue that. So, this issue only applies to the counties. And an additional amendment was voted on in November of 2011 and was defeated and a new amendment will be voted for in a few months in November. The amendments would allow the county sustainability that municipalities have to issue them for infrastructure, transportation projects specifically. So the mitigation measure when looking at situations like this is when you're dealing with a newly created local funding mechanism, as TRZ was in Texas years ago, you need to conduct a thorough legal feasibility assessment and perhaps talk to potential lenders to make sure the law will allow you to implement the tool and you will be able to use the tool to generate the funding to deliver the project. And I will skip this example. And we can discuss the other things that we have what we call local political climate and political feasibility risks. These are risk that may impact the ability of the local government to use or pursue a value capture technique as from temporary events are permanent changes in the political climate including changes in public support or opposition to a project up to the value capture technique being proposed and also result of that and risk that fall into this category include elections at the local, state and national level, public support for the value capture technique for the project or changes in support for enabling legislation that may happen at the state level and prolonged civil unrest.
So the example that we have here is an example of the project and assistance for the transportation District used for its implementation and they may face resistance from landowners and developers because they are a new tax and property owners in the district make argue their neighbors outside of the district or future residents Dawn't have to pay the fee or the tax although they are been a fading or will benefit from it. According to Virginia law, in order to initiate the process of establishing a TID, at least 51% of the commercial land must make a petition and in phase 1 of the Dulles corridor Metrorail project was overcome with a group of developers who supported the idea of creating the TID and a group of land owners and economic alliance of [ Indiscernible ] and this group carried out an extensive campaign together support from other landowners to generate and formulate to establish the TID. So, the mitigation technique in a case like this is to conduct an effective outreach campaign and identifying champions in the developer community that help generate awareness of the projects value generation benefits.
And I will go on to the next category. Here economic risks and these are risks that directly affect the ability to secure funds from lenders or financial markets due to unexpected discrepancies between forecasting the national development level spurred by the project and this is a situation in which the value capture technique generates less revenue than expected making it impossible to secure funding to fund the project. And some of the risks that fall under this category we have project location, the lack of or not sufficiently following these studies or selection of the project we funded with the value capture technique.
In the first example we have here is related to transit development and I do want to move on to this next one which happens to be -- can be a bigger issue especially with techniques that rely on property tax revenue.
So this is the fiscal impact and risks that affect the local government's ability to sustain basic government services as a result of the commitments made to the project and situations that fall under this category include over committing a future tax revenues within an area for a particular project, or overcommitment of these revenues that causes a loss in the ability to sustain adequately essential services within the area, or relying too much on tax increment financing districts or similar to that in turn it results in a negative impact to the municipalities general revenue fund. This is a big deal in many cases that has to be dealt with in the first example that we have here is related to financing districts and when the projects funded Spurs the economic development. And what this means is when the project doesn't deliver on the development expected is that the project starts being subsidized by the general revenue fund rather than creating additional revenue and the way to mitigate this risk is by conducting but for feasibility studies based on realistic expectations and stress this, the developers assumptions.
Make sure that the story is true and make sure that the development is very likely to happen.
And the next category we have is the policy and institutional risks. Here we have two types of risks. The first one is the policy and institutional risks related to social equity. They are risks generated by the value capture technique used for the project selected when they have a disproportionate impact on low income or disadvantaged communities. These include risks, for example on low income or disadvantage communities through gentrification, impacts from acquisition that result in relocation or other examples include noise and air quality impacts or impacts on cultural or historical sites.
The first example we have here is when a development or redevelopment that is associated with a value capture project affects low income residents in these districts so when they are used to pay for projects that spur development or redevelopment in blighted neighborhoods and this is done without a thorough evaluation, the project may end up disproportionately affect in low income residents effectively removing them from the area through read gentrification and displacement. And an example here low-cost units are cleared and replaced with higher income units or commercial development forcing the migration of lower income out of the location. So how some places, in some cases these can be mitigated and in many cases can be mitigated and for example in the state of Utah they have incorporated requirements for development of affordable housing in their housing and transit reinvestment zones and the requirements are found in the legal framework for financing districts in California and Oregon. So, either a percent or a percent of the revenue has to be spent on affordable housing in order for these districts to be approved.
