Arena Development PROPOSED CHANGES TO FINANCIAL STRUCTURE City - - PowerPoint PPT Presentation

Virginia Beach Arena Development

PROPOSED CHANGES TO FINANCIAL STRUCTURE

City Council Briefing Douglas L. Smith, Deputy City Manager July 12, 2016

Presentation Overview

• Context:

Review the Basic Deal

• Review Current USM Request
• Review Draft Resolution
• Discussion

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The Basic Deal (Dec 2015)

I.

Privately owned, managed, controlled Arena in Virginia Beach

II.

City providing land, infrastructure and revenue streams supporting the facility’s debt service

• City land leased through Virginia Beach

Development Authority (VBDA)

• Approximately 5.8 acres plus exclusive use of plaza

and parking areas during events

• 60 year term
• City’s interest in land subordinated to private loan -

pay off loan or lose land

• All “but-for taxes” and 1% hotel tax paid into Arena

Fund and disbursed to USM for debt service

• $76.5M in infrastructure paid from TIP Fund
• III. USM obligations
• Finance, construct, operate Arena
• Build it in accordance with plans
• Maintain and Operate Arena

according to minimum standards for quality and number of events

• Primary operational standards = 20

events of 7,500 or more and 450,000 total paid attendance

• Subjective standards for

maintenance and operation based

• n comparable arenas located in

Lincoln, Tulsa, Jacksonville 3

Arena Fund Agreement Highlights

• 33-year term (depending on term of financing)
• Direct taxes from Arena Operations(“But For” taxes) included in Arena Fund

based on actual receipts when received:

• Real estate taxes and Personal property taxes
• Business license tax (BPOL)
• Admission taxes
• Local sales taxes (1%)
• Local meals taxes (5.5%)
• Portion of state sales tax (2.025%)
• Citywide hotel tax (1% of hotel sales not including $1/night fee): $3.2 M

placed in Arena Fund commencing July 1 of year in which the arena

• pens
• Annual cap (debt service and 6% return on equity) not to exceed

$14.6M

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Summary of Annual Net Fiscal Impact (12/15)

(in millions) Direct annual payments by City to USM:

Direct local taxes generated by arena

• 6.0

State sales tax generated by arena

• 0.2

1% of City-wide Hotel Taxes

• 3.2

Total annual taxes returned to USM

• 9.4

Net Cost of City Services

• 0.5

Direct Annual City Costs

• 9.9

Annual Debt Service on City Infrastructure (20 years)

• 4.0

Total annual City costs Total Annual Net Fiscal Impacts (per CSL)

• 13.9

+ 6.7 Total estimated annual negative fiscal impact

• $7.2

Note: All city costs funded from TIP Fund, no General Fund impact. TIP was established to create amenities for tourists and residents

5 Direct Annual Payments by City to USM:

• Direct local taxes generated by arena
• 6.0
• State sales tax generated by arena
• 0.2
• 1% of City-wide Hotel Taxes
• 3.2

Total Annual Taxes Returned to USM

• 9.4

Net Cost of City Services

• 0.5

Total Direct Annual City Costs

• 9.9

Annual Debt Service on City Infrastructure

• 4.0

Total Annual City Costs

• 13.9

Total Annual Net Fiscal Impacts (per CSL) + 6.7 TOTAL ESTIMATED ANNUAL NEGATIVE FISCAL IMPACT

• $7.2

Note: All City costs funded from TIP Fund, no General Fund impact. TIP was established to create amenities for tourists and residents

Current USM Proposal

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Domestic Bond Issue Versus Chinese Bank Loan

• Bond Issue through VBDA underwritten by B.C. Ziegler
• These bonds do not create an obligation on the part of the City, Commonwealth
• r VBDA beyond those already contained in the existing transaction documents
• Bonds privately placed with major institutional investors (insurance

companies, pension plans etc.)

