Local Government Debt Financing Primer: Enhanced Security for Project Development Financings

<p>Kara Millonzi is a School of Government faculty member.</p> <p>Blight City is looking to revitalize a portion of its downtown. Over the past ten years the area has fallen into disarray and contains many abandoned, dilapidated buildings. Working with a couple of local developers, the city has developed plans to purchase and demolish one of the buildings and construct a large parking garage in its place. The city also plans to improve several of the existing roads leading into downtown and to pave a few additional side streets. The local developers intend to purchase the other buildings and either refurbish or replace them with modern, mixed-use structures. The local developers have secured several long-term leases with retailers to occupy the bottom floors of the new buildings. The new city parking garage will benefit these tenants (although no commercial entity will be guaranteed parking spaces for employees or customers.) The total projected cost to the city for the public infrastructure projects is $30 million. After exploring all of the debt financing alternatives, city officials believe that project development financing is their best option. That means that the city will pledge as security for the loan the incremental ad valorem tax revenue that is generated by the new development in the downtown area (project development district) that is spurred by the city’s investment in the parking garage and other infrastructure projects. The city also intends to use this incremental tax revenue to make its annual debt service payments on the loan. (To learn more about project [...]</p>