And the next type of risk we have we call them administration and transparency risks, and these are those that arise from a limited transparency or communication of the risk caused within the location rationale and a decision-making for risk return. And some of these that may take place in these categories are nondisclosure of unknown project risks including the nondisclosure conditions of compensation for the developer, and so on. Here, some of the risks that are typical is the failure in performing feasibility studies or not performing any risk analysis of the assumptions and not performing the public about the risks that are shared with the value capture tick me or the risk associated with the project. And an example we have here is this first one the study found that in some instances value [ Indiscernible ] [ Indiscernible ] without informing the public that is easily understood so the funds were initially supposed to be allocated with a balance between low income areas and high income areas, but at the end they were allocated differently than what was supposed to happen and in other cases it wasn't part of the property tax revenue that wasn't supposed to be diverted away from projects but was diverted from public schools. So other potential mitigation measures in cases like this or in all cases include developing a district master plan that illustrates the public on where the districts are located and what the projects are in each district and also including that the value in the district and making it mandatory so that each project that is approved as part of that and has to be approved by the [ Indiscernible ] and also having this mechanism or revenue performance monitoring mechanism for the district.
The next slide is a matrix that has a full explanation, but we do this in the primer, and it summarizes the different risk categories that are most relevant to the different value capture techniques that we have.
And I will move on to the last section of our presentation today and this is called building resiliency into a strategy and as I mentioned earlier, it's key to maximizing the value generated by the transportation [ Indiscernible ] and the long-term success of value capture is a funding source and the sustainability of value capture is a funding source. And they have incorporated the needs including two mechanisms to cost-effectively deal with potential deviations in the actual price outcomes that may affect the ability to generate the value expected or the ability to capture the value expected. And the way we accomplish this is through what we call a risk adjustment value capture strategy.
So, risks are usually identified by reference to the different phases in the project development process or by reference to the risk categories. And when we talk about phases, they include here are shown on the screen is project initiation, preliminary engineering and design, PS and D development, leading and award, construction, and maintenance and operation. Running in parallel to these phases we have the environmental compliance and right-of-way and utilities. And risks that may have this unsuccessfully using the value capture technique may materialize in each one of these phases or and one or more of these phases. So, a risk strategy involves living a plan to manage these risks that is tailored to the timing of these. And the likely timing of the risks in each of these phases. So, for example, a risk allocation early in the project initiation and in the preliminary engineering phases can learn -- lead to more risks materializing and also the risks of the local government or stakeholders may face in the first four project phases, initiation, engineering and design, development and letting an award and it is process oriented and they depend on adequate execution of each one of these processes. And for example in the initiation phase a project that is selected through a rigorous planning process and justified by significant mobility or accessibility needs is more likely to spur the economic development on a project that is [ Indiscernible ] but on the other hand, the risks that occur in the construction or the maintenance and operation phases depends on a much wider range of factors that often the factors outside the local government so it's also essential that districts and their timing and for example construction delays that affect the timeline when the expected value capture revenues begin and other risk events that may not realize it is open to construction bid influence the other demands for economic activities. For example, an economic [ Indiscernible ].
This concludes the presentation and as I said you will be getting a copy of each one of the slides and more examples are included there. And I think we can take questions.
Great. Thank you. We do have a number of questions and I will read them out too. The first thing is Richard wanted to know, will we be providing a link to the attendees to access the recorded presentation. Yes. There will be a link that will reside on the federal highway value capture website so you can share that. When you click on the link, you are able to hear the presentation and watching the slides be presented. But getting on to the questions. The first one we have is, Pierce has an observation that the Dulles landowners generally supported the task -- tax district due to density credits and zoning protections it took hard work but was not a hard sell. Any thoughts?
That is right. There is a lot of hard working [ Indiscernible ] but is not hard sell once you communicate the potential benefits and you create the incentives for them to happen to get developers on board.
Anybody else want to chime in on an answer? Moving on, Caroline has a question. How does the city address over or under investment risk?
That's a very good question and that is a balancing act and local governments, like I say, every year are more hard-pressed to answer. And that is supposed to be responded through the but for test that demonstrates the investment would not happen would it not be for the local government contribution to happen in the form of a Financial District or other developer incentives. So it is a balancing act, and how we do it is through the but for test and it includes a very thorough analysis of those involved and the business case and making sure that the right amount of government support is being provided. And its kind of depends on the expected revenue in terms of practice and the condition of the revenues that have to be made to the private developer in this case.
Great. Mark has a question. We got a question similar to this almost every webinar. Does prop 13 in California essentially strangled this strategy in the state?
I have to be honest, am not familiar with prop 13 in California.
Okay. It essentially sets a threshold with property taxes.
