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Thursday, May 4, 2017

VA Homes Project Proceeds With Financing Plan

Council met with VA home developers, Bloomfield/Schon and KMK attorney, Jim Parsons, to discuss the financing component for the historic homes. FTM file. 
By Robin Gee

A plan for financing the VA homes project was the main focus of a May 1 meeting between Fort Thomas city officials and project developers, Ken Schon and Steve Bloomfield. Also present was attorney James Parsons, who specializes in development financing.

A special session of the city council followed directly after the meeting to keep the momentum going and to allow for a first reading a zoning change for the VA site at the special session.

RELATED: VA Homes Developer Shows Preliminary Plans 

City Administrator Ron Dill opened discussion with a brief introduction about proposed financing and asked Jim Parsons to share his expertise on Industrial Revenue Bonds, or IRBs, recommended for the VA homes project.

Parsons explained while IRBs have not been used in Fort Thomas, the bonds are fairly common in the region for financing larger development projects. IRBs have been used on several familiar Northern Kentucky projects such as the Newport Pavilion, Newport on the Levy and the SouthShore condos in Newport, as well as The Ascent condos in Covington.

IRBs are attractive to developers because they offer a lower interest rate and a long-term, fixed-rate financing package. The bonds are not tax exempt.

The bonds are sponsored by a public entity (state or local government), but the bonds are used by a private business (the developer) to secure financing for the construction and other aspects of project development. The developer is totally responsible for repayment of the loans.

What this means for the city

“The important thing to know about the Industrial Revenue Bond is it’s not a debt belonging to the city. Even though the city is issuing the bond, it is acting more as a conduit. …During the term of the bond, 30 years, the city will have legal title to the houses,” Parsons said.

He emphasized, however, the city has no financial obligation. The loans for construction and related development costs are the responsibility of the developer. The city’s obligation will be for streets, other public areas, such as the park and ball field, and maintaining the public right off way.

The bonds make the project affordable and attractive to developers. Local governments forego property taxes for the promise of future value and revenue from the project as well as the jobs it will create in construction, management and maintenance of the development.

One concern, however, is that property taxes are the main source of financing for many school districts including Fort Thomas. The good news is the IRBs allow for flexibility. A special payment agreement, known as a “pilot,” can be offered to offset some of the loss of property taxes and to help support the school districts.

The city and developers have proposed that a pilot for the Fort Thomas School District would provide payment from the developer to the district. Payment would be based on the current value of the average home in the city. If the school district agrees, the payment would continue throughout the terms of the 30-year loan.

“The bottom line is this is a necessity for the developers to be able to make the project work,” said Mayor Eric Haas. He explained, unlike a traditional development project in which a developer buys a plot of land to put up houses and can reasonably estimate upfront costs, it had been difficult to find a developer who has the expertise to tackle the complex VA project with so many unknowns.

Haas praised the developers for finding a way to make the project work for them and for the city. “Here we don’t know all the expenses, and they’ve been gracious to work with us in this time period and in looking at the numbers so that the houses don’t cost three million dollars a piece. They want to keep the prices somewhat marketable. Using the IRB to finance the process was the logical thing to do,” he said.

What this means for homeowners

Because the city holds legal title to the property until the development loans are paid off, the city actually holds the deeds for the term of the loan, in this case, for 30 years. Once the loans are paid off, whoever owns an individual home at that time will be given the deed to that home.

Parsons explained that owners would have exclusive rights to the property. Homeowners will technically be considered “tenants” who will lease the property from the city, but will have all the rights and responsibilities of traditional homeowners. They will have a mortgage with a lender of their choice and can improve or sell the property just as any other homeowner.

The only major difference will be that they will have a lease agreement rather than a deed until the loans are paid.

The property is tax-exempt for the developers, he added, but owners will receive a bill for an amount equivalent to what they would pay in taxes. This payment would go to the developer to offset costs and for the pilot payments to the school district.

The mayor was concerned that the process for home buyers be as smooth and as familiar as possible under the circumstances.

“I understand the basics of this and the need to do it this way because of the unique situation, but it is a very complicated process,” he said. “So, now someone wants to buy one of these homes and now they are hit with this…Anything we can do to make this feel as much like a normal mortgage I think will help,” he said.

Council member Ken Bowman, who is a realtor, said he has been a part of these IRB-funded properties and has found the process for the owner to be almost unidentifiable from traditional mortgage situations.

When asked about worst-case scenarios such as foreclosures, Parsons said that the city, as lease holder, would be named in a foreclosure but would have no financial responsibility. As in foreclosures on traditional mortgages, the process would play out as it would normally between the lender and the borrower.

More to come as the process unfolds

Now that the council has discussed the agreement, it will be back for consideration at the next regular council meeting May 15.

In the meantime, the developers and the city will continue talks with the school board about the pilot payment proposal and are working with Duke Energy and other utilities to identify needs and costs.

“The extraordinary costs are obviously the environmental issues, lead paint and asbestos and the condition of the houses after having sat empty for decades. It’s been a very unusual length we have had to go through to get new 21st century infrastructure to this site," said Ken Schon.

Environmental remediation, infrastructure issues, starting the necessary IRB documentation and working with the many different interests involved means a full plate ahead for all involved.

The sewer and water lines must be run almost a mile toward the main lines on S. Fort Thomas Avenue, which will cost a lot of time and effort.

Despite the challenges, city officials and developers appeared confident and excited that the process is now fully underway.

1 comment:

  1. Why would the bonds be issued for 30 years when the homes would be sold to homeowners within 3-4 years at the most? These developers typically hold limited assets for the Development LLC that controls these homes. Once the homes are sold and the income transferred out of the Development LLC back to the parent company, who pays the bills? I admit I am not familiar with IRB's but this sounds like trouble. Also, why would the school board agree to the "average of the home values of fort thomas" (about 200,000) for the school taxes when these will likely be 500,000-1,000,0000 homes?