Corporate welfare? So what?

If “corporate welfare” results in community investments, does that mitigate the “welfare” component? Are there different degrees of “corporate welfare”? If a corporation, in a time of economic recession, can bolster a community’s tax base – if it can add jobs to the local economy – what would it be worth to that community? What kind of a price tag would we put on that?

The current credit squeeze has hurt developers’ ability to move forward on their projects. Banks are not providing large commercial construction loans. But commercial developers want to continue building even during the recession – and it’s important that they’re allowed to do so. Why? Because in a time of recession, commercial development can add much-needed revenue and jobs to the local economy.

But without the ability to secure construction loans, how can developers move forward?

As of Aug. 3, they can ask that their land is designated a “special assessment district” (SAD), which essentially means that the municipality in which the development is situated will back the issuance of bonds to pay for the development’s infrastructure costs.

There’s still a lot of confusion about the state legislation, and rightfully so. The law is only a few months old, and the N.C. General Assembly did not include “protocols” in the legislation. Essentially, that means that those protocols have to be invented the first time the legislation is taken for a spin.

And that’s what is happening right now in Iredell County. Developers of Langtree at the Lake – the $800 million upscale mixed-use development in Mt. Mourne – have asked county commissioners to issue up to $46 million in bonds to install infrastructure at the southern Iredell development.

The request sent up red flags to folks who are fundamentally against government involving itself in private business. Others may have found the proposal questionable due simply to unfamiliarity with the new law.

So what’s it all about? Who’s at risk? What’s the risk specifically to the county? Who’s responsible for repayment if Langtree developers, or the “benefitted properties” within the development, miss a payment or fold altogether?

Let’s start with the problem: If developers are in the beginning stages of their projects – i.e. the “horizontal development,” or the grading/infrastructure stage – they could technically go to banks to request loans. But people want to buy buildings, not sewer lines, and banks cannot generate money from properties until the development “goes vertical” (i.e. buildings are built and ready to close), said David Parker, attorney and partner of Langtree at the Lake. The banks, therefore, may agree to lend the money – but only a certain percentage of every dollar, and a much lower percentage right now (about 50 cents per dollar), due to the recession, than in stable economic times (at least 80 cents per dollar).

The SADs allow developers to ask municipal governments to issue bonds for infrastructure costs. The bonds, in turn, are sold, and the developers’ properties are put up as collateral; the requirement in most states with SADs is that the developers have a 3:1 ratio of land value to bond. The developers – and eventually the benefitted-property owners and merchants – repay the debt through property assessments.

“The county is not lending us a dime,” said Parker. “The benefitting business owners are borrowing the money from (bond buyers).” Langtree, he said, is simply “asking for the county’s blessing.”

The onus, then, is on the developer having in place accredited bond buyers, which Parker said are limited to either “qualified institutional buyers” and/or accredited investors across the country with a net worth in excess of a million dollars, excluding their primary residence.

Recognizing that municipalities would not want to secure bonds by using their taxing authority since only certain parts of the municipalities would benefit, the N.C. General Assembly agreed to make the bond buyers first in priority, even before the property’s mortgage holders and “vertical construction” lenders. The bond buyers are second only to the county’s property taxes and state/federal tax liens.

Why did the state create such a law? “Because it’s a good public purpose,” said Parker. “It creates sales-tax revenue, a heftier tax base and jobs.”

Will the developers benefit from the bond proceeds? Absolutely. But so will the state and the local economies. One key difference, however, is that the state and municipalities are not legally liable for the bonds. They have relatively little, if any, risk because the bonds are secured by the developers’ land – not the county.

As of 2002, the U.S. had 3,600 SADs. Florida is one state that has them, and Parker said it’s the one with the most safeguards in place. He said that’s why Langtree developers “modeled all of (their) findings – and all the information that will be submitted to the (N.C.) Local Government Commission” after the State of Florida.

