This memorandum provides an overview of the STAR Bond program using the Q&A format. Information addresses the program, financing criteria, and eligible uses of bond proceeds.
What is a STAR Bond?
A STAR Bond is a tax increment financing (TIF) program that allows city governments to issue special revenue bonds, which are repaid by all of the revenues received by the city or county from incremental increases in transient guest taxes, local sales taxes, and use taxes collected from taxpayers doing business within the designated portion of the city’s “sales tax and revenue” (STAR) bond district. All or a portion of the increased state sales and use tax revenues also may be used to repay the bonds, which typically have a 20-year repayment period.
What Projects Qualify for STAR Bond Financing?
- A project with a capital investment of at least $75.0 million and $75.0 million in projected gross annual sales revenues, and projects in metropolitan areas with a population between 50,000 and 75,000 with at least $40.0 million in capital investment and $40.0 million in projected gross annual sales revenues;
- A project located outside of a metropolitan area with a population of more than 50,000 that has been found by the Secretary of Commerce (Secretary) to be in an eligible area under TIF law and of regional or statewide importance;
- A major commercial entertainment and tourism area, as determined by the Secretary;
- Auto racetrack facilities, multisport athletic complexes, river walk canal facilities, historic theaters, the Manhattan Discovery Center, the Wyandotte County Schlitterbahn Project, museum facilities, and a major motorsports complex in Shawnee County;
- A project involving buildings 65 years or older and contiguous lots that are vacant or condemned; and
- A significant business headquarters or office building development designed to draw a substantial number of new visitors to Kansas.
What Projects are Excluded from STAR Bond Financing?
Projects that include a gaming casino are specifically excluded from use of STAR Bonds.
How Does the STAR Bond Program Work?
The law allows the governing body of a city to establish one or more special bond projects in any area in the city, or outside a city’s boundaries with written approval of the county commission. However, each special bond project must be approved by the Secretary based on the required feasibility study prior to utilizing STAR Bonds.
The city is also required to propose a project plan, hold a hearing on the plan, and adopt the project plan. One mandated component of the project plan is a marketing study conducted to examine the impact of the special bond project on similar businesses in the projected market area.
Finally, the city must complete a feasibility study, which includes:
- One or more consultants selected and approved by the Secretary.
- Whether a project’s revenue and tax increment revenue and other available revenues are expected to exceed or be sufficient to pay for the project costs;
- The effect, if any, the project will have on any outstanding special obligation bonds payable from the revenues used to fund the project;
- A statement of how the jobs and taxes obtained from the project will contribute significantly to the economic development of the state and region;
- Visitation expectations (with a plan describing how the number of visitors will be tracked and reported), the unique quality of the project, an economic impact study (including the anticipated effect of the project on regional and statewide economies), and integration and collaboration with other resources or businesses;
- The quality of service and experience provided as measured against national consumer standards for the specific target market;
- Project accountability, measured according to industry best practices;
- The return on state and local investment that the project is anticipated to produce;
- A net return on investment analysis;
- A statement concerning whether a portion of the local sales and use taxes are pledged to other uses and are unavailable as revenue for the project, and, if the revenues are so committed, a detailed explanation of the commitment and the effect;
- An anticipated principal and interest payment schedule on the bond issue; and
- A full disclosure and description of all state, federal, and local tax incentives that apply or are anticipated to apply to any business located in or that will locate in the district.
The Secretary places a limit on the total amount of STAR Bonds that can be issued for any project.
A city is also required to have a certified public accountant conduct an annual audit of each project. STAR Bond districts are prohibited from including real property that was part of another project or district unless that project or district has been approved by the Secretary prior to March 1, 2016. A district in a metropolitan area with a population of more than 50,000 must be a contiguous parcel of real estate and is limited to those areas being developed and any areas reasonably anticipated to directly benefit the project.
STAR Bond districts created and approved in 2017 or later must exclude tax increment revenues derived from retail automobile dealers. If a STAR Bond district adds area, the base tax year for the newly annexed area will be the 12-month period immediately prior to the month in which the new area is added to the district.
What are the Constraints Placed on the Developer?
The developer of a special bond project is required to commence work on the project within two years from the date of adoption of the project plan. If the developer does not commence work on the project within the two-year period, funding for the project ceases, and the developer has one year to resubmit the project to the Secretary and appeal to the Secretary for reapproval of the project. If the project is reapproved, the two-year period for commencement applies.
No state or local or government official can be employed by a STAR bond project developer or manager. Also, the law requires that Kansas residents be given priority consideration for employment in construction projects located in a special bond project area.
What are Eligible Uses for STAR Bond Proceeds?
- Purchase of property, relocation assistance, and site preparation work;
- Various infrastructure costs, such as utility relocation, parking facilities, street improvements, etc;
- Landscaping, lighting, and similar costs;
- Costs incurred for auto race track facilities, major multisport athletic complexes, museum facilities, and major motorsports complexes;
- Construction or renovation costs of buildings or other structures for rural development projects;
- Construction or renovation costs of amusement rides, including buildings to house amusement rides for projects approved in fiscal year 2024 only;
- Related expenses to redevelop and finance the project; and
- Recovering Department of Commerce (Department) costs arising from fulfilling administrative, review, approval, and other responsibilities in relation to the project up to 1.0 percent of the bond proceeds, but not exceeding $200,000, plus any actual administrative costs incurred by the Department that exceed the fee.
What are Ineligible Uses for STAR Bond Proceeds?
Excluding rural development projects and, for FY 2024 only, buildings to house amusement rides, costs incurred in connection with the construction of buildings or other structures are not eligible. In addition, proceeds are not available for fees and commissions paid to real estate agents, financial advisors, or any other consultants who represent the developer or any other businesses considering locating or located in a redevelopment district; salaries for local government employees; moving expenses for employees of the businesses locating within the redevelopment district; property taxes for businesses that locate in the redevelopment district; lobbying costs; bond origination fees paid to the city; any personal property as defined in KSA 79-102; and travel, entertainment, and hospitality.
All cities that have projects financed with STAR Bonds are to prepare and submit an annual report to the Secretary by October 1 of each year. The Department compiles an annual report on all STAR Bond projects and submits them to the Governor, the Senate Committee on Commerce, and the House Committee on Commerce, Labor and Economic Development by January 31 of each year. For the past three calendar years and year-to-date, each STAR Bond district must report the following information:
- Names of the owners, partners, officers, or principals of any developer and of any associated business partners of any developer involved in the STAR bond project.
- The gross annual sales, gross annual sales projected pursuant to the STAR bond project plan and feasibility study, gross annual sales required to meet bond debt service requirements and other expenses, and amount of sales and use tax collected;
- The amount of bond payments and other expenses incurred;
- The amount of bonds issued and the balance of bonds, by district and by project;
- The remaining cash balance in the project to pay for future debt service and other permissible expenses;
- Any new income-producing properties brought into the district, identifying the base amount of revenue the State would retain and the incremental amount that goes to the district;
- The amount of bonds issued to repay private investors, identifying the share of the indebtedness financed by private and public financing;
- The percentages of state and local effort committed to the district; and
- The number of visitors to the district, identifying the number of in-state and out-of-state visitors.
Additionally, the transfer of any ownership in real property acquired with the proceeds of STAR bonds requires the advance approval of the Secretary. While bonds are outstanding, such a transfer would require disclosure of the sale price and the names of any transferees, owners, officers, or principals in the transaction.
Previously reauthorized in 2017 and 2020, the authority to issue debt pursuant to the STAR Bond Financing Act was extended by 2021 House Sub. for SB 124 until July 1, 2026.
by Mike Ditch Jr.