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MassDevelopment In The News
Massachusetts May Gain More Access to SABs
April 2, 2007: The Bond Buyer, by Michelle Kaske
Massachusetts could hold an additional trump card in its infrastructure financing portfolio if state lawmakers pass legislation, known as chapter 40T, that would allow municipalities easier access to special assessment bond financing, a $12 billion to $15 billion market at the national level, experts say.
Currently, local governments cannot sell special assessment bonds, or SABs, unless state lawmakers enact special legislation that specifically identifies the proposed projects. This additional layer of requisite action tends to slow the timelines on such projects.
Laura Canter, executive vice president of finance programs at the Massachusetts Development Finance Agency, said a general law facilitating SAB use could encourage local governments to use the financing mechanism.
"There’s certainly a risk that many worthy projects simply won’t get that far, wouldn’t think about [SABs] if you don’t have enabling legislation that just allows this as a matter of course," Canter said.
With special assessment financing, bonds are secured by a lien on the development property, which places responsibility for repaying the debt onto the developer and not on the municipality. In other types of infrastructure financing, local governments must participate in repayment of the debt, be it general obligation bonds or tax-increment financing, which is known as district-improvement financing, or DIFs, in Massachusetts.
In 2003, lawmakers passed legislation called 40Q enabling municipality to use DIFs, a financing technique that draws upon a portion of expected real estate tax increases, due to the property’s improvement, as security for the bonds.
SAB financing allows local governments to facilitate development and increased economic activity without taking on additional debt or tapping into tax revenue. This can help local governments stay under the state’s ceiling on increases to real estate taxes, said James Shea, co-chair of the real estate department at Edwards, Angell, Palmer & Dodge LLP. Shea was the sole author of 40Q and also helped draft 40T, the SAB bill.
"It’s more palatable to the city or town because it’s a betterment assessment that does not come out of their real estate tax revenues, and we have Proposition 2 1/2, so there’s a levy limit, constitutional limit, on how much you can increase your real estate taxes," he said. "But a special assessment is not counted toward that, so it doesn’t come out of their revenues for their budget."
Shea said that 40Ts passing would actually enhance the use of 40Q, as SABs could be used during the design and construction phase of a project until the development generates increased real estate taxes.
"[40T] would also work with the DIF law to provide for, in effect, a gap security between the time that you issue the DIF bonds and the time the project’s actually built and the tax increment [is] there to service the bonds," he said.
Last year, former Gov. Mitt Romney killed 40T with his veto. State Sen. Richard Moore, D-Worcester and Norfolk, and state Rep. Lida Harkins, D-Norfolk, refiled the bill in January without an eminent domain clause that had prompted the veto, according to Hal Davis, a bond lawyer who is "of counsel" at Davis, Malm & D’Agostine PC and president of New England Economic Development.
"The governor vetoed it primarily because it didn’t have a public hearing and it had an eminent domain feature," he said. "In the revised bill, we’ve taken that out."
The measure now sits with the Joint Committee on Community Development and Small Business with a tentative public hearing date set for May 14, according to Timothy Hoppe, Moore’s chief of staff.
Under 40T, a project cannot use SAB financing without community approval and would include not only projects that the municipality does not want to accrue debt for, but also downtown revitalization projects, such as when businesses join together to finance parking structures, and also residential areas that need to improve their sewer systems, but do not want to issue GO debt, Davis said.
The cost of SAB financing is similar to GO bonds, and with the right project, 40T could benefit developers, communities, and investors.
"There’s a lien that’s on the property’s security, but what the property owners like is its non-recourse, the only liability is the lien on the property. But that’s pretty good security because the underwriter does a careful analysis and other lenders that are financing the actual buildings feel very comfortable, because if there’s a default by the developer or the local neighborhood, they go in and have to make the annual payments," Davis said. "They don’t have to pay off the bond issue, so it’s patient money. So its not something that’s called very easily and the rate probably is around 5.25% to 5.5% fixed for 30 years, which is pretty decent, so it isn’t that much more than a straight municipal bond for 30 years."
Davis said he has been working on the 40T bill for two years and that he anticipates both developers and local governments taking advantage of SAB financing if the bill becomes law.
"We get major developments who want to use this type of financing and also homeowners that have septic system problems, and where the city or town doesn’t want to issue a GO bond," he said. "This is a way for a neighborhood to get together and use a district as a method to finance that."
If 40T is approved, the state would have three financing mechanisms — including 40Q and the state’s new Infrastructure Investment Incentive, called I-Cubed — for infrastructure development to attract more economic development throughout the state. With I-Cubed, which was enacted last year, a developer makes debt service payments on a project during its beginning phases before then transferring project ownership to the municipality, which then pays debt service using a percentage of sales tax and hotel tax revenues generated from the new development.
"We really have now, when the 40T passes, a full complement of infrastructure finance tools that fit together very neatly," Canter said. "They all line up and all work towards financing public infrastructure, but they really, together, allow for negotiations between a developer, a municipality, and then the commonwealth as to who will benefit and who will pay for that infrastructure — all tax-exempt financing tools, all tax backed — but to support different agreements, and one project might use all three of them."
Other states, such as Florida and California, have used SAB financing, a market that totals $12 billion to $15 billion at the national level, according to Davis and Shea. Over the past 10 years, Florida has sold $14.8 billion of SABs followed by California with $6.3 billion, according to Thomson Financial. Massachusetts is third on the list with $1.48 billion of SABs, all of which the Massachusetts Bay Transportation Authority sold in four different series.
One project that will contribute to the commonwealth’s potential rise in special assessment financing includes MassDevelopment selling $150 million of SABs on behalf of North Point Cambridge Land Company LLC to help finance the transformation of a 45-acre site into a mixed-use neighborhood over the next 15 years. The land is located in Cambridge, Boston, and Somerville, with assessments on 4.9 million square feet of land to repay the debt, according to MassDevelopment documents.
The transaction will be the authority’s first-ever SAB sale, which the agency expects to issue within the next few months. Lawmakers last year passed special legislation to facilitate the authority’s use of special assessment financing for the project.
© Copyright 2007 The Bond Buyer.
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