Preliminary Due Diligence Review of Proposed Arena Bond ... · Arena Cost Paid by Bond Proceeds and...

John GernerVice Chair, Navy Hill Development Advisory Commission

Managing Director, Leisure Business Advisors [email protected]

Preliminary Due Diligence Review of Proposed Arena Bond Financing

and Introduction of the Commission Financial Model

Topics Due diligence process involving the proposed arena bond financing plan. Key arena bond debt parameters. Planned bond payment sources. Overlap between the Navy Hill Fund and the City’s future General Fund. Particularly incremental real estate taxes from existing properties in the

increment financing area. Especially looking at the next five years, based on an accelerated bond

payment schedule. Goals of the advisory commission’s financial model. Confirmation levels for bond payment sources in general. Specifically, current confirmation level for arena sponsorships and the

development parcels. Causation versus correlation and cannibalization potential. Hunden effect. Next steps.

Due Diligence Approach

Neutral, similar to an audit. Default position is that uncertainty increases risk. Goal is to identify level of certainty through confirmation. Absence of confirmation increases uncertainty. Adds sensitivity ("what if") analysis. Adds additional analysis if needed to aid City Council in its

consideration of Navy Hill ordinances.

Overall Bond Uncertainty – EDA Determines Details

Source: Cooperation Agreement in Ordinance Number 2019-211.

Main Source for Planning Numbers is MuniCap

Arena Bond Debt Parameters

Overall Assumptions for Arena Bond

Richmond needs an operating arena or coliseum. Existing coliseum is not reopened as is. Existing coliseum is not renovated. Therefore, a new arena is constructed. This is a 17,500-seat arena. New arena is not privately-owned and financed. Cost of constructing arena not shared with a company. Cost of arena is not shared with counties in the metro area. Cost of arena is not substantially shared with state. Arena is built as soon as reasonably possible.

Total Amount for Arena Bond = $311 million

Source: MuniCap, Inc.; Draft Projection No. 26 Values (Citi Debt Service).

Arena Cost is Approximately $245 million

Source: Davenport & Company presentation on October 14, 2019).

Arena Cost Paid by Bond Proceeds and Other Sources

Source for above amounts: Citigroup and Davenport (presentation on October 14, 2019).

Note: John Gerner estimates that $5 million of the $8.7 million in "Excess Incremental Revenues" in FY2021 and FY2022 would be from existing properties within the increment financing area (aka TIF district). Of the estimated $5 million, $2 million would be in FY2021 and $3 million in FY2022.

Contextual Definitions

Certain terms are defined within the context of the arena bond financing plan. An example is "excess" incremental revenues on the previous slide. This is specifically defined as the amount of incremental revenues

credited to the Navy Hill Fund above the amount needed to pay the bond for that particular year. It does not mean the amount after paying all expected uses, such

as city services, or the loss to the future General Fund if this revenue would have normally been deposited there. The same applies for the term "surplus" in this presentation.

Interest Rate is Higher than General Obligation Bonds


Bonds Currently Proposed to be Issued in April 2020


PlannedAnnual and Total

Arena Bond Debt Service

Bond Payment Sources

Planned Total Percent by Bond Payment Source

Source: MuniCap, Inc. (presentation on October 14, 2019).

Planned Total Revenues and Debt Coverage Ratio

Source: MuniCap, Inc.; Draft Projection No. 26 Values worksheet (Citi Debt Service).

Note: 150% or 1.5 debt coverage ratio is the targeted minimum annual level to allow for potential future disruptions such as recessions.

Bond Includes "Turbo" Payments – 50% of "Excess" Annual Revenues

Source: Citigroup and J. P. Morgan, Navy Hill Project Financing Overview presentation (October 14, 2019).

Illustration of Expected Accelerated Debt Service Schedule

Source: Citigroup and J. P. Morgan, Navy Hill Project Financing Overview presentation (October 14, 2019).

Categories are Very Important "Total Revenues Available for Debt Service" in a previous slide includes

incremental real estate tax revenues from existing properties in the increment financing area. By itself, an increment financing area (or TIF district) does not cause new

tax revenues since there is no special assessment fee. Instead, it categorizes future tax revenues. In this case, one category is the Navy Hill Fund that is paying the arena

bond. The other category is the City of Richmond’s future General Fund, which

pays for essential services. There is overlap between these two categories since tax revenues are

transferred from the future General Fund to the Navy Hill Fund. The accelerated debt schedule with turbo payments would use all of the

overlap during the first five years, and most during Years 6 to 10.

