UC/PNC Outlook 2015:Real Estate Debt Markets

Laura BrunnerPresident & CEO

Port of Greater Cincinnati Development Authority

March 6, 2015

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Private Sector Practices

• Risk Tolerance

• Market Focus

• Sense of Urgency

Public Sector Tools

• Resources / Tools

• Credibility

• Long Term Perspective

Value Creation

• Jobs

• Property Values

• Residents

PLANNING

STRATEGY

STEWARDSHIP

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OUR STRATEGY: TO BE THE MOST SOUGHT

AFTER DEVELOPMENT PARTNER

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Stage of Growth and Risk Profile

DesperateStart-UpEstablished &

Looking to Grow

Port Authority Tools

Port Authority tools are primarily debt-related• Reduce cost of capital or construction costs• Access to capital on more attractive terms

Commercialize

Finding the right tools:

Freedom Center

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$539 million for 15 financing projects

Development Bond Financing

Freedom Center

Red Bank Village

Queen City SquareOakley Station

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CONSIDER: since 2010

CLEVELAND: EB-5 Deal Value: $232 Million

HERE: No large-scale development deals with EB-5…yet

Greater Cincinnati EB-5

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Port Authority EB-Program: RolesPartnership with the Cleveland International Fund (CiF) Start with the Port Authority

Port Authority• Market program locally• Pipeline generation• Preliminary due diligence• Offer bond financing to EB-5 projects when appropriate

Regional Center (CiF)• Loan and EB-5 underwriting• Solicit foreign investment• Manage investors and immigration process• Program compliance

Most common in EB-5 investments

• Over 90% of EB-5 applications via Regional Centers

• Investors invest in the Regional Center, which then invests in the

project, rather than direct investment into projects or companies

• Operates within a defined geographic region, although does not

have exclusivity to any given region

Benefits:

• Can do other types of financing

(i.e. flexible, senior debt, and mezzanine financing)

• Can use Economic Modeling to estimate job creation,

counts both direct and indirect jobs

• Can aggregate funds to do larger scale investments

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Regional Center Model

EB-5 for Development Finance

• Works best as a portion of the capital stack– Senior debt at higher LTV and/or lower interest rates

than traditional debt

– Mezzanine debt to fill a financing gap

• Works with a variety of asset types

• Projects with public sector participation are more significant to foreign investors

• Can be combined with TIF, New Markets Tax Credits, other

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• Minimum $30 million project

• Senior Mortgage or Mezzanine Debt

• 5 Year Term, Interest Only

• Office, Retail, Hotel, Multifamily, Industrial, Infrastructure

• Anywhere in Hamilton County, urban areas of Hamilton and Middletown

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Port Authority EB-5 Requirements

Case Study: The Flats East Bank

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Centered on the construction of the Ernst & Young office tower, attached Aloft Hotel, and space for retail and restaurants. Phase 1 completed in 2013.

Total EB-5 Investment: $45 million Total Project: $275 millionEB-5 Investors: 90 Job Creation: Estimated 1,800+ Status: Closed | Fully Funded

• $65 million office development

• Maximum EB-5 investment of $16 – 20 million

• Senior Debt or Mezzanine Debt, as opposed to Equity position

Examples

Recent Ohio projects financed with Lease Structure:

CLEVELAND: - Flats East Banks- Eaton

TOLEDO:-The Andersons

COLUMBUS:- Lane Avenue Development

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CONSIDER:

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Structured Lease

• Port Authority not required to pay state and local sales tax on construction materials – even if the project is for economic development purposes

• To use this incentive, Port Authority must have an ownership interest in the project – even if those properties are leased to private entities

• Property transfer and lease arrangementsmade on a case-by-case basis

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Structured Lease

$25 million new construction project (hard costs)• Assume 50% of hard cost for construction materials

• Hamilton County sales tax 6.75%

• Goal: 80% of savings retained by client post transaction fees & expenses

• Total savings to client: $675,000

$5 million new construction project (hard costs)• Add on to a project where the Port Authority has another role

• Assume 50% of hard cost is for construction materials

• Hamilton County sales tax of 6.75%

• Goal: 80% of savings retained by client post transaction fees & expenses

• Total savings to client: $135,000

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Structured Lease - Examples

Structured Lease - Bond Financing• Port Authority specific financing option

– capital or operating lease

• Port Authority purchases or constructs the facility;leases facility to a master lessee who makes lease payments to cover debt service on the bonds

• Master lessee can be a developer or an end user

• The bondholder has recourse only to the lease payments made by the lessee or any guarantor or to the asset leased or financed

• Lease bond financings are credit dependent

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303 Broadway

Queen City Tower

Lease Bond Financed Projects

TOLEDO-LUCAS COUNTY:$30 million in energy efficiency projects, $18 million (approx.) in PACE projects

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CONSIDER:

Property Assessed Clean Energy

(PACE)

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Barriers to Upgrading

What is PACE?

• Innovative financing to support energy efficiency and renewable energy upgrades

• Property requests assessment on property tax bill to raise capital for improvements

Benefits

• No net out-of-pocket expense

• 100% of project costs can be financed

• Debt terms extended to 15 years, to achieve positive cash flow on retrofits

What type of Project qualifies?

• Demonstrated cost savings; reduced energy consumption or generation

• End-of-Life cycle equipment replacement

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Property Assessed Clean Energy (PACE)

Five Ohio Bond Funds have financed more than 100 deals for $400 million

None in Cincinnati

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CONSIDER:

Southwest Ohio RegionalBond Fund

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Southwest Ohio Regional Bond Fund:

Eligible Borrows and Projects

Eligible Borrowers:• Industrial or commercial companies including manufacturing,

distribution, housing, education• Infrastructure projects (TIF & Special Assessment Projects, PACE)• Non-profit or 501 c(3) entities• Governmental

Eligible Projects: • Acquisition and/or renovation of existing buildings• Construction of new buildings• Acquisition of land• Purchase and installation of equipment• Financing costs and soft costs

Upcoming Event:Innovative Real Estate Finance Tools

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UC Real Estate Center Professional Development Series

March 24, 20157:30am-11:00am

Susan Thomas, Vice President of Public Finance,Port of Greater Cincinnati Development Authority

Matt Staarmann, Managing Director, Ross, Sinclaire & Associates

Public finance and other non-traditional funding sources for real estate development

Thank you

UC/PNC Outlook 2015:Real Estate Debt Markets

Laura BrunnerPresident & CEO

Port of Greater Cincinnati Development Authority

lbrunner@cincinnatiport.orgcincinnatiport.org @PGCDA