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Public Debt Financing of Sport Facilities Sport Finance

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... to re-pay bond debt is preferred: Less visible impact ... Does not count against the government's debt ceiling; ... Another way to direct debt to the team. ... – PowerPoint PPT presentation

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Title: Public Debt Financing of Sport Facilities Sport Finance


1
Public Debt Financing of Sport FacilitiesSport
Finance
2
Debt Financing
  • Most public agencies finance major capital
    projects in the same way people buy homes Loans
    from financial institutions.
  • Loan is referred to as a Government Issued Bond.
  • The loan is re-paid through various funding
    sources such as hard or soft taxes.
  • Interest costs for this type of financing are
    relatively high.

3
Public Sector Funding
  • Average Amount of Public Contribution to Stadium
    and Arena Financing 78
  • Public Funding Sources
  • Taxes Bonds

4
Debt Financing
  • Much attention given to government issued bonds
    used for stadiums.
  • More bond dollars used for other investments
  • Parks
  • Golf Courses
  • Convention Centers
  • Schools
  • Highways

5
Debt Financing
  • Bonds A promise by the borrower to pay back the
    lender a specified amount of money plus interest
    within a specified period of time.
  • Using taxes to re-pay bond debt is preferred
  • Less visible impact of taxpayer burden
  • Elected officials appear to be successful in
    creating a facility (and its impact)
  • Equity for population.

6
Debt Financing
  • Fundamental Rule
  • Do not issue bonds for a maturity longer than
    the life of the facility.
  • The length of maturity should be the length of
    the lease agreement.

7
Debt Financing
  • The 1986 Tax Reform Act
  • Government Issued bonds not exempt from Federal
    taxes if
  • More than 10 of the stadiums useful service
    consumed by private business (unless it is a
    qualified private activity).
  • More than 10 of the bond payment comes from
    sport franchise revenues.
  • Use of other revenues for bond payment.
  • Owners are prohibited from providing revenue.

8
Debt Financing
  • The 1986 Tax Reform Act
  • Changed the financing structure of sports
    facility construction.
  • This change was designed to discourage local
    governments from investing large amounts of
    public money in sports facilities.
  • Instead, it prompted the creation of a whole new
    set of incentives (or subsidies).

9
Debt Financing
  • General Obligation Bonds
  • Government makes an unconditional promise to
    re-pay the loan.
  • Usually secured by property taxes (local) or
    sales/income taxes (state).
  • Borrowing costs (interest rates) are lower
  • 1-2 less than non-guaranteed bonds

10
Debt Financing
  • General Obligation Bonds
  • Usually requires voter approval (taxation)
  • Voters are less willing to approve this bond
  • Many teams and cities are using funding
    alternatives.

11
Debt Financing
  • Non-guaranteed Bonds
  • Not backed by the full faith and credit of the
    government.
  • Repayment based on other sources of revenue.
  • Many sources of revenue to use
  • Revenue bonds
  • Tax increment bonds
  • Certificates of participation

12
Debt Financing
  • Non-guaranteed Bonds
  • Does not require voter approval
  • Does not count against the governments debt
    ceiling
  • Generally, if revenue is used to pay debt, the
    debt is being paid by those using the facility.

13
Debt Financing
  • Revenue Bonds
  • Repaid from income produced by the facility.
    Including
  • Ticket sales
  • Parking
  • Advertising
  • Lease Revenue Bonds
  • Bond agreement includes specific revenues used
    for repayment.
  • Contractually Obligated Income (COI) from
  • Luxury suites
  • PSLs
  • Concessions contracts
  • Sponsorship agreements

14
Debt Financing
  • Revenue Bonds
  • Advantages
  • Reflects a user pay philosophy
  • Voter approval not needed
  • Does not count against the debt ceiling
  • Disadvantages
  • Higher interest rates
  • Restricted to profit-making ability
  • May restrict participation because of higher user
    fees

15
Private Placement Bonds
  • Sold privately by the team, its owner, or a
    development corporation.
  • Secured by a lien on future facility revenue,
    especially from contractually obligated income.
  • Income to bond holders is fully taxable.
  • Relieves the municipality of some of the debt.

