8.8 IRB Intent CITY OF SALINA
REQUEST FOR COMMISSION ACTION DAZE ZIME
10/06/1997 4:00 P.M.
AGENDA SECTION: ORIGINATING DEPARTMENT: APPROVED FOR
NO. AGENDA:
8 City Attorney
ITEM
NO. 8 6reg Bengtson
Matter
Setting of public hearing and authorization of published notice regarding issuance of industrial
revenue bonds for the construction of a manufacturing/office complex for Coronado Engineering,
Inc.
Discussion
The specific action to be considered by the City Commission is whether to set a public hearing for
the October 20, 1997, agenda and to authorize published notice of that hearing and issuance of
industrial revenue bonds for Coronado Engineering, Inc. Coronado Engineering proposes to
construct a 27,600 square foot manufacturing/office complex in the Salina Airport Industrial
Center. The Salina Airport Authority was initially to be the issuer of the industrial revenue bonds.
Attached is a memo dated September 19, 1997, by bond counsel for the project, Randy Irey of the
Kansas City offices of Gilmore & Bell. As Mr. Irey explains, it is now recommended that the City
be the issuer of the bonds in order to assure that the applicant's qualification for property tax
exemption will not be unnecessarily jeopardized.
Also attached are copies of the proposed published notice and a General Information Outline
regarding industrial revenue bonds prepared by the City Manager and the City Attorney. Staff
will answer questions regarding the industrial revenue bond process at Monday's meeting. Details
regarding the specific project will be addressed at the October 20th meeting.
Recommendation
Adopt a motion setting a public hearing on October 20, 1997, and authorizing published notice of
the hearing and the issuance of industrial revenue bonds for Coronado Engineering, Inc.
GEP, 19,1997 2:55PM GILMORE AND BELL 816 931 7599 NO, 3143 P, 3/4
IVfEMORANDUM
September 19, 1997
Re: Coronado Engineering Inc. Project
Coronado Engineering Inc. (the "Company"), a manufacturer currently located in the City of
Salina, Kansas (the "City"), is expanding its facilities. The Company has negotiated with the Salina
Airport Authority (the "Authority") to acquire unimproved land owned by the Authority on which the
Company proposes to relocate and expand its manufacturing facilities (the "Project"). The Authority has
also agreed to issue its industrial revenue bonds to finance the Company's Project. Sunflower Bank,
N.A. (the "Bank"), has agreed to purchase the bonds, with the final terms of the financing currently being
resolved. The interest on the bonds will be exempt from income taxes pursuant to federal law provisions
("Federal Tax Requirements"), and the Project will be exempt from ad valorem property taxes pursuant
to Kansas law provisions ("State Property Tax Requirements").
The Authority has taken the necessary action to meet the Federal Tax Requirements and the
required preliminary steps to meet the State Property Tax Requirements.
The exemption of the Project from ad valorem property taxes is an important financial concern
of the Company. While a strong legal argument can be made that the Project should be exempt from ad
valorem property taxes if the Authority issues the bonds, it appears this will be a case of first impression
for the Kansas Board of Tax Appeals ("BOTA") as they have not previously reviewed ad valorem
property tax exemption in connection with the issuance of industrial revenue bonds by an airport
authority. Recently, BOTA has been more restrictive in approving exemptions from property taxes.
These two factors together create concern about maximizing the likelihood that the Project will be
exempt from ad valorem prope~y taxes if the Authority issues the bonds. Unfortunately, no assurance
can be given that BOTA will grant the property tax exemption until after the bonds have been issued and
the application for the exemption is presented next year pursuant to BO'IA procedures.
The City has the authority to issue industrial revenue bonds for the Project and grant the property
tax exemption. Obtaining the exemption t¥om ad valorem property taxes from BOTA, while never
guaranteed, is more likely if the City issues the bonds rather than the Authority. BOTA regularly
reviews and grants property tax exemptions based on the issuance of industrial revenue bonds by the
City.
For these reasons, it is desirable for the City to issue the bonds to finance the Project rather than
the Authority.
If the City agrees to issue the bonds, the steps already taken to date by the Authority to meet the
Federal Tax Requirements will apply to the bonds issued by file City without any further action. The
City will, however, need to take the necessary steps to meet the State Property Tax Requirements as the
Anthority's prior actions will not apply if the City is the issuer.
