In an era when the costs for infrastructure are skyrocketing, the need for innovative financing structures is more critical than ever. The panel discussion “Accelerating Development with Early-Stage Financing” at the 2023 ULI Spring Meeting provided a fresh perspective on how early-stage capital can expedite development timelines and transform the industry.
The Emergence of Special District Tools
Sam Sharp, the head of the special district group and managing director at Piper Sandler, emphasized the importance of tax increment financing (TIF) and special district financing in the current market. “Tax increments are a widely used tool to help invest in public infrastructure and pay back over a period of time,” Sharp said. They are typically backed by a percentage of projected tax collections and are based on an incremental increase in property tax values.
One key theme that emerged from the discussion was the growing use of special district tools across the United States. Sharp highlighted this trend, noting that “almost every new master plan for some states has a special district that’s helping to pay some portion of the capital.” This not only includes traditional markets like Florida, California, Texas, and Colorado, but also other states across the country.
The rise of special district tools signifies a broader shift in the industry toward more innovative and flexible financing structures. These tools are helping reshape the landscape of real estate development, enabling projects to move forward at a faster pace and with greater financial efficiency.
Innovative Financing
Kurt Krieg, executive vice president of Extell Development, provided an example of how innovative financing structures are being used in real-world projects. In Wasatch County, Utah, the Mayflower Mountain Resort, which he called “a combination of basically a 40-year vision,” was developed through a series of 22 transactions. The project, facilitated by the Military Installation Development Authority (MIDA), showcased the potential of public infrastructure districts (PID) in providing early-stage financing.
Krieg’s insights offered a glimpse of the transformative potential of innovative financing structures. By enabling the development of a project of such scale and complexity, these structures demonstrated their capacity to drive growth and innovation in the industry.
Investor Confidence and Market Dynamics
Shelby Noble, managing director with Piper Sandler, provided an overview of the public market and investor feedback, highlighting the importance of investor understanding and confidence in the growth potential of a project. She also noted that today’s market is significantly different from that of just a few years ago, with credit quality and market fundamentals playing a crucial role. “Investors are clearly yield focused,” she said.
Noble underscored the critical role of investor confidence in driving the growth of the industry. By understanding and appreciating the potential of early-stage financing, investors can play a key role in supporting the development of innovative projects and driving the growth of the industry.
Sensitivity of Financing Tools
Chad Ellington, owner and principal of Peak Development, emphasized the sensitivity of these financing tools while discussing Canyon Pines, a luxury residential community in a forest in Colorado on the edge of the Rocky Mountains. The upfront costs were a major barrier. After two series of general obligation bonds, the special assessment bonds were the “more creative structure which really cracked the code on this project,” Ellington said.
By providing developers with a nonrecourse source of capital, these financing structures can help mitigate risk and accelerate the development process. This, in turn, can enable developers to undertake larger, more ambitious projects.
Ellington also noted the sensitivity of these financing tools. He spent a lot of time with local advocacy groups and concluded that “these tools far outweigh the risks of a couple of bad apples,” he said.
The Future of Early-Stage Financing
The panel concluded with lessons learned, which included how common these tools are and how much care it takes to get them right, as well as how dynamic capital markets can be. In the fast-paced world of real estate development, innovation is not just a luxury but a necessity. As developers continue to seek new and innovative ways to finance their projects, early-stage financing is likely to become an increasingly important tool in their arsenal.