16
Asset-Backed Securitization Bonds
  • Another way to direct debt to the team.
  • Also taxable to holder, and sold privately by the
    team, its owner, or a development corporation.
  • These bonds have less stringent collateral
    requirements than private placement bonds.
  • The revenues of selected income streams are
    bundled into a financial security and sold
    initially to a bankruptcy-proof trust, which
    sells them to private investors.

17
Repayment Sources
  • Generated by local governments
  • Hard taxes
  • Soft taxes
  • Tax Abatements
  • Appropriations

18
Hard Taxes
  • Hard taxes include
  • Real estate / Property taxes
  • General sales
  • Local income tax
  • Financial burden falls on the general public.
  • Local citizens absorb costs, may not derive the
    benefits.
  • Hard taxes usually require voter approval

19
Hard Taxes
  • Property Taxes
  • Tax base The aggregate value of all assessed
    property within a jurisdiction
  • Tax Rate Then, once the tax base is determined,
    the local government sets a tax rate to meet its
    revenue needs.
  • Local budget extra projects costs- anticipated
    income from other sources

20
Hard Taxes
  • Sales Tax
  • 2nd largest source of tax revenue. Usually
    ranges between 3-10.
  • Services usually exempt from sales tax.

21
Soft Taxes
  • Soft taxes are borne by a select and relatively
    smaller portion of taxpayers.
  • Often, the costs are placed upon non-residents.
  • Easier to levy.
  • Soft taxes include
  • car rental
  • hotel-motel
  • player
  • restaurant
  • sin
  • taxi

22
Sin Taxes
  • Alcohol
  • Tobacco
  • Gambling
  • Prostitution (Nevada only)

23
Player Tax
  • Tax imposed on income earned by visiting players.
  • 43 states have imposed player taxes
  • Based on the right for states to tax
    non-residents on income received for services
    performed within their boundaries.

24
Tax Abatements
  • Abatement exist in approximately 2/3 of the
    states.
  • Often part of a government agencys incentive
    package for a facility.
  • Exempts an organizations assets from property
    taxation for a given period of time.

25
Appropriations
  • Funds set aside for specific purposes.
  • Usually used as a supplement to the debt
    financing (bonds).

26
Certificates of Participation
  • Third-party transactions
  • Involves a non-profit public benefit organization
  • Borrows funds from a lending institution
  • Agency leases facility to public or private
    operator
  • Operator in turn makes lease payments to retire
    certificates

27
Debt Financing
  • Certificates of Participation

Facility Builder
3
4
7
Financial Institution
Intermediary Organization
Facility Operator
5
1
6
2
28
Debt Financing
  • Certificates of Participation
  • Despite not being a general obligation bond,
    typically the municipality pays off the debt if
    revenues from the facility fall short.
  • COPs have higher interest rates and lower bond
    ratings.

29
Debt Financing
  • Tax-Increment Bonds (TIF)
  • A mechanism allowing local government to capture
    the increased tax revenues generated by real
    estate development.
  • The key test for its use is that but for the
    TIF assistance, development would not occur.
  • TIF can enhance the development of other
    businesses that will increase tax revenues.

30
Debt Financing
  • Tax-Increment Bonds (TIF)
  • The steps involved in TIF are as follows
  • A redevelopment district is defined and a base
    tax value is established
  • Development occurs and a new tax value is
    realized
  • The taxes collected on the incremental increase
    in tax value are captured to pay for public costs
    (e.g. infrastructure).

31
Debt Financing
  • Bond Ratings
  • Estimates the level of risk investors incur when
    making a loan.
  • Rating level depends upon the ability of the tax
    base or revenue source to generate the required
    money to make bond payments while continuing to
    fund existing operations.
  • Lenders use the ratings to determine cost of loan.

32
Debt Financing
  • Bond Ratings Factors
  • Existing revenue streams
  • Historical (financial) performance of the
    community
  • Risks associated with the project
  • Political volatility
  • Whether the project is economically viable

33
Debt Financing
  • What issues must be addressed when financing a
    stadium?
  • In addition to developing a financing plan
  • Is the site appropriate for the stadium?
  • Does it have environmental or geotechnical
    issues?
  • Is the land available for acquisition?
  • Are there existing residents/businesses that must
    be relocated?
  • Does related infrastructure already exist or does
    it need to be built?
  • What opportunities exist for ancillary
    development?
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