SEP, 19,1997 2:55PM GILMORE AND BELL 816 93i 7599 NO, 3143 P. 4/4
The following is a proposed calendar of events for the City to issue the bonds:
Date Activity
October 3, 1997
Completion of revised cost/benefit analysis
required by K.S.A. 12-1749d with the City as
issuer
October6,1997
Notice (prepared by Gilmore & Bell) of public
hearing on granting of tax exemption sent to the
Salina Journal for publication
Notice of hearing and intent to adopt
inducement resolutiot~l:n,~e~pared by Gilmore &
Bell) sent to U.S.D, 306,~dad Saline County by
City clerk --~
October 10. 1997
Publish Notice of hearing
October 20, 1997
City Commission conduct public hearing and
adopt inducement resolution
October22, I997
City apply for allocation from Kansas
Department of Commerce to issue tax-exempt
industrial revenue bonds
October 27, 1997
(or any Monday thereafter)
City Commission adopt ordinance authorizing
issuance of bonds and execution of financing
documents
10 days after adoption of
Bond Ordinance
Closing, lease recorded and bonds delivered to
Sunflower Bank in exchange for deposit of bond
proceeds in construction fund
OCT. 2.1997 2'19PM GILMORE AND BELL 816 931 7599 NO, 3747 P. 3/i0
(Published in The Salina Journal, October 10, 1997)
NOTICE OF PUBLIC HEARING
AND OF
ISSUANCE OF INDUSTRIAL REVENUE BONDS
Public notice is hereby given that the City Commission of the City of Salina, Kansas (the
"City"), will conduct a public hearing on October 20, 1997 at 4:00 p.m.,, or as soon thereafter as may be
heard in the Commission Meeting Room at the City/County Building, 300 West Ash, Salina, Kansas, in
mgm'ds to the issuance by the City of its Industrial Revenue Bonds (Coronado Engineering, Inc. Projec0,
in an aggregate principal amount of not to exceed $980,000 (the "Bonds") and in regards to an exemption
from ad valorem taxation of property constructed or purchased with the proceeds of such Bonds. The
Bonds ate proposed to be issued by the City under authority of K.S.A. 12-1740 et seq., as amendexi, for
the purpose of acquiring, constructing, furnishing and equipping a manufacturing facility to be located on
the south side of Wall Street in thc 1700 block of Wall Street at the Salina Airport Industrial Center in
the City of Salina, Kansas. The City further intends to lease such facility to Coronado Engineering, Inc.,
a Kansas corporation. Thc City will not adopt an ordinance authorizing the issuance of such revenue
bonds until said public hearing has been concluded. These are the same Bonds for the same project as
was initiated by the Salina Airport Authority following a public hearing on December 18, 1996; the only
change is that the City of Salina will issue the Bonds.
Notice is further given, in accordance with K.S.A. 12-1744e, that the City intends to issue the
Bonds and lease the facility to thc Tenant as set out above.
A copy of this Notice, together with a copy of the inducement resolution of the City to be
considered for adoption on October 20, 1997, indicating the intent of the City to issue such Bonds, and a
report analyzing the costs and benefits of such property tax exemption as required by K.S.A. Supp. 12-
1749d ate on file in the office of the City Clerk of the City and are available for public inspection during
normal business hours.
The hearing will be open to the public. All persons having an interest in this matter will be given
all opportunity to be heard at the time and place above specified.
Dated: October 10, 1997
CITY OF SALINA, KANSAS
By Judy O. Long
City Clerk
GENERAL INFORMATION OUTLINE
INDUSTRIAL REVENUE BONDS
I. MUNICIPAL BONDS MOST COMMON TO SALINA:
General Obligation Bonds - Used for city's public projects not necessarily
generating a revenue stream, e.g. roads, buildings, subdivision improvements,
fire vehicles. Backed by full faith and credit of city and full taxing power, thereby
carrying lowest interest rate. Interest on bonds is almost always tax-exempt.
Revenue Bonds - Used primarily for city's public projects generating revenue,
e.g. water and sewer utility. Backed by the revenues from that enterprise. Carry
slightly higher interest rate. Interest on bonds is almost always tax-exempt.