• EXIM Bank of China no longer involved
• Substantial benefit to remove risks associated with foreign lender
• Change in source of financing does not require, in and of itself, an amendment

to the Development Agreement approved by City Council and executed by City

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Change in Debt/Equity Ratio

• Council-approved agreement contemplated

$170M debt / $40M equity ($210M)

• Proposed structure contemplates $230M to $240M debt / $10M

predevelopment expenses + equity from developer ($240M to $250M)

• $200M estimated construction cost – debt financed
• $30M to $40M – debt financed for debt service reserve, capitalized interest ,

cost of issuance, G& A Reserve

• Material change in debt equity mix necessitates amendment to

Development Agreement

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Comparison of Sources and Uses of Funds

(in millions) Original $ (December 2015) Proposed $ (July 2016) Sources Debt 170.0 230.0 / 240.0 Equity 40.0 10.0 Total Sources 210.0 240.0 / 250.0 Uses Construction 200.0 200.0 Debt service reserve, Capitalized interest, Cost of issuance, General & Admin Reserve N/A TBD Working capital 10.0 TBD Sub Total 10.0 30.0 to 40.0

Total Uses $210.0 $240.0 / 250.0 (est)

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City Investment in the Project

• Amount of private equity to be invested was a material inducement to the City

to make its own investment in the project

• City’s investment consists of:

1.

Lease of the land where the arena will sit for 60 years (with fee interest in such land being subordinated to the debt) $ 6.1M

2.

Infrastructure improvements $ 76.5M

3.

Dedication of expected portion of City’s hotel tax plus all taxes generated at the arena site for a period of 33 years Nominal Dollars $438 M NPV (4%) $229 M

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Considerations

• Requirements of USM based on existing Project Documents:
• Contribute approximately $40M of equity
• Obtain debt (approximately $170M) from private funding

source, specifically an overseas lender

• Obtain a commitment letter evidencing this financing by

September 9, 2016 (with two possible extensions)

• Draft resolution contemplates granting these extensions

now (November 8, 2016)

• Close on financing within 10 months

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Considerations

• Proposed new Bond Structure eliminates overseas lender and many

associated uncertainties/risks

• Satisfaction of Conditions of Support would protect City’s interests in

project and ongoing contributions to it

• Bond Structure adds to overall cost of Arena as it requires

capitalization (pre-funding from amounts borrowed) of construction interest, debt service reserve, cost of issuance, general & admin reserve

• Accordingly, amount of debt secured by Arena and City-owned land

under the Arena increases

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Proposed Conditions of City’s Support

• Maximum amount financed:
• shall be no more than $200M for construction or actual guaranteed maximum

price for the design-build contract, whichever is less

• plus capitalized interest on a drawn-down basis, debt service reserves and

issuance costs

• shall not include any previously incurred expenditures by USM or any

development fee payable to USM

• No change to Maximum Payment Cap (Schedule 2 of the Arena Fund Agreement),

including maximum annual payment amounts and maximum 33 year term

• Complete independent financial feasibility study shall be provided to the City prior

to any vote on an amendment to the Development Agreement

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Proposed Conditions of City’s Support

• The bonds to carry an investment grade rating from one of the three

major rating agencies:

• Moody’s: at least Baa3
• S&P: at least BBB-
• Fitch: at least BBB-
• Repayment of bonds
• shall be payable solely from project revenues, including previously agreed City

incentives

• shall not be a general obligation of the City, Development Authority or the

Commonwealth of Virginia

• All protections and cure rights of the City will be included in all final

Project Documents

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Exhibit A: City’s Conditions of Support

1.

Maximum amount financed shall be no more than $200M for construction or the actual guaranteed maximum price for the design-build construction contract, whichever is less; plus capitalized interest on a drawn-down basis, debt service reserves and issuance costs

2.

The amount financed shall not include any previously incurred expenditures by USM or any development fee payable to USM

3.

Maximum Payment Cap set forth on Schedule 2 to the Arena Fund Agreement shall not change, including the maximum annual payment amounts and the maximum 33 year term of such payments.

4.

A complete independent financial feasibility study shall be provided to the City prior to any vote on an amendment to the Development Agreement.

5.

The bonds shall carry an investment grade from one of the three major rating agencies:

• Moody’s: at least Baa3
• S&P: at least BBB-
• Fitch: at least BBB-

6.

Repayment of the bonds shall be payable solely from the revenues from the project, including the previously agreed City incentives, and shall not be a general obligation of the City, Development Authority or the Commonwealth of Virginia

7.

All protections and cure rights of the City contemplated by the Project Documents will be included in the final Project Documents and final documents evidencing the Bond Structure

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Discussion

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