We have a similar one in Texas. I can refer to what I understand is it is set up in the same way for the last years in Texas and it doesn't necessarily establish it but I think the key is making projections that take into account some of these ceilings that may exist for local property taxes. So at least from our standpoint when we have a situation like that, what we do is there are ways of conducting an analysis to ensure the projections you make of growth, property growth and property development, stay within a limit that is not going to push you over the ceiling and at least that are some of the assumptions we can make in your feasibility analysis to ensure you Dawn't overpay and you Dawn't take too much risk when analyzing that but at least if it is the same the ceiling on property taxes doesn't necessarily create an issue if you consider it in the development of the [ Indiscernible ].
Any other presenters want to weigh in on this? If not, I will move on to the next question. Hearing nothing, Caroline wants to know should business relocation resulting from the new development be considered in the risk assessment.
Yes. Part of that the same way that not only housing does but the relocation of businesses and that is also something that shows in environmental process and it should also be considered.
We do have another question. Given the administrations emphasis on equity, there are concerns about housing displacements and value capture. Will the primer cover this topic enough to respond to those concerns?
This is a question that is very important, so we will do our best to cover these issues and how different and basically dealing with it by presenting examples on how locations that of handled the assessment we have.
Okay. Great. We have one less question before we move on to the next presenter, but Travis wants to know will the primer have a recommended template resources are set of standards for financial feasibility test or expected revenue forecast? For example, how can local governments know that the consultant they hire for these has used in adequately rigorous method? That is a tall order.
The challenge with the primer is we need to keep it at a certain length and to make it a useful reference and something you can quickly grab too quickly look up for [ Indiscernible ] of interest but the way we are planning to handle it is we are going to include references and links to studies that have considered to have been best practice or have had good results so that is the way we are going to do it and unfortunately we are not going to be able to have a specific [ Indiscernible ] for risk valuation of forecasting but we include links and references to more thorough documents that they can use.
I would like to add. At the Texas DOT office we had a very good question and we have run into that on a number of occasions with some of our local government partners where they have had had studies done and they Dawn't look at the right thing necessarily that would mitigate the financial risks so we put together in formal lists and then we work to see if we can add that to some of the examples that are made available and, if not, we're happy to share it on a sidebar and I think typically included in Mike presentation and I didn't today but I'm happily to share it today through the website or individually, but it is a very good question. Oftentimes, some things are left out or only looked at as more of an economic impact perspective versus looking at it from estimated revenue forecast and I find oftentimes it can be to Rosie and from a local government perspective, you want a realistic conservative estimate for this because you may issue debt to it so it is part of your risk mitigation, we will work with Rafael and if not others to see if we can share some of the best practices we learned and it is by no means a perfect list or all-inclusive, but it is sort of something we learned through our experience.
Thank you. And that was Julie De Hoyos from Texas DOT who you will hear from in a few minutes. Go ahead.
I am sorry. I should have introduced myself. Thank you.
Now we will move on and we will hear from Kristin Button. She has over 20 years of experience in public finance and the most recent being at 1020. She provides ratings for municipalities including tax increment districts and Texas and surrounding states. Prior to this she worked at Bank of America providing direct lending to municipalities and its Moody investor as a ratings analyst. With that, take it away, Kristin Button.
Thank you, Terry. Yes. I am in the public finance team with S&P Global Ratings located in the Dallas, Texas, office. I will be going over the criteria for special-purpose district including tax increment financing and we will just go through the presentation and I will see if I can get it to advance but key takeaways for today are that tax rates and developments are outside of control of the district so this is a key risk and we will talk a little bit more about that and there are some risks to consider so we will also go over those and our criteria covers eight factors. I will go more in depth on those with you and then finally we will talk about the volatility ratio, which is a proxy we use for incremental revenues and how they can rise or fall.
So the main credit risk here we identify in our criteria again are the tax rates and the pace of development in the project area and they lie outside the control of the district that may be issuing the debt and that is because obviously the tax rates are set by underlying taxing entities like cities, counties, schools, park districts, and others, that set their tax rates without consideration of the needs of the district. And there can also be changes in state tax law or assessment practices that can influence tax increment revenues. So, these are things that we would talk about with an issue or and these risks and how they might be mitigated.
And the features of tax increment financing. We do know there is no additional tax burden for taxpayers. It is really just a reallocation of tax revenue that would otherwise be going to the pre-existing taxing entities or tax collection rate with other alternate financing which can be a concern but not as much so with tax increment financing. And undeveloped land is a good thing because it could mean that obviously there will be more tax revenue coming into the extent there is new development.
