The loan to the developer is limited to a percentage of the project cost, commonly referred to as loan-to-cost (LTC). Currently, the LTC for most developments ranges from 75 to 90 percent. In other words, the construction lender will provide on the average 80 percent of the project financing, in the form of debt, and requires that the balance of the project cost (20 percent) be in the form of equity, or at-risk cash.
Part 2: Public Partner(s) Capital Investment
If the financial analysis reveals a basis for a public partner to invest in a TOD, there are multitudes of funding sources to tap. Investment could be in the form of cash, bonds, grants and/or tax credits. Many public facilities also generate operating income, which can be used to support bond financings. Public partners should think creatively when trying to optimize operating income. For example, public facilities such as libraries, new sources of income can be introduced to help cover a portion of the debt service and/or operating expenses. For example, a public/private finance plan could include community funding programs, income from an on-site retail shop and/or café, income from operating the library garage after hours and on the weekends, renting out major spaces and/or classroom space after hours, lease payments for naming rights for the library, selected rooms and/or public spaces.
For most traditional commercial developments, land cost equals 10 to 15 percent of the total development budget (TDB). Government–owned land should be viewed by government officials as an investment and should expect a return on that investment. The public partner can sell the project site, or structure a long-term land lease with a developer. Government officials should not underestimate the income which can be generated from a land lease, nor the ability to leverage the base rent, which is typically a guaranteed annual payment from the developer (See Part 3).
Part 3: Non-Tax Income Generated by the Project
One of the most powerful techniques to solve any “gap financing” requirements is to optimize non-tax income generated by government-owned land serving as the TOD site and from any proposed public facilities on site. Public partners should view their real estate assets as a potential major source of income. Under a land lease arrangement, the government entity, or public partner is able to retain ownership of the project site and also realize any appreciation in land value achieved to date and in the future. Developers like land lease arrangements because they can avoid upfront cash outlays required to purchase a TOD site. Depending on the results of preparing a developer pro forma, the public partner, and their consultant should structure a land lease, which includes up to nine types of land lease payments paid by the selected developer to the public partner, the land owner. The nine types of land lease payments include: 1) construction rent, 2) base rent, 3) index rent, 4) participation rent, 5) participation in any sale proceeds, or refinancing, 6) maintenance, operation and security (MOS) payment, 7) home-run insurance, 8) land lease payouts, and 9) interest income.
Public partners should also be able to generate non-tax income, or operating income from any on-site public facilities. Many public facilities throw off traditional operating income, such as user fees, or admission charges, but there are other creative types of operating income that can be realized. These more creative types of income include:
- Introduce complimentary retail space, such as a coffee shop or café.
- Lease advertising space in appropriate areas of the facility.
- Lease naming rights.
- If the facility or system is large enough, lease pouring rights.
Part 4: Tax Revenue Generated by the Project
Another important source of income from a TOD is the multiple types of tax revenue generated by commercial leasehold improvements developed on government-owned land. In addition, if the project site is owned or purchased by the private developer, the land will generate property tax annually. Depending on the building types included in the commercial development portion of the proposed TOD, projects will generate substantial tax revenue, such as:
- Property tax
- Personal property tax
- Sales tax
- Hotel occupancy tax
- Corporate income tax
- Local and state income tax
- Utility taxes