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Item 1.
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| City Council Work Session | |
| Date: | 11/04/2024 |
| Title: | Historic Tax Credit Structure Review |
| Presented by: | Andy Zoeller, Finance Director |
| Department: | Finance |
| Presentation: | Yes |
| Legal Review: | Not Applicable |
| Project Number: | N/A |
RECOMMENDATION
Staff will provide an update on the current status of the Historic Tax Credit financing structure that is being developed. The action items associated with this transaction will be on the November 12, 2024 Regular City Council Meeting. No decisions will be made at the work session, but time is being provided to ask questions and gain an understanding of the structure. Bond counsel from Dorsey & Whitney (Erin McCrady) and our historic tax credit consultant from Wishneff & Associates (Adam Markwood) will be available during the meeting for questions.
BACKGROUND (Consistency with Adopted Plans and Policies, if applicable)
On November 28, 2022, Council approved the proposal from the consulting firm of Brian Wishneff and Associates, LLC to assist the City in obtaining historic preservation tax credits and related financing, including identifying investors for the new city hall building. The City has been advised by Wishneff as well as the State of Montana Historic Preservation Office that all or a portion of the project is eligible for federal and state historic preservation tax credits.
On December 19, 2022, Council approved that city staff move forward with the full build-out of the new city hall building. Council has indicated its intent to pursue historic preservation tax credits to partially fund expenses of the renovations.
On June 26, 2023, Council approved a resolution to pursue financing options in compliance with IRS regulations for the new city hall renovations.
On June 24, 2024, Council authorized staff to sign a letter of intent with First Interstate Bank to develop an agreement for the equity investment for the City's receipt of historic tax credits.
Since the authorization of the letter of intent, the City has engaged a Dorsey & Whitney, the City's bond counsel, BakerTilly Advisors, the City's Financial Adivsors and additional consultants to develop the agreements which will put in place the structure needed to capture the tax credits. On November 12, 2024, Council will be asked to approve the structure establishing the entities needed to realize the tax credits.
There are two elements of the financing to be approved in these resolutions, which must be either approved or denied together as our letter of intent with FIB states that FIB will provide both elements of the financing.
The first financing piece is the lease financing transaction with First Interstate Bank (FIB). This will refinance the amounts that were approved and financed with the Montana Board of Investments. As additional construction funds are needed, FIB will provide them through completion of the project. It is estimated that total amount financed through this structure will be up to $14 million. This includes $12-$13 million project costs and $1 million in legal and financing costs. This will be paid for by the departments that occupy City Hall, the receipt of tax credit proceeds, and proceeds from the sale of existing city hall. The resolution Approving Lease Purchase Documents provides the description of the documents and what each will do associated with this portion of the project.
The second portion of the financing structure are the elements related to the historic tax credits. This resolution will provide the means for the City to recognize the proceeds from historic tax credits. Through approval of this resolution the City will establish two LLCs the Manager LLC (which the City Finance Director is appointed as the manager of for purposes of performing the obligations of the Manager LLC) and the Landlord LLC (which the City Finance Director, as the manager of the Manager LLC will perform the obligations of the Landlord LLC). The Landlord LLC will be a partnership between the Manager LLC and FIB. Through this partnership, FIB will provide funds for the tax credits, which are estimated to be a net amount to the City of approximately $5 million. Through this structure the City will maintain fee title ownership of the building, but will lease the building to the taxable entity (Landlord LLC) for a term that transfers ownership from a tax perspective. The Landlord LLC will then lease the building back to the City.
On December 19, 2022, Council approved that city staff move forward with the full build-out of the new city hall building. Council has indicated its intent to pursue historic preservation tax credits to partially fund expenses of the renovations.
On June 26, 2023, Council approved a resolution to pursue financing options in compliance with IRS regulations for the new city hall renovations.
On June 24, 2024, Council authorized staff to sign a letter of intent with First Interstate Bank to develop an agreement for the equity investment for the City's receipt of historic tax credits.
Since the authorization of the letter of intent, the City has engaged a Dorsey & Whitney, the City's bond counsel, BakerTilly Advisors, the City's Financial Adivsors and additional consultants to develop the agreements which will put in place the structure needed to capture the tax credits. On November 12, 2024, Council will be asked to approve the structure establishing the entities needed to realize the tax credits.
There are two elements of the financing to be approved in these resolutions, which must be either approved or denied together as our letter of intent with FIB states that FIB will provide both elements of the financing.