When a SAD assessment payment has been missed in Florida, said Parker, the primary lender (typically a bank) covers the missed payment to avoid default. “The bank doesn’t want to have to come in on foreclosure and buy the whole bond,” said Parker, “because in that case, it only makes 80 cents per dollar.”

“For that reason,” he said, “it is impossible to sell the bonds without ‘vertical’ financing in place.”

Fortunately for Langtree, the developers have “loan commitment letters for further financing from lenders that understand that they may be in behind the Special Assessments and are comfortable with that,” Parker said.

In essence, the county, by approving the issuance of the bonds, would essentially help “legitimize” the bonds to bond buyers and bond underwriters, who determine whether the feasibility studies related to the bonds are legitimate.

The underwriters, said Parker, “are very sophisticated.” He said “there are only 5 to 10 underwriters in the country that underwrite these kinds of bonds, and they follow legislation like hawks on sparrows.”

Langtree’s underwriters, from Florida and Arkansas, have assured Langtree that “they already have buyers wanting to buy the first $20 million in bonds,” said Parker. The buyers, he said, “want the favorable tax treatment and like the security of the project.”

Langtree may adjust their request to the county from $46 million to $20 million, which would cover the entire first phase of development, said Parker. “We asked for the full project amount ($46 million) because several commissioners told us to ask for it all on the first hearing instead of coming back for each phase,” he said. “I, personally, would rather just ask for issuance for Phase 1 and then, if the credit market remains in its current funk, ask again if necessary for issuance for future phases.”

“All economic models of the depth and breadth of this recession show recovery within two years past our anticipated construction completion,” Parker said. If that’s the case, and if the county approves issuing $20 million in bonds now, then the developers could secure a private loan for the remaining $26 million a couple years from now. By then, the development would be “vertical” – or buildings would be built and ready to close – which means the banks could approve a better private loan.

An additional advantage of the bonds: With Iredell County’s consent, Langtree can capitalize interest payments for a two-year period after construction starts. Basically, that means that payments for the first two years past construction are included in the loan amount.

Langtree’s infrastructure installation could be complete within three months after the bonds are issued because construction companies, due to the economy and lack of work, are able to complete jobs quicker and under-budget. And theoretically, Langtree’s first condominium tower will reach build-out 14 months after construction on it begins, while the development’s office tower will take 12 months. So, construction on Langtree’s first phase could be complete at the end of the two-year period of capitalized interest payments – which is the same time that the economy is projected to pull out of its current slump.

Langtree’s condo tower, Parker said, is already 70 percent pre-sold, and the retail tower is 50 percent pre-leased. “So when the two years is up,” Parker said, “we’ll be well underway with the ability to make those payments (on the bonds).”

Parker said Langtree had to have the pre-sale and pre-lease commitments before it was able to secure commitments from its “vertical construction lenders,” or people who intend to lend money for the development’s buildings.

And in order to have bond underwriters sell bonds, Parker added, “vertical lenders have to be in place.”

The vertical lenders, who will eventually buy the bonds from the folks who originally purchase them, are actually at the highest risk in a bond financing arrangement, said Parker, because they have accepted 50 cents per dollar from the bonds, putting them in second place to the bond buyer, who will receive 80 cents per dollar.

“Langtree’s lenders on vertical construction know all of this and are still willing to fund us because they believe in us,” said Parker. “They are willing to pay the bond even if they don’t make anything back on the loan.”

If it all falls apart, said Parker, the bond buyers “come after our development. The risk is only to us. We hold all the risk.”

So, why does Langtree need the county? Iredell, by issuing the bonds, would help legitimize the bonds to buyers and underwriters. But even more than that, the developers need a stamp of approval from the LGC, which has credibility with bond buyers and underwriters throughout the country. The LGC’s job is to protect the issuing municipalities by determining whether the bonds will perform as they should.

