HomeMy WebLinkAboutCity of Bozeman Financial Analysis Summary Memo Draft 070921Draft Memo
To:
Ellie Staley, Downtown Bozeman Partnership
David Fine, City of Bozeman
From:
Mikaela Huot, Director
Date:
July 9, 2021
Subject:
Preliminary Downtown Bozeman Parking Financial Analysis
Background
The City of Bozeman established the Downtown Urban Renewal District to facilitate development and redevelopment in the area and specifically as a method for financing of certain public
improvements, including structured parking, in the defined downtown area. The City and Downtown Bozeman Partnership have requested assistance with preparing a financial feasibility
and debt capacity analysis related to financing of certain public infrastructure and parking improvements with tax increment revenues as a funding source. The purpose of this memorandum
is to provide a summary of the financial and debt capacity analysis as related to ability of the district to finance improvements.
The City and Partnership have provided preliminary cost estimates for certain improvements in downtown that include primarily parking and other enhancements to the area. We anticipate
additional discussion will be had relative to feasibility of financing certain improvements, as well as timing for incurring those costs. The preliminary costs have been based on estimates
for structured parking and other related improvements in the downtown and do not include acquisition or site control costs for specific locations. We understand an ultimate goal would
be to establish one or more public/private partnerships to facilitate construction of future improvements to incorporate the public and private elements related to new development.
Assumptions
The financing scenarios include a debt capacity matrix with variations to both interest rate and revenue assumptions. The interest rate variables include 1) tax-exempt, 2) taxable and
3) 50/50 mix of both, as discussed in previous conversations. Borrowing rates would be reflective of current market in this matrix. The revenue assumptions are that we either 1) hold
net revenues constant through 2032 (net amount available of approximately $1.1+ million per year after debt service and operating expenses), 2) grow revenues by 3% each year and 3)
alternate scenario that includes additional revenues generated from 1-time new value growth of $10 million with no future inflation.
Interest rate for tax-exempt scenarios was based on the resolution for the last refunding (Series 2020), at 2.44%. This rate was judged by the Municipal Advisory team to be in tow to
current rates for similar issues.
Interest rate for the taxable scenarios was based on the resolution for the last refunding (Series 2020), which specified that in the event of taxability, “the interest rate on this
Bond shall increase to an interest rate per annum equal to the quotient of the tax-exempt rate of interest on the Series 2020 Bond (2.44%) divided by 67.5% (the “Taxable Rate”).”
Rate of increase for the increasing revenue scenarios is 3% per year.
The $10 million increased value scenarios pertain to an aggregate increase in that amount to the properties in the TIF district. Which, given current rates would increase annual revenues
available for debt service repayment starting in 2024 and going through the maturity date.
A coverage ratio of 1.3x is assumed.
Bond analysis assumes a serial issue with its first principal payment in 2022 and maturity date of 07/01/2032.
Revenue available for bond payments is net of the projected operational budget for the district and debt service payment for the existing bonds.
Costs of issuance were based off a similar deal completed for a TIF District in Billings, MT, in April of 2021.
First set of scenarios that incorporate current interest rate assumptions:
First Scenario: Tax-Exempt Bonds
Par
Interest (2.44%)
Total DS
TIC
Net Project Cost
Constant Revenue
$8,235,000
$1,160,190
$9,395,190
2.6748%
$8,026,180
Increased Revenue (3%)
$9,525,000
$1,418,787
$10,943,768
2.6365%
$9,300,700
$10MM Increase (2024)
$9,715,000
$1,410,981
$11,125,981
2.6635%
$9,488,420
Second Scenario: Taxable Bonds
Par
Interest (3.615%)
Total DS
TIC
Net Project Cost
Constant Revenue
$7,755,000
$1,642,792
$9,397,792
3.8521%
$7,551,940
Increased Revenue (3%)
$8,940,000
$2,008,675
$10,948,674
3.8394%
$8,722,720
$10MM Increase (2024)
$9,130,000
$1,997,859
$11,127,860
3.8447%
$8,910,440
Third Scenario: 50/50
Par
Interest
Total DS
TIC
Net Project Cost
Tax Exempt
$4,105,000
$578,026
$4,683,026
2.6704%
3,999,097
Taxable
$3,865,000
$818,240
$4,683,240
3.8523%
$3,758,024
Total – Constant Revenue
$7,790,000
$1,396,266
$9,366,266
3.2475%
$7,757,121
Tax Exempt
$4,755,000
$708,424
$5,643,424
2.6583%
$4,641,197
Taxable
$4,460,000
$1,002,500
$5,462,500
3.8393%
$4,346,011
Total – Increased Revenue
$9,215,000
$1,710,923
$10,925,923
3.2349%
$8,987,208
Tax Exempt
$4,840,000
$703,411
$5,543,411
2.6415%
$4,725,252
Taxable
$4,555,000
$996,550
$5,551,550
3.8448%
$4,447,008
Total – $10MM Increase
$9,395,000
$1,699,961
$11,094,961
3.2427%