Co
Industrial Revenue Bonds - Referred to as "private activity bonds." Used to
finance certain private sector projects which bring a public benefit, e.g.
economic development, jobs, health care, etc. Not general obligation of city.
Payable solely from rental proceeds and earnings. Historically, began use in
1936 in southern states.
II. INDUSTRIAL REVENUE BONDS
A. Under Kansas State Law
Uses - purchasing/acquiring constructing, equipping, furnishing, enlarging or
remodeling of facilities for agriculture, commercial, hospital, industrial,
natural resources, recreational development and manufacturing.
Property Tax Status - Facilities, etc. carry automatic ten-year property tax
exemption under state law. However, cities may require a payment in lieu of
taxes for all or part, effectively negating this provision, or may get waiver of
this provision. Under Salina/Saline County Airport Authority policies, IRB tax
exemptions are handled according to our constitutional tax examption
formulas.
3. Local Authority - Decision about issuance of IRBs is not subject to petition
for referendum.
B. Under Federal Law
Tax Status - Federal law deals primarily with the income tax status of interest
earnings on the IRBs. 1986 tax act greatly reduced the uses of IRBs which
could have federal tax-exempt interest. Federal law now allows this tax
exemption primarily for "small issues" for manufacturers. Though there are
some other provisions for certain other uses, e.g. health care, IRBs may be
used for purposes under state law but not carry a federal interest tax
exemption.
C. Why Do Companies Use Tax-Exempt IRBs?
1. Lower interest rate borrowing (fixed or variable)
2. Longer term borrowing
3. Possible reduction in property taxes
4. Sales tax advantages
5. Negotiated loan covenants
6. Equipment financing available
D. Bond Buyers - Safety and Security
1. Project review
2. Company financial status
3. Interest rate sensitivity, risk/reward analysis
E. City of Salina Process
1. Application - including application fee
2. All costs incurred by city to be paid by applicant
3. Application review by staff:
a. project review
b. professional services review
c. references, experience
d. due diligence standard
e. risk analysis-done primarily by bond buyers
f. resolution of intent of inducement resolution (public comment)
4. Property tax abatement policy - same policy as under constitutional provisions.
F. The Role of the City's Trustee in an Industrial Revenue Bond Issue
An industrial revenue bond project generally brings the excitement of new
economic activity to a community. Along with that excitement come the more
mundane responsibilities of the City to assure (1) that its bond proceeds are
properly applied within the project budget; (2) that detailed records are
maintained regarding issuance and ongoing ownership of the bonds; and (3)
that the developer pays the rent payments necessary to pay off all of the
principal and interest owned on the bonds. Cities usually carry out those
responsibilities by using a financial institution with trust authority as its trustee.
That delegation of authority generally takes the form of a "trust indenture"
between the City and the designated trustee.
1. Bonds
The trust indenture will address the particulars of the bonds that are to be
issued, including how they are to be denominated, issued, transferred, recorded
and possibly redeemed.
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2. Bond Proceeds
The trust indenture will establish what is generally referred to as the "Project
Fund" for the receipt of the bond proceeds. The trustee is then responsible to
pay from the Project Fund the costs associated with the acquisition or
construction of the project.
3. Payment of Principal and Interest on the Bonds
Under an industrial revenue bond issue, the City holds record title to the
property for the term of the bonds. The bonds are paid from rents paid by the
developer under a lease between the City and the developer. The trustee
serves much like a property manager for the City through its collection of rents
and payment of the principal and interest as those become due on the bonds.
The trust indenture calls for the creation of what is referred to as the "Principal
and Interest Fund" for that purpose.
4. Trustee as Landlord
The trust indenture will generally delegate to the trustee the responsibility to
enforce the City's rights under its lease with the developer. Whether the
developer defaults by nonpayment of rent, failure to pay taxes, failure to
maintain the property or any other violation of the lease, the trustee has the right
and duty to pursue resolution of the default with the tenant.
In the tenant is unable or unwilling to correct the default, the trustee will take the
lead role in taking control of the property and either terminating the lease or
causing the lease to be assigned to a new tenant. The trustee's course of
action in a default scenario will be determined by what approach reasonably
maximizes the likelihood of full payment to the bondholders.
Outline by:
Dennis Kissinger, City Manager
Greg Bengtson, City Attorney
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