These are the risks that we have identified, and I am sure there are more, but this was our criteria when we do that issuance and there could be volatility in commercial real estate values or construction risk on projected projects. There could be plant closures for the purchase or foreclosure of land by tax-exempt entities. There could be a real estate bust, state tax law changes, the concentration of the risk and then a high volatility ratio.
The eight key factors that we will go into include project area analysis, taxpayer concentration, management, historical assessed and future assessment, legal considerations, financial operations, and tax limits.
With project area analysis, we are talking about general economic factors so population growth, employment opportunities, income levels. We will talk about building permits. We would want to review a district plan that talks about economic conditions and objectives.
And with taxpayer concentration, we Dawn't really have a size limit on an area but generally smaller districts have weaker credit characteristics and larger project areas are usually more diverse and so generally have higher ratings. Concentration is analyzed by comparing the AB of the top taxpayers to the project area incremental value. So not the total value but incremental value. And then because a lot of the project areas are smaller, the top five taxpayers can comprise about 40% or more of the tax base. Taxpayers may not appear concentrated, but if you take a look at who actually owns property, you may find it is actually one development. So, a condominium may look like it is several buildings and separate owners, but it may all be one development. Concentration can also be with property like computer equipment that can be moved around so that can affect that as well.
On historical assessed valuation growth, we want to look at least four years of assessed value if we can we typically do see high growth with new project areas. We use the total project area looking at valuation growth because the base value can change depending on certain circumstances, so we do look at the total value. And on future assessment growth an important indicator is the acreage available so we will be talking about acreage and we know that they are not necessarily guaranteed to get the growth projected, so we will talk about that and opportunities and there is construction risk. We definitely want to talk about future growth, but we also will talk about historical tax revenues and that can cover that without considering future growth because it can be risky.
Sorry, I think I was accidentally on mute. I am so sorry. So, with management, I was saying we talked to the Executive Director and questions we go over include additional plans and unusual features of the plan and land use breakdowns.
Can you go back one slide? Thank you.
This one?
I think the previous one on legal.
Yes. I am going back to that one. We want to talk about security, so we make sure we have a good understanding of that, and we talk about the flow of funds and the debt service reserve fund. If there won't be a debt service reserve fund, we consider that is a negative because debt recovery is pretty low and we will talk about provisions of additional debt so a typical additional bonds test is 1.25 times the coverage of maximum annual debt service and a lower ABT is okay but should be mitigated by a lower volatility ratio or taxpayer concentration and will also talk about tax increment authorization laws and litigation.
And on financial operations, here, we are looking at if there are fluctuating tax rates or if there has been any delinquencies or collection rates and historical debt service coverage. So, no specific level of coverage leads to a particular rating, but it uses the lower of the ABT or MAD S.
So, we do have had historically a lot of ratings in California and I am not sure how many new ones we have. When they do issue they will definitely have a tax limit and they can had a cap and the problem is if projected tax increments reach those before bond maturity so our team would look for covenant by redevelopment agency there to review tax revenues and make sure they won't hit the cap so they can do things like ask for revenues are not accept the tax money.
[ Captioners transitioning ]
We express it as a fraction between one and zero the higher number means more volatility. it is specific to each project area and has nothing to do with the amount being issued.
Another way to look at this is how much AV would have to fall.
I have a slide showing and comparing project area A and project area B. The big difference here is the base value. Project area capital a is a much more mature area with a much lower base value. Comparing these, they are both fine, it is 10% fall value has occurred we look at that and say what would the effect the X for area B it is a stronger effect because of this much larger base value. Volatility ratio is very high compared to project area A it does not look very good.
My final slide is comparing examples that we have. These are both in Houston. The city of Houston does true borrowing in that area. The first one is golf gait rated triple B it is around the airport area. You can see there is a big difference. The volatility ratio from Midtown is much lower versus Gulfgate. This one is rated A versus --. It is 638 million but Midtown it is 2 billion because it started at a much lower base value. Then there are some other ratios like MAD coverage and additional bond test. This does not cover everything, but it does include some of the key ratios. I just wanted to share this with you.
Is that your last slide?
Yes.
Wonderful.
If you have any questions for Kristin, I knew there would be a legal disclaimer.
While we wait for some questions to be typed in, let's just go over some of the comments that were posted in the chat pod in response to some of the earlier questions. John Duell, who is one of the federal highway experts on the EDC five team. He said capture techniques are used with projects that have federal funding and required to follow the federal uniform act.
