Rick Rosenberg, managing principal at Development Planning & Finance Group Inc., in Austin, Texas, said he has often seen cities and states use TIF bonds most often following a recession. These bonds are repaid from tax revenue generated by the project they financed. So, when financing is leveraged on the predicted success of a project, the well-thought-out feasibility study can hold the key to a project’s success or failure.
“Those projects successful in identifying how to use these tools will be the ones coming out of recession more stronger than their competition,” he said during a webinar this month hosted by the Council of Development Finance Agencies.
But what should bond issuers – and investors, for that matter – look for in a feasibility study? Rosenberg and Caleb Bell, a bond attorney with Bricker & Eckler LLP in Columbus, Ohio, offer these pointers.
Money Isn’t Everything
Cheaper isn’t always better – the lowest-cost bid to conduct a feasibility study may not always be the best option. Remember, said Rosenberg, these studies are meant to assess the viability and financial return of a project, factors which will determine whether the tax revenue it generates will be sufficient to pay back investors. Thoroughness is a must.
“You get what you pay for,” said Rosenberg. “Saving a few bucks up front may end up in costs down the road.”
Investors should also be wary of feasibility studies funded by developers as they more likely to have a specific agenda, they said.
“It’s more objective when the issuer or local government hires the consultant than the developer – the developer controls a lot of information,” Bell said.
Seeing is Believing
Does the feasibility study include a tour of the site? It had better, Rosenberg and Bell said. Maps and pictures of the site only tell part of the story. Feet on the ground can take up questions like, what is adjacent to the proposed construction area? What is the surrounding community like?
“I don’t know how you can write a proposal without [seeing the site],” Rosenberg said, adding that consultants should spend “a day or two in the field talking to brokers and the community. Without that, it reflects lack of commitment.”
Not Always a Home Team Advantage
Local firms familiar with the proposed development area have their advantages. But they don’t always deserve favor.
“It depends on the type of project you’re using,” Bell said. “There are use-specific facilities ... like continuing care. If you have a market analyst from California who’s nationally recognized in continuing care, I’d want him on my Ohio project.”
Residential projects, on the other hand, require a more intimate knowledge of the local market.
“You’re going to want the person who’s seen that market go through different cycles,” Rosenberg said.
Do the Math
Does the study take into account local nuances with real estate taxes and zoning? After all, a project’s tax return doesn’t always correspond with what it’s worth on the open market.
“Especially when you get involved with real estate taxes as source of revenue, you need to understand how the local assessment district is coming up with their numbers,” Rosenberg said. “A lot of times the assessed value has nothing to do with market values.”
A feasibility assessment that understands the balance between any private financing and the TIF financing is also critical, Bell added.
“What are private sources of equity? What are expected TIF revenues? What’s the additional security to make bond holders happy? And disclosure: show schedules that have these growth increments,” he said.
Be Wary of Sunny Predictions
“I recall in the ‘80s when you saw projected revenue growth of 6 percent and expense growth of 3 percent and there was this [feeling of], you can only succeed,” Rosenberg said. “I think there’s a lot more conservatism now. There’s pushback ... where’s your justification for that kind of scenario?”
The housing collapse in 2008 jerked everyone back to reality. As a result, Bell said, there has been more disclosure by consultants in recent years on the assumptions they are making in their studies.
“Especially in residential assessments, we’ve seen things like, ‘It is uncertain whether the value will uphold over time and possible that the value can go down,’” he said. “Those stronger assumptions ... since 2007 are filtering their way into feasibility studies.”
