In the wake of the 2011 demise of California’s 400 redevelopment agencies, cities, developers, and institutions are all struggling to find new ways to fund the construction and maintenance of essential infrastructure and other public buildings and facilities. A San Francisco official recently complained to me that there are 40,000 dwelling units entitled in the city that aren’t being built. He noted a variety of reasons, but a chief one for large developments is the need for massive unfunded up-front investments in infrastructure. This includes projects like Treasure Island, Park Merced, Pier 70, and Hunters Point/Candlestick. These huge developments are all reuse projects for outmoded economic and land uses that once would have benefited from tax increment financing (TIF) through the local redevelopment agency. Tax increment financing, in use in every state in the union (and many other countries), is a financial tool to bond against future general property tax revenues, based on the increased value created by the development. The governor took exception to this diversion of revenues from cities’ general fund budgets. Redevelopment of course had other social and economic goals in addition to being a financing mechanism.
With the loss of TIF, other strictly financing techniques are being used, including Community Facilities Districts (also called Mello-Roos districts in California, around since 1982). CFDs, unlike TIF, are financed by bonds secured by special taxes on the benefited properties, and do not come out of the city’s general fund. And unlike Redevelopment, they must be voted in by two-thirds of the property owners. A newer and more flexible financing technique, Infrastructure Financing Districts (IFD) is a cross between TIF, which diverted property tax from the general fund, and CFD, which are special taxes on the benefited properties requiring a vote of the landowners. IFDs have this same two-thirds voting threshold as CFDs, but then are able to divert property taxes from the general city revenue stream and are not a special tax.
Concerned about the loss of property tax revenue from the city’s general budget, San Francisco requires the formation of Community Benefit Districts (CBD) to pick up future maintenance costs for capital facilities built by IFDs. CBDs are merely a Business Improvement District (BID) by another name – again a special fee on the benefited properties that must be voted in by the benefited owners.
Cities and counties and special districts throughout California are getting expert at these work-arounds for the lack of the very important Tax Increment Financing tool of Redevelopment.
For decades, I have been involved in San Francisco’s Mission Bay, a 300-acre former Southern Pacific railroad yard, developing into a 300-acre new-town-in-town, with a 40-acre, 2.7 million square foot University of California San Francisco Medical Center as its centerpiece. A CFD is in place to take care of the infrastructure.
The development model for Mission Bay is that this medical research campus is the “bait” for private biotech and pharmaceutical research and development companies locating adjacent to the campus to capitalize on the university’s discoveries. Thus it is key that the university build out its campus with deliberate speed. The risk is always that, dependent on annual allocations from the State, UC would find itself in the same trap that so many other development projects are experiencing: a lack of up-front capital construction money.
For the last ten years I have been on the board of a creative first-of-its kind institution designed to make sure this doesn’t happen to UC Mission Bay, one building at a time – the Campus Facilities Improvement Association, or CFIA for short. Traditionally, to build new buildings, UC has gone through a standard procurement process, developing a program, selecting an architect, overseeing the design, putting the building out to bid, and managing its construction. Public contract law requires competitive bidding, a good protection of the public’s dollars, but not always the best way to get the best building. In this traditional model, the State provides the money, the University owns and operates and maintains the building, again dependent on the legislature coming up with the annual draw.
Enter CFIA, a public private partnership that is a long-term deal (for 30 years minimum). It is a unique negotiated partnership that introduces risk and reward into the picture and arrives at a more flexible negotiated cost, and includes long-term management of the building by the private partner. CFIA is a not-for profit 501(c)(3) entity.
So far, we have successfully developed one building, and are just beginning the second. The Sandler Neurosciences Center is a 240,000 square foot $174 million LEED Silver laboratory building on the main quad, designed by Skidmore Owings and Merrill, and developed and maintained by a joint venture, Edgemoor McCarthy Cook.
Here’s how the CFIA model works. The University programs the building just like a traditional project. They then go through a design/build solicitation for an architect-developer- contractor team. The deal is a real estate deal, not a procurement deal, and thus is not subject to public procurement law requiring competitive bidding. It’s all negotiated. The building is designed and goes through CEQA and other required entitlements. Here’s the interesting part. UC, the fee owner of the land, ground leases the site to CFIA, which in turn, sub ground leases the site to the developer for co-terminus lease terms. CFIA issues tax exempt bonds (through a conduit issuer) to finance building construction, backed by the University’s long-term lease of the completed facility.
In the case of the Sandler labs, completed and occupied in 2012, we had access to Build America Bonds, a now-expired Obama Administration program introduced in 2009 as part of the American Recovery and Reinvestment Act to create jobs and stimulate the economy during the Great Recession. Our current project is a new clinical services, research, and training building for the Department of Psychiatry. These bonds will be standard tax exempt bonds issued through a conduit issuer, the I-Bank (the California Infrastructure and Economic Development Bank), as were the Sandler bonds. The I-Bank is a State institution, part of the California Business, Transportation and Housing Agency, that issues securities to raise capital for revenue-producing projects where the funds are generated by a third party (the “conduit borrower”) to make payments to the investors. There is a ready market for these tax exempt bonds in the private market.
Under a Lease Disposition and Development Agreement (LDDA) with CFIA and UC, the developer builds and owns the building for the term of the agreements. The University executes a space lease with the developer, coterminus with the ground leases, and pays the developer occupancy rent. The developer operates and maintains the building all at an initial fixed cost. Subsequent remodelings etc. are handled by negotiated contract between the University and the developer. In the case of the new Psych building, the architects are ZGF and Pfau Long, and the developer, SKS/Prado, and the construction cost about $200 million.
The University gets its building without being dependent on the Legislature. The building’s users can negotiate a more tailored deal than you get in the standard lowest-price bidding system. Cost savings are split 60% to the developer and 40% to the University. The building is maintained in AAA condition, again without the vagaries of annual state allocations. There is a vehicle for future renovations, which are certain to occur in the R and D world. Private investors have the benefit of buying tax exempt bonds, and public capital is not tied up for thirty years.
The CFIA Board are five volunteer individuals appointed by the UC Board of Regents. We monitor the project and approve disbursements during the construction period, and have monitoring and auditing responsibilities for the life of the leases.
This is yet another creative way for government to do more with less in our current political/fiscal environment. CFIA is set up fulfill its role on any UC campus in California. It is a model other institutions should consider to jump-start development projects without having to raise capital up front.