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

2 Presentation Overview  Context: Review the Basic Deal  Review Current USM Request  Review Draft Resolution  Discussion

The Basic Deal (Dec 2015) 3 Privately owned, managed, controlled I. III. USM obligations Arena in Virginia Beach  Finance, construct, operate Arena City providing land, infrastructure and II.  Build it in accordance with plans revenue streams supporting the facility’s  Maintain and Operate Arena debt service according to minimum standards for quality and number of events  City land leased through Virginia Beach Development Authority (VBDA)  Primary operational standards = 20 events of 7,500 or more and  Approximately 5.8 acres plus exclusive use of plaza 450,000 total paid attendance and parking areas during events  Subjective standards for  60 year term maintenance and operation based  City’s interest in land subordinated to private loan - on comparable arenas located in pay off loan or lose land Lincoln, Tulsa, Jacksonville  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

4 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 opens  Annual cap (debt service and 6% return on equity) not to exceed $14.6M

5 Summary of Annual Net Fiscal Impact (12/15) (in millions) Direct Annual Payments by City to USM: Direct annual payments by City to USM: Direct local taxes generated by arena -6.0 • Direct local taxes generated by arena -6.0 State sales tax generated by arena -0.2 • State sales tax generated by arena -0.2 1% of City-wide Hotel Taxes -3.2 • 1% of City-wide Hotel Taxes -3.2 Total Annual Taxes Returned to USM - 9.4 - 9.4 Total annual taxes returned to USM Net Cost of City Services - 0.5 Net Cost of City Services - 0.5 Total Direct Annual City Costs -9.9 -9.9 Direct Annual City Costs Annual Debt Service on City Infrastructure - 4.0 Annual Debt Service on City Infrastructure (20 years) - 4.0 -13.9 Total Annual City Costs Total annual City costs -13.9 + 6.7 Total Annual Net Fiscal Impacts (per CSL) Total Annual Net Fiscal Impacts (per CSL) TOTAL ESTIMATED ANNUAL NEGATIVE FISCAL IMPACT -$7.2 + 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 Note: All city costs funded from TIP Fund, no General Fund impact. TIP was established to create amenities for tourists and residents

6 Current USM Proposal

Domestic Bond Issue Versus 7 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 or 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

8 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

Comparison of Sources and Uses of Funds 9 (in millions) Original $ Proposed $ (December 2015) (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, N/A TBD General & Admin Reserve Working capital 10.0 TBD Sub Total 10.0 30.0 to 40.0 Total Uses $210.0 $240.0 / 250.0 (est)

10 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: Lease of the land where the arena will sit for 60 years 1. (with fee interest in such land being subordinated to the debt) $ 6.1M Infrastructure improvements $ 76.5M 2. Dedication of expected portion of City’s hotel tax plus all taxes 3. generated at the arena site for a period of 33 years Nominal Dollars $438 M NPV (4%) $229 M

11 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

Considerations 12  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

Proposed Conditions of City’s Support 13  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

Proposed Conditions of City’s Support 14  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

Exhibit A: City’s Conditions of Support 15 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

16 Discussion