Langtree and Iredell County must approach the LGC with fine details of the financing proposal. The LGC will pour over the information and ultimately render an opinion on whether the county should issue the bonds. The county can then base its decision on the LGC’s recommendation.

“Iredell County is not being asked to lend a private developer anything and is not at risk in authorizing the bonds,” said Parker. “South Carolina, Mississippi, Alabama and most of the other southern states have these bond facilities in place, and they have worked without any peril to the counties.”

If Iredell County does not issue the bonds, Parker said that Langtree will continue building its development, but it will likely wait for at least a year. Why? Because the developers would rather wait until the recession is over than move forward with a 50-cents-on-the-dollar loan.

Some folks have expressed concerns that the bonds would simply be cheaper for the developers, thereby allowing them to make more money. Parker said that isn’t so. In fact, he said the interest rate that Langtree would pay on the bonds would be in the range of what private equity lenders are charging (8-9 percent). Since the bonds would not be backed by the county, the developers would not receive the cheaper “general obligation” rates, which are currently in the 4-5 percent range.

The difference between the bonds and a private loan is that the bond moneys are available now, the pay-back term is up to 30 years, and the bonds feature some favorable tax advantages and better security for the bond buyers. “There are no cost savings to the developer, and specifically none to Langtree,” Parker said.

“The problems in the economy right now are related to the lack of credit, not interest rates,” he added. “Banks simply will not make any large commercial loans until the defaults in home mortgages and credit-card-backed obligations have run through the system, which may take another year.

“We would like to build during this recession if at all possible,” he said. “In short, bond money is available today – bank loans are not. Employment during a recession requires credit. The bonds can provide that.”

Another concern is that the state legislation opens the door for every developer in the state to request bonds. But Parker said the legal fees alone for the SAD financing will top $20,000; in Langtree’s case, the developers also plan to pay the county’s associated legal fees. The underwriter fees are also very expensive, he said. The underwriter and legal fees alone would eat into all the potential profit of smaller projects. Additionally, the bonds likely wouldn’t sell on smaller projects because they wouldn’t perform in the current economy, and smaller projects aren’t as likely to be able to secure both infrastructure and vertical loans.

“Only 4- and 5-star developments will even look at this (funding option),” Parker said.

So, what’s the bottom line? The bond proceeds would no doubt help Langtree at the Lake by enabling the developers to continue building through the recession, when prices are cheaper and workers are more readily available. And the sooner that Langtree can “go vertical,” the sooner it can start making money.

And make no mistake about it, Parker said: “I share your suspicion and leeriness of developers.” After all he said, “They’re always in it for themselves.”

But there’s a good side even to developers, and as long as “the better angles of the developer’s nature are consistently heard by the developer and the public,” then a development can benefit both, Parker said.

Look no further than Lowe’s corporate headquarters in Mooresville: The town offered it tax incentives to locate here. But the corporation has also generously donated millions of dollars to the community, including sinking millions to build the YMCA and to expand the Mooresville Public Library.

Langtree’s more immediate contribution would be providing jobs to labor workers in desperate need of work right now. The development would also provide useful tax revenue to the county and to the Town of Mooresville. Think about this: Two years ago, Iredell County received approximately $20,000 a year in taxes for the properties now owned by Langtree. Now, the county makes about $170,000. With the addition of infrastructure alone, those annual property taxes would jump to $500,000 a year.

At the end of the day, it isn’t the developer’s job to base its decisions on the economic benefits that its project would have on a community. That’s the job of our public officials; in this particular case, the Iredell County Board of Commissioners.

It’s no secret that Langtree won’t pull the plug on its development if the county decides not to issue the bonds. But the developers have said that they will wait to move forward until the economy pulls out of its current slump.

To the county, is it worth the wait?

Langtree expects to appear before county commissioners today with a development agreement. Commissioners have voted to conduct their “due diligence” on the project before reconsidering a request from Langtree to approve a “final assessment resolution.”