Stephan who is the code lead with Ty Bishop mentioned that it has equity baked into it based on the economic beneficiary pay principal. Individual techniques can further address equity such as Utah use of transportation reinvestment zones requiring low income housing. Stephan, did you want to mention anything else about that?
It is fairly self-explanatory, the beneficiary page indicates that those who benefit on the investment portion -- the benefit that they receive and, in fact, there are legal cases that show there is a nexus between the value created on the project and the -- the value would not exist but for the project and those outside the area -- would be included in the TIF zone. There are things baked into it, but it is based on -- who the benefit paid and those who do not benefit and should not pay.
Great. Kristin, we have a request from Catherine. Would you please review the calculation of the volatility ratio? Maybe Pepper can load your slide backup.
Sure. Let me see if I can get the pointer to work.
Okay. Our calculation is based value here to the total value. In this example, it is base value 400 to the 450 and that is how we get to .8 volatility ratio. Again, the scale on the ratio is one to zero. The lower the number, the better we view the volatility ratio will not be as level.
Great.
Another question for you, Mark wants to know what transportation infrastructure was funded with bond funds for these developments to raise values of the district?
That is a great question. On Gulfgate , it was an older shopping mall, I think it had been abandoned for a while. What they did is they came in and put in new infrastructure to support retail projects, a lot of the stuff that we are seeing in Texas is what improvement and beautification projects to make the area more appealing to bring in development. That was Gulfgate. Midtown, I believe it was to support some multiuse apartments that would have restaurants on the bottom and apartments that are up from office buildings. A lot of it is the infrastructure to make it easier access to get in and out of the area, to connect it to downtown, those kinds of things. A lot of drainage projects get done that way.
Great. Rick has posted a comment in the chat pod. Rick is one of our other subject matter experts. He notes that proposition 13, which is a California proposition, value capture is considered a fee and not a tax. It is an important legal distinction and special assessments are exempt from prop 13 restrictions. I hope that adds to the conversation.
Let's check and see if we have questions over the telephone. Could the operator open the telephone lines for any questions?
Ladies and gentlemen if you wish to ask a question press star one on your telephone otherwise the prompt will indicate when your line has been open. Once again, that is star one. No questions in queue at this time.
Let's move on to our third presentation. It will be given by Julie. Julie serves as the corrector project finance and operations for the Texas Department transportation project finance, debt, and strategic finance division. Prior to joining TXDOT she worked at the office of the Comptroller and the government's office of economic development. She has a Masters in economic and undergraduate degree from quantitative economics from Tufts University right here Massachusetts. Take it away.
Thank you. For those of you who may have heard a presentation about -- before today we are going to take a different angle to address some of the things that have been spoken about by my colleagues. That is really about the state level risk assessment of value capture and specifically for us transportation reinvestment and how it can be leveraged while still mitigating those risks. I will start by talking about the Texas case. I know we keep doing the same thing but a lot of this can apply at the national level with similar programs.
Transportation reinvestment zone has been briefly described as a tool created specifically for value capture for transportation projects. Here in Texas it is a geographical zone planned around the project that helps to facilitate and capture property tax increments. It does allow for sales tax increment capture, but we have not seen very many cases of that. Typically, sales tax increments have been spoken for at the local level and we have seen the use of the property tax increment. DRGs are a local VC tool. We assist them at the state level but because it is the usage of the capturing of a local property tax. The tool is created by the local tax and entity. Currently, legally it is allowable for counties, municipalities, and important navigation districts, those were added on in more recent legislation. As was mentioned earlier, we see this used by minister polities and navigation districts because of the legal limitations that counties have had. Their ability, or I should say limitation to the use of this tool to issue debt backed by these types of funds and the proposition that will be on the ballot this November would authorize counties to be able to issue those infrastructure bonds more specifically in blighted areas. There are some other limitations that would limit the percentage of the increment allowable for the debt issuance. Again, these would give a little more clarity whether they pass or not, it would give clarity to some of our county partners regarding the legal risks and limitations that they are currently facing.
State involvement. TXDOT supports local government entities with a number of aspects of TRZs. The first is information and that is what people who spoke about that is assisting with awareness and presenting to local leaders and partners about the tool itself and how it can be used. That helps to mitigate the risk of misinformation about its usage and hoping -- we do not ever want to stand in the way of legal counsel but being able to say yes, this is what is currently in the legislation and these are examples of who are using it, sharing information that we have regarding our partners and their current use of the program.