$9,172,260
Second set of scenarios that incorporate 100 basis point increase to interest rate assumptions:
First Scenario: Tax-Exempt Bonds – 100bps Bump
Par
Interest (2.44%)
Total DS
TIC
Net Project Cost
Constant Revenue
$7,815,000
$1,572,037
$9,387,037
3.6761%
$7,611,220
Increased Revenue (3%)
$9,020,000
$1,821,985
$10,941,985
3.6338%
$8,801,760
$10MM Increase (2024)
$9,215,000
$1,914,202
$11,129,202
3.6688%
$8,994,420
Second Scenario: Taxable Bonds – 100bps Bump
Par
Interest (3.615%)
Total DS
TIC
Net Project Cost
Constant Revenue
$7,375,000
$2,018,466
$9,393,466
4.8581%
$7,176,500
Increasing Revenue (3%)
$8,480,000,
$2,467,717
$10,947,717
4.8447%
$8,268,240
$10MM Increase
$8,675,000
$2,456,815
$11,131,815
4.8501%
$8,460,900
Third Scenario: 50/50 – 100bps Bump
Par
Interest
Total DS
TIC
Net Project Cost
Tax Exempt
$3,905,000
$784,592
$4,689,592
3.6764%
$3,801,484
Taxable
$3,670,000
$1,000,955
$4,674,955
4.8580%
$3,572,666
Total – Constant Revenue
$7,575,000
$1,396,266
$9,366,266
4.2531
$7,374,150
Tax Exempt
$4,500,000
$959,588
$5,459,588
3.6336%
$4,387,819
Taxable
$4,235,000
$1,002,500
$5,462,500
4.8445%
$4,130,941
Total – Increasing Revenue (3%)
$8,735,000
$2,193,197
$10,928,197
4.2410%
$8,518,759
Tax Exempt
$4,455,000
$920,501
$5,375,501
3.6700%
$4,344,887
Taxable
$4,195,000
$1,181,305
$5,376,305
4.8515%
$4,091,313
Total – $10MM Increase
$8,920,000
$2,178,534
$11,098,534
4.2460%
$8,702,960
There are several important overarching assumptions we have to make as they impact the feasibility of the entire analysis (as has been discussed previously but restating for reference
and additional conversation):
We are assuming that the District can incur additional debt. However, both the Series 2007 and the Series 2020 indentures do not allow for additional debt. Your bond counsel has confirmed
that currently there is no additional bonds provision and issuing additional debt within the District would require City Council to take action and would likely require sign off from
both the County and the School District. While not insurmountable, this would present a substantial legal hurdle to clear prior to any additional issuance.
The Series 2020 refunding does not allow for additional debt and the bonds are only callable in 2026. This means that the only possible ways to issue additional debt under the indenture
as it currently exists would be to either issue additional debt to defease the Series 2020 Bonds or to subordinate the new bonds to the Series 2020 Bonds; even here any additional subordinate
debt may face the same current debt prohibition. Both alternatives would be costly and at this point we would not recommend either one. Defeasing the Series 2020 Bonds would require
funding an escrow through the call date,
which mean that the District would need to bond for interest payments through 2026, adding a substantial expense to the defeasance. Subordinating the new bonds to the Series 2020 Bonds
would erode the credit quality of the new borrowing and would substantially decrease investor interest in the offering. While the Series 2020 Bonds were not rated, the Series 2007
Bonds received a rating of BBB at the time of issuance. Assuming that this rating carries forward to today, it is likely that the highest rating outcome possible on the new debt would
be BBB- with a junk bond rating outcome possible as well.
There is a third option in this situation, which is to negotiate with Truist, the current holder of the Series 2020 Bonds, and get them to accept additional parity debt under the indenture.
Given that the refunding was a private placement, this is not out of the realm of possibility. There is a strong likelihood that they would agree to it under the condition that any
additional debt that gets issued is also placed with them. In any event, selling additional bonds for the District as parity bonds to the Series 2020 Bonds appears to be the only prudent,
cost-effective option in our opinion. If sold as public debt, the additional bonds could be rated and sold into the public market in a process similar to the sale of the Series 2007
Bonds or, more recently, the Midtown District’s Series 2020 sale. In the event that Truist requires the debt be placed with them, the Partnership would need to work to ensure that Truist
accepts a fair market rate on the new borrowing.
For purposes of our analysis, in all scenarios we assumed that the additional borrowing is issued in the form of rated, parity senior debt of the District.
Along the lines of the credit assumptions outlined in #2 above, we assumed that coverage can be calculated using the gross revenue number (approximately $1.8 million for FY2021) as total
revenue available for debt service. While we would still reduce the gross revenues by the assumed operating expense of approximately $200k per year and the debt service on the existing
bonds of $335k per year to calculate revenues available for new debt service, using the gross revenue number allows us to essentially ignore the operating expense for coverage calculations.