Previously published in HotelNewsNow.com
On 29 December, in the case of California Redevelopment Association v. Matosantos, the California Supreme Court upheld Assembly Bill ABX1 26, which provides for the termination of all California redevelopment agencies. The court also struck down legislation known as ABX1 27 that would have allowed RDAs to continue in existence by paying a greater share of tax revenues to California and other agencies.
The immediate future for RDAs and other agencies in California has, quite simply, shifted in tectonic proportions. California's Legislative Analyst's Office estimates that before their dissolution, RDAs received more than $5 billion in property tax revenues annually. Further, if property is located in a redevelopment project area, the RDAs have certain controls over land use decisions.
For those real-estate stakeholders in existing relationships with RDAs— specifically those holders of notes or bonds tied to a redevelopment project, a development agreement with an RDA, a loan with the RDA or an owner of property located in an RDA project area that is under contract to be acquired—the impacts can be immediate.
RDA Obligations
Three of the more signifcant obligations an RDA undertakes for a development include: real property assemblage, tax-increment financing and affordable housing. Under many Owner Participation Agreements and Disposition and Development Agreements between RDAs and property owners, a pledge of tax increment is set forth within the documents. In some cases, the RDA is required to pay tax increment directly to the developer after certain benchmarks are met.
A variation on this approach is when the RDA promises to issue a tax increment-backed promissory note to the developer in exchange for meeting certain milestones. The RDA also may have promised to use best efforts to issue tax-increment bonds to the public and use the proceeds of the bonds to pay for infrastructure or other authorized public improvements.
Ternative Mechanisms for Leverage
Without this financing mechanism available, many hotel owners and developers wonder how they fill gaps or shortfalls in their capital stacks to actually build their projects. Fortunately, there are two mechanisms that may prove useful in leveraging public funds for the construction of public elements, such as parking structures, sewer and wastewater facilities, and public parks that are necessary for hotel projects.
Most meaningful are Community Taxing Districts that use a pledge of transient occupancy taxes. Some municipalities charge as much as a 14% transient occupancy tax per room that goes directly to the local coffers. A charter city law, opposed to a general law city, has power over its municipal affairs including taxation. These charter cities can, by ordinance, create a taxing district that encompasses the specific hotel and then provide a rebate of the transient occupancy tax generated from the site. Usually, only net new revenues can be pledged, but for ground-up construction, the amounts can be significant. In a general law city (as opposed to charter cities, such as Los Angeles, Santa Monica and San Francisco, who have more control over tax matters), project sponsors have a more difficult time
Another mechanism worth exploring is an Infrastructure Financing District. Cities or counties can create an IFD over a certain prescribed area and issue bonds to pay for public works projects such as highways, parking facilities and parks. IFDs work very similar to redevelopment tax increment in that the IFD captures the increase in tax revenue over the assessed value of the property within the IFD. However, unlike redevelopment financing, there is no requirement that the area be blighted. An IFD can be formed for greenfield development and urban development alike.
IFDs have not taken off in California because governments traditionally looked to RDAs to fund the nature of the improvements that could be funded by an IFD. However, AB 26 coupled with an attorney general opinion from 1998 that allayed concerns about the unconstitutionality of taking tax increment from property not in a redevelopment project area, IFDs are coming to the forefront. The first IFD was formed in Carlsbad for the public infrastructure related to a hotel adjacent to the Legoland theme park.
Ultimately, the demise of RDAs has brought challenges but also opportunities. Hotel owners should be aware of and on the lookout for both, especially where the concept of harnessing net new revenue can applied even in the absence of a redevelopment agency.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
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