We have analysis come up that often is partnering with our colleagues. We have worked closely looking at the studies and looking at the feasibility studies and the estimated potential of these value captures because that is something that we keep talking about, understanding, what is potential of using value capture for your specific community? Every project is different. You could be in the same city and you have two very different scenarios, understanding based on that very specific location, what is the potential for it, what is the increment that you have available to you. We run a loan program called the state infrastructure bank loan. That allows local governments to borrow at a low interest rate using funds that are from TRZ.
We also provide tracking tools. I will talk more about that for our partners who have TRZ in order to monitor their investments and monitor their capturing of the increment. And finally offer training to local communities regarding using the tracking tool and how to partner with the local tax assessors to properly look at the data and make sure they are keeping a close eye on how those are performing.
The department sees this as a tool for local entities to leverage funds in order to move a project forward. Sometimes that can be separate from TXDOT. It could be for a project that TXDOT is not involved in. Of course, we tend to help more with projects we are involved in and we would like to see them get to the finish line, but we do assist broadly.
This has been mentioned but I cannot say it enough, it does not levy a new tax. It is a tool that sets funding aside that is already being captured. It allows the community to capture existing economic growth as well as expected growth that would be generated from the project. It can be used in conjunction with other financing mechanisms to fund a project, sometimes, more often, I have seen it used in -- it may not fund the whole project but it may fund a piece of it or help it get off the ground. The TRZ estimate study is established ahead. This is to establish a zone and quantify the potential opportunity. Just the initial step of risk assessment. This really is the base step of Rick risk assessment for the local community. Is it worth going down the path and using a political capital to make people aware, what is the dollar amount that this would bring to the table and figure out if it is worth taking the next step?
The communities that are familiar with TIRZ/TIF like to use this tool because it is similar, and it does not require -- it is a nice benefit for our local partners. Finally, a mechanism to speed up a project that may not have had sufficient funds otherwise.
I want to talk about what the risks are of using TRZs, again, I am really speaking to extremes that we have had working alongside our local government throughout the state. They are not often a soul funding mechanism. As I mentioned they may contribute partial funding to a larger project, we have seen them very beneficial possibly paying for things like environmental studies, utility relocation, how can it pay for a portion of the project, if not the whole thing? It is very important from a risk perspective to educate the stakeholders, the local stakeholders about value capture. What does it mean? That goes back to the comment from one of the attendees, it took work up front, but it is not a hard sell. Once people understand it is not -- we are capturing tax that would have been captured otherwise. I like to explain it as almost a savings account specifically for transportation projects, you are setting funds aside specifically for a predetermined project. When you explain it upfront, it is not such a hard sell after all.
Excuse me, I have an interrupter in the background. Something else I want to talk about, can the local community work around the expectation budget wise? That is very important about the balancing act that Rafael mentioned earlier the balancing act between the budget needs in conjunction with the project itself. Sometimes you can identify just a percentage of that increment towards the project, it does not have to be the full increment, the feasibility study and the risk assessment on the front end can help avoid budgetary issues and overcommitment in the long run. Again, doing the work up front can solidify the project in the long-term.
Again, risk perspective from the state point of view, I will talk about here, I will mirror something that Kristin touched upon, that is the risk associated with the financing aspect. When financing loans backed by TRZ typically the project needs to issue debt upfront. They need the capital upfront. The two most common mechanisms in Texas are either through bond issuing or a loan agreement. The loan agreement more often than not is -- we do have our programs that the communities are aware of and used two and they may have used them for other projects. That is very popular for us. The tax increment bond can have a higher cost due to the rating compared to other noticeable debt mechanisms and that can be due to the speculative nature of value capture. Trying to estimate revenue that comes with TRZ and other tools is very different than looking at what may be backed by expected tools or revenue. Is a different aspect of what we are talking about estimating and predicting the trends of property tax growth in a community? Of course, we have recommended ways to look at that and tools and economists who work with it trying to use their best judgment in doing those estimates, but it is speculative in nature. There is a risk and with that comes a higher cost. That is on the bond side, we see similar things with the program where the commission requires -- by the community and general revenue funds are backing a loan that is being pledged with TRZ increments.
When we have worked with our partners, explaining TRZs working with local leaders and educating about the tool itself, sometimes the entities or local community may stop and consider whether a TRZ is needed to move forward. If they do have to pledge general revenue funds, why even go down the path of the TRZ. Some committees like it, some think it is politically helpful it sets aside funds specifically upfront with a delineated geographical area and a goal. For some communities it works in other communities stop and look back at tools that they had ahead of considering a value capture tool and may issue that separate from using a value capture element. Some of the risk factors that are unique to each community and each entity that we work with and need to be considered at the local level.