Overlap with City of Richmond’s Future General Fund

IFA = Increment Financing Area (aka TIF district) Note: This is conceptual and not in proportion.

Arena Bond Debt Assumptions

Planned Tax Revenues from Existing Real Estate Properties

Source: John Gerner calculation using numbers from MuniCap Draft Projection No. 26 Values.

Total for Year 1 to 5 periodis $17 million.

Total for entire bond period is $316 million.


Tax Revenues from Existing Properties + Planned Dominion 2 Tower

These Amounts Are in the Overlap Area of the Future General Fund


Commission’s Financial Model

One goal of the advisory commission’s financial model is to estimate the amount of that overlap between the Navy Hill Fund used to pay the arena bonds and the City of Richmond’s future General Fund.Part of this effort involves a due diligence assessment of the

certainty of the planned revenue sources for the Navy Hill Fund.

General Confirmation Levels for Due Diligence

Contractual and guaranteed Contractual with deadline Contractual Stated in a non-binding document Verbal assurance Implied

Arena Sources for Bond Payment


Planned Arena Revenues for Bond Payment


Combined Sponsorship Revenues = $108 millionConfirmation level = Stated in non-binding document

Selected Sponsorship Conditions in the Lease

Source: Navy Hill Deed of Ground Lease (Arena)).


Current Confirmation Level of Sponsorships

Source: October 19th Responses to Commission’s Questions/Requests for Information


Development Management Fee

Source: Development Agreement in City Council Ordinance 2019-211.

Development Parcels Revenues

Development Parcels

Note: First sequence development would be Parcels C,A,F,E + D.


Contractual Developer Commitment for 1st Sequence


Note: Parcel D is a VCU-related build-to-suit office/research/hospitality/retail complex that is independently funded.

Master Plan for Development Parcels

Note: Office / Research space is the largest part of the planned first sequence of development.


Causation versus Correlation

The development parcels have not yet been declared surplus by the City of Richmond. Therefore, prior private development was not possible and these

parcels had not been actively marketed by the City. Much of the planned development, especially during the first

sequence, involves uses such as office/research that are not typically associated with arenas. So there is the question of whether the new arena is directly needed

to cause the development of these parcels. If there is no causal link, development of one or more of these parcels

could independently occur in correlation with further consideration of a new arena.

Example of Correlation Development in Area

Source: Richmond BizSense.

Located at 706 E. Leigh Street, near the existing Coliseum.

Meals and Lodging Taxes are Significant Bond Payment Sources

Source: MuniCap, Inc. (presentation on October 14, 2019).

Cannibalization

A significant amount of planned future tax revenues for bond payment is from lodging taxes generated by the new convention hotel or from part of the meals tax charged by new restaurants on the development parcels. For example, planned lodging tax revenues would be $2.5 million for

2022. This would be 28% of all occupancy tax revenue collected by the City of Richmond in FY2019. The planned meals tax revenues from the development parcels would be

$3.1 million in 2022. That would be 8% of all prepared food tax revenues for the City of Richmond in FY2018. If these sales take sales away from other existing and new businesses in

the city, the development parcels would be cannibalizing tax revenue that would normally have gone to the future General Fund.

If Correlation/Cannibalization, Future Taxes Would Be in Overlap Area


“Hunden Uplift”

Source is 2018 Hunden Report

Major Lag in Impact (2018 Dissertation)

Key Takeaways

These Amounts Are in the Overlap Area of the Future General Fund



Planned Tax Revenues from Existing Real Estate Properties

Source: John Gerner calculation using numbers from MuniCap Draft Projection No. 26 Values.

Total for Year 1 to 5 periodis $17 million.

Total for entire bond period is $316 million.

Next Steps

Next Steps

Continue due diligence review. Further examine expected incremental tax revenues from

existing properties within the increment financing area (aka TIF district). Evaluate market demand for the new arena, as well as for

residences, office/research development, lodging, restaurants, and retail within the Navy Hill project area. More research on potential development correlation and tax

revenue cannibalization. Add fiscal impact analysis as more data becomes available. Document results in the commission’s report in late December.

Questions?

John GernerVice Chair, Navy Hill Development Advisory Commission

Managing Director, Leisure Business Advisors [email protected]

Preliminary Due Diligence Review of Proposed Arena Bond ... · Arena Cost Paid by Bond Proceeds and...

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