The first financing piece is the lease financing transaction with First Interstate Bank (FIB). This will refinance the amounts that were approved and financed with the Montana Board of Investments. As additional construction funds are needed, FIB will provide them through completion of the project. It is estimated that total amount financed through this structure will be up to $14 million. This includes $12-$13 million project costs and $1 million in legal and financing costs. This will be paid for by the departments that occupy City Hall, the receipt of tax credit proceeds, and proceeds from the sale of existing city hall. The resolution Approving Lease Purchase Documents provides the description of the documents and what each will do associated with this portion of the project.
The second portion of the financing structure are the elements related to the historic tax credits. This resolution will provide the means for the City to recognize the proceeds from historic tax credits. Through approval of this resolution the City will establish two LLCs the Manager LLC (which the City Finance Director is appointed as the manager of for purposes of performing the obligations of the Manager LLC) and the Landlord LLC (which the City Finance Director, as the manager of the Manager LLC will perform the obligations of the Landlord LLC). The Landlord LLC will be a partnership between the Manager LLC and FIB. Through this partnership, FIB will provide funds for the tax credits, which are estimated to be a net amount to the City of approximately $5 million. Through this structure the City will maintain fee title ownership of the building, but will lease the building to the taxable entity (Landlord LLC) for a term that transfers ownership from a tax perspective. The Landlord LLC will then lease the building back to the City.
The chart below depicts the financing structure that will be established if all items are approved. The dollar amounts below are estimates and will be finalized prior to closing.
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ALTERNATIVES
No council action will occur during the work session. However, the resolutions will included on the November 12 City Council Meeting for consideration. The resolutions must be approved or not approved together. If they are not approved, the City will have to finance the entire project through a lease financing structure over the term of 15 years. Additionally, the City will have costs associated with development of the legal documents and structure, which were previously approved by City Council, and will need to identify a source of funds to pay for this work.
FISCAL EFFECTS
The lease financing structure will allow for the City to borrow the needed construction funds to complete the new city hall project. The interest rate for the lease financing structure will be established prior to closing based upon the current FHLB 5/15 amortizing rate is plus 200 basis points. As of 10/29/2024 that rate would be 6.252%. This structure will allow for prepayment as funds are available so the amount financed can be reduced. It is estimated that the total amount financed will be $14 million for the project plus the legal and banking costs for the entire structure. The maximum amount authorized to be financed is $14 million.
The historic tax credit structure will provide a gross estimated $7.8 million to the transaction. After consultant and financing fees are paid and a portion of the transaction proceeds are held back for repayment to FIB in accordance with IRS regulations, the net amount to the City is approximately $5 million. The recommendation is to use the proceeds from this transaction to reduce the lease financed amount.
The total estimated project cost at this date are $46,268,074. This includes all construction costs, the initial purchase, and owner provided costs. The purchase and construction costs were largely funded by cash of approximately $34 million and $14 million through lease financing. The additional financed amounts (estimated at $1.8 million) will cover the legal and financing costs associated with the tax credit structure. When the tax credits are realized at the City, they will be used to reduce the financed amount. However, until that time, which is expected to occur in mid to late 2025, the City will have payments on the entire amount financed, which could be as much as $1.47 million per year.
The historic tax credit structure will provide a gross estimated $7.8 million to the transaction. After consultant and financing fees are paid and a portion of the transaction proceeds are held back for repayment to FIB in accordance with IRS regulations, the net amount to the City is approximately $5 million. The recommendation is to use the proceeds from this transaction to reduce the lease financed amount.
The total estimated project cost at this date are $46,268,074. This includes all construction costs, the initial purchase, and owner provided costs. The purchase and construction costs were largely funded by cash of approximately $34 million and $14 million through lease financing. The additional financed amounts (estimated at $1.8 million) will cover the legal and financing costs associated with the tax credit structure. When the tax credits are realized at the City, they will be used to reduce the financed amount. However, until that time, which is expected to occur in mid to late 2025, the City will have payments on the entire amount financed, which could be as much as $1.47 million per year.
Attachments
- Lease Purchase Finance Resolution
- Historic Tax Credit Structure Resolution
- Master Lease Exhibit
- Manager Operating Agreement Exhibit
- Landlord Operating Agreement Exhibit
- Ground Sublease Exhibit
- Development Agreement Exhibit
- Contribution Agreement Exhibit
- Forbearance Agreement Exhibit