It was the economic development needs today and the future, other growth needs that a community may have based on a growing population. Of course, political ramifications in terms of preference. Some communities say, stop. I thought I could use this for pay go. How can I use a TRZ for pay go? We know that transposition -- -- those are all political preferences that a community would have to look at individually.
Again, weighing all the different risk factors can often lead to an alternate solution. I want to talk about post implementation risk. We have touched on it slightly, again, I often push on this. It is a big push upfront. It can be a very successful tool. TRZ was established, financing was secured, and the project is underway, and you're done. Nope. If you are not. What risks are there now that the project is underway, and the zone is created, and you have gone through the homework upfront. Now at this point, the risk comes during the monitoring of the zone itself and making sure that those estimates, the feasibility studies were accurate or hopefully conservative and that the actual value capture that is occurring is going to help you meet whatever debt issuance or any financial agreements that have been put in place. Were the estimates on target? Were they lower or higher? Does the zone need to be expanded in Texas has some legislation that was added layer that gives the community the ability to expand the zone, you cannot make it smaller if you already have an agreement in place tied to that, you can expand the zone. Again, it is a positive thing. There is a solution, but you have to be mitigating and monitoring it to be able to react to it. TXDOT has worked with TTI to create a tracking tool to help monitor their incremental value. Working with a local appraisal district on the partial and values can be complex. It can be tricky. Some communities have the expertise and the know-how to look at the data and the software and some cannot. We wanted to create something that made it more user-friendly for them. Initially, when we created it, it was more for those who have that issue for us and a way for them to monitor their debt and obligation and whether they are meeting them. We offer the tool for anyone.
Just to recap some of the risks that we have covered today. Is a TRZ or increment value capture tool a fit for the project? You have to look at all of the risk factors that come with it with the project itself, for the community, talking about preferences and legal limitations. Is it a fit in conjunction with other local needs, economic development demands, budget needs? Will it get the project funding to the finish line? Can it be stacked with other sources of funding? If it is finance, what are the cost and risk associated with pledging these types of funds for debt repayment, or should an alternate solution be considered a go once all of those are looked at, if it is still something that works for the community, making sure those monitoring tools are in place. Is the staff dedicated to monitoring that for the community? There could be somebody on staff, someone who leads the financing effort, or a business manager who is in place who can mount monitor and track the increments. It is just really important that all of the items are tackled. There are often solutions are preventative measures that can be put in place to mitigate these risks. Doing that approach it makes it easier in the long run. I know it reflects something we keep saying, it makes the project stronger in the long run and avoids issues that can often creep up if you have not been following the risk along the way and making sure you are ahead of any problems that may arise. That is my presentation today. My contact information and I'm available to help if needed.
Great. Thank you so much.
For those of you who have questions for Julie or any of the other speakers, please type them into the chat pod. While Julie was speaking, Rick had a couple of more comments one, he talked about how value capture is a fee and not a tax, it is an important legal distinction. He also commented that marketing value capture, if properly designed and if permitted, value capture returns to the public sector the value that the public sector created in the first place. I would be curious to hear the presenter's comment on this. Mark asked the fee is paid by the property owner separately from the property taxes and the fee is based upon the increase property value?
I can speak to that. Why don't I speak to Mark and then we can open it up, does that work?
Yes. Great.
Again, I do not spend too much time talking about the nuances of the TRZ and to show exactly what we are capturing in today's angle was a bit different. It is not a fee. You're talking about a base here. Kristen mentioned that, let's pretend that I am a municipality I want to create a PRC and I do the homework in the feasibility study and I get my local government on board, I will forward and I get everybody to do the legal stuff to create it and it happens and the base year becomes 2021. It is like pressing a pause button on what your value of the zone, the property tax in that specific zone is worth this year. Next year, will there be an recommend capturing? Maybe, maybe not. As time goes on, if an outlier happens, there will be sort of a hockey stick increase that you will see with evaluation on the value of the zone. You are capturing property taxes already being captured. Those paying that property tax would not see a difference. It is just how the city or the entity who is creating the zone is separating those, like I said, almost like a savings account a tax used towards the project. It is not a fee but just the property tax itself that is being captured. Hopefully that answers the question.
Great. Does anyone else want to make a comment on that? If not, I'm looking to see if we have more questions. Now would be a good time, let's ask the AT&T operator to open the telephone lines as if we have questions over the phone.
