Mass construction projects are going up with the help of tax-exempt bonds

Many large commercial projects are getting built in Virginia with a little help from the local government.

Localities and developers are partnering on projects by creating an independent community development authority with the ability to issue tax-exempt bonds for public infrastructure.

The financing model is being used increasingly on some of Virginia’s largest and most high-profile projects. And today’s volatile financial markets aren’t likely to slow the trend, say real estate experts. In fact, some localities are looking to CDAs to get potentially lucrative developments, hurt by the fallout from the subprime mortgage crisis, back on track.

Interest is so strong that the International Council of Shopping Centers, in conjunction with Blacksburg and cities in Hampton Roads, recently sponsored programs to explain how CDAs can be used as an incentive for development.  The program’s tagline: “Weapons of Mass Construction: CDA in Virginia.“

And many of these public-private developments are massive. New Kent Vineyards, a $1.5 billion residential/commercial/resort development in New Kent County, won nearly $86 million in CDA funding for water and sewer infrastructure.

Nearly $93 million in CDA bonds is a key driver in the transformation of Hampton’s 33-year-old Coliseum Mall into the 500,000-square-foot Peninsula Town Center.

Typically, developers welcome CDAs. They can significantly lower upfront costs by providing funds for expensive infrastructure. Localities like them, too, because a CDA helps attract projects that, over the long term, may expand a jurisdiction’s tax base.

By law CDA bonds can be applied only to infrastructure that will be used by the public — things such as water and sewer lines, roads, parking lots and traffic lights — and for projects that will be owned by a public entity upon their completion.

Chesterfield County approved the creation of a CDA last summer to help pay for road improvements at the Watkins Center, an 800-acre light-industrial and office park expected to generate as much as $11 million in annual taxes when completed.

Counties, towns or cities may create a CDA when petitioned by owners of at least 51 percent of the land in a contiguous area. CDAs raise money by issuing bonds that usually are repaid by assessments on properties within the CDA.

An advantage for tax-conscious local governments is that the developer bears the ultimate risk for repayment, not the locality. The real estate is the CDA’s collateral.

Henrico County has become something of a leader on CDAs, using bonds to seed three large projects in recent years: Short Pump Town Center, a regional shopping mall; The Shops at White Oak Village; and Reynolds Crossing, a 63-acre mixed-use office park.

“For local governments, they’re in vogue,“ says Henrico County Manager Virgil R. Hazelett, “but we look at them very critically. What you do today is going to have an impact in 10 or 20 years, and we want that impact to be positive.“

Due diligence is a must before proceeding with CDAs. For instance, both Henrico and Prince William counties have established guidelines that raise red flags at proposals for residential development because it generally costs more to provide services in such developments than the county receives in taxes and fees. Consequently, neither county will approve a CDA for residential development alone.

To be considered in Henrico, a project must be large enough to increase the county’s tax base by at least $25 million. Plus, the term of the bonds must be relatively short — 10 to 15 years.

From a developer’s perspective, CDAs allow investments on infrastructure at rates and for periods that a typical lender would be reluctant to offer, notes Paul Weinschenk, vice president of the Peterson Cos. in Fairfax. Peterson relied on two CDA bond issuances of $7 million and $6.6 million for road improvements and infrastructure development at the Virginia Gateway in Prince William, a mixed-used development of high-end shopping, dining and offices space.

One issue that could harm the popularity of CDAs is concern that bond-rating agencies might view them unfavorably. These ratings are key to a government’s capacity to borrow money, and the fear is that a CDA bond could be viewed as a debt that could come back to bite if a developer went under or the value of real estate dropped dramatically, as has happened recently in some areas.

A recent check by Stone & Youngberg on the ratings of many Virginia localities that have issued CDAs did not reveal changes.

The current real estate slump doesn’t seem to have curtailed the creation of CDAs, but a continuing downturn may.

John B. Levy, founder and president of the John B. Levy & Co. real estate investment-banking firm in Richmond, says there could be situations where bonds will come due and authorities won’t have the money to pay off debts on retail projects.

Questions remain about the public role in assisting private development, with some CDAs prompting legal challenges. Yet, the trend appears here to stay.  “It’s something we’ll keep in the tool kit,“ says Peterson’s Weinschenk. “We’ll use it again.’

This is a version of a story that appeared in the March issue of Virginia Business magazine.