As a quick reminder it is *1, also if you are using a speakerphone pick up the handset before pressing the corresponding digits. Once again, *1. No questions in the queue.
Great. Rick is noting that TRZ and tiffs are taxes.
Raphael, after hearing the other two presentations, do you have comments?
I guess I just wanted to follow-up on the question on --. The special assessment and the is a function -- but as Rick said it is in addition as separate from the property tax it is a function of the property line.
The other thing [ Indiscernible ], I wanted to follow up on the marketing and piggyback on what Judy was saying. With [ Indiscernible ] capture the [ Indiscernible ] as I mentioned in the presentation. It is very important to reach out to stakeholders and beyond in the project so that there is support from [ Indiscernible ] the city Council as well as other partners the support from the developer community and -- and support from the community at large. For my expense there is a need to have a -- because all of these processes are not easy. They require spending time and helping educate for example city councilmembers -- to capture the tool -- what are the expectation challenges and tools on -- is not taking a slice of the pie [ Indiscernible ] increase the size slice of the pie and it creates more benefit.
Okay. I have a question for Julie and Kristin, what are some of the risks that you see commonly that municipalities do not identify or under evaluate as a risk. If I am in a local government, are there things that you can point me to make sure I'm doing the risk evaluation to watch out for?
Kristin, do you want to go first?
Yes. I was thinking, if you have an immediate response, go ahead.
Hopefully we spoke to those items today in the presentation. Where I see the most common trip ups, where I cannot emphasize enough is the feasibility study, the more you understand the potential of what you are capturing financially, some people say this will bring us so much money and all of our problems will be solved, trying to look at the feasibility study, the potential of those, looking at the actual cash flow of those funds, paralleling it to possible debt issuance and taking a realistic approach. Again, does it work for the project. Is a fully funded? And in conjunction, how does it affect my budget. Doing that homework can help not just the project be successful, but also those collaborations with your local stakeholders, you're being honest in terms of what they are signing up for and what they can and cannot do. I would say that is the number one thing. It is early on in the process, do your homework right up front and then you are setting yourself up for success.
Great.
From my point of view, taxpayer concentration going back to that slide, on the surface it can look like you do not have that much concentration and in some cases when we have asked for more information because not much was provided to be able to tell or distinguish between the taxpayers, once the issuer went and take them -- did some digging it might say Mark four building or Trinity building, different names but when they really dug into it they found it was all one developer. There was more concentration then we expected. I think we have seen some surprised by that
In the chat pod Mark and Rick were having a conversation one thing that Rick is pointing out is TRZ and tiffs is invisible to the taxpayer, they pay it regardless whether there is a TIF or TRZ. Mark wants to know can you explain further your point about how value capture fee would work separately from a tax. Is there a simple hypothetical example you can create? Do any of you want to take that on?
[Indiscernible - multiple speakers].
I thought that was another question for Rick.
He is not on the phone. He is typing. I just wanted to see if any of the presenters had a thought on that
Do we have any further questions from participants? If not, I am going to turn it back over to pepper who is going to talk about the next webinar as well as the evaluation we would love for you to fill out.
Thank you. Pulling up a table here that shows we are coming to the end of our webinar series. The last one will be October 6 also 1:00-three:00 p.m. Eastern. That should be ready for release on the webinar. I shared the link to others that I have developed. I encourage you to visit the website and look at those resources that have been produced on capture techniques. There will be a [ Indiscernible ] also being posted to the website in the near future. Again, I also shared a link to the FHWA page two a recording of all of the webinars we have held during 2021. That is where the recording for this one will be housed as well as slides. We encourage you to visit that site to check out the whole series of webinars [ Indiscernible ] and even 2019. We encourage you to look for resources on that website. Right now, you should see a file share window just above the audience chat. That is where the single PDF file and all slides are located. If you hover your mouse over the file you will see an icon that pops up. Click on that icon and it will start the download process for you. That is how you will get yourself a copy of today's slide. And the link for registering the last webinar series is on the screen now.
I also want to bring up an evaluation tool. We would like to get your feedback on the webinar, we can do that by using this tool, you can also email us feedback at value capture D.O.T.gov, it is all one word. The email address is showing in the upper left corner of the webinar room under evaluation instruction. That is also the email address that you can use to request confirmation of your participation. Again, if you email valuecapture@dot.gov we can email you a confirmation.
I would like to thank today's presenters and also acknowledge the ongoing support of our web conferencing office. Thank you all for attending and we look forward to having you back on October 6.
That concludes our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.
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