As Default (Allegedly) Looms, the Center City District Bond Now Involves a Myriad of Disputes

In a twist in the ongoing saga of the Center City District redevelopment deal, City staff informed members of East Lansing’s Brownfield Redevelopment Authority last week that the public bond for the project is at risk of default if it is not refinanced by Dec. 1.

But former mayor Mark Meadows, who structured the deal with the developers in 2017, is strenuously objecting to how this process is playing out. 

The unexpected news of possible default came via a staff memo prepared for the BRA’s meeting last Thursday, Sept. 22. That memo states that the BRA will owe the bondholder a payment of approximately $3.74M on Dec. 1, an amount that is “significantly more than the $1.3M” of taxes that has been “captured” from the new project so far to pay the bond debt.

In response, BRA members voted unanimously in favor of a resolution to rush to refinance those bonds in an amount up to $33.5M. The principal of the original bond stands at $25.265M.

The project’s developers are Harbor Bay Real Estate and Ballein Management, incorporated for this deal as HBBM, LLC. As ELi readers are aware, Harbor Bay’s executives have recently been battling the City over the senior housing portion of the project.

Now the issue of the bond is growing equally hot – and it is complicated by the fact that the bondholder is not some independent investor, but is, in fact, Scottsdale Capital, a company owned by Peter Paul Bell, father of Harbor Bay CEO Mark Bell. (Both those companies are registered to the same address.)

Before and since the BRA’s latest vote to refinance, Meadows has been providing ELi with references that seem to show that the BRA is not legally responsible for the shortfall in funds for the Dec. 1 payment.

Both the Master Development Agreement and bond Trust Indenture say the developer will pay for any shortfall.

So, unless Meadows is missing something, it is Mark Bell’s company – not the BRA – that owes his father’s company the shortfall for the Dec. 1 bond payment. 

If that’s the case, experts tell ELi that the BRA should seek to obtain the shortfall from the developers, not move to include the amount of the shortfall in a new bond so it will be paid out of future taxes. 

Meadows also tells ELi that the BRA remains at risk of taking action that could unnecessarily cost East Lansing taxpayers $6 million by exceeding the approximately $50M tax-capture cap set by City Council, and, in the process, violating Michigan’s Brownfield law by paying for “expenses” that are not legally eligible.

Lawyers from Miller Canfield, bond counsel to the BRA and City, continue to dispute Meadow’s reading of the $6 million issue, saying the cap was set at about $56M. They called his reading of the cap “nonsensical” at last week’s meeting. (The staff memo includes their reading.)

The BRA, which is made up of volunteers appointed by City Council, is now in the challenging position of being caught in the middle of all these disputes – including what now amounts to a disagreement between Meadows, who feels he is defending the public’s interest, and attorneys from Miller Canfield, who are being paid to protect the public’s interest.

A long road to the question of refinancing the bonds

The Center City District project includes the new public parking garage on Albert Ave. as well as buildings owned by the developers: Newman Lofts above the parking garage, the retail space (holding Foster Coffee, Barrio Tacos, Jolly Pumpkin) in front of the garage, and The Landmark building on Grand River Ave., which houses the new Target store.

The public bond for this project was set up as a mechanism to capture taxes generated by the private portions of the redevelopment using Brownfield Tax Increment Financing (TIF) to pay for the environmental clean-up of the site and the public infrastructure — mainly constructing the parking garage. Council approved about $50M in expenses (column 2 of this document).

In practice, for a total of 30 years, the owners of the new private properties in Center City will pay taxes on the new private development, and those “captured” taxes will keep going into a trust fund to pay off the bond.

Importantly, the approximately $25M BRA bond was structured in 2017 as a “no recourse revenue bond.” The only security promised for this bond was the tax increments to be generated by the redevelopment project. Public officials were repeatedly told by Miller Canfield that if there wasn’t enough in taxes to pay off the debt, the bondholder could not come after any other asset of the City or BRA.

ELi readers may recall that, back on July 9 of this year, the BRA voted to refinance the Center City District bond. They did so after being advised by Brian Lefler of Robert W. Baird & Co. that the refinancing terms presented were the smart financial choice. 

Lefler has often worked for the City as a financial advisor. But two hours into the July 9 meeting, in response to a question from a BRA member, Lefler revealed he was working for the developers on this, not the BRA or City. By that point, the BRA had already voted to refinance based on Lefler’s advice.

The revelation about Lefler’s position made several members of the BRA uncomfortable, including then-Mayor Pro Tem Aaron Stephens, who was sitting in for then-Mayor Ruth Beier. 

Making things more complex, on July 13, ELi brought forward information from Meadows suggesting that the July 9 bond refinance resolution had been based on the wrong numbers – that it assumed $6 million more in taxes available to repay the debt than in fact had been authorized by City Council. 

The first refinancing resolution was undone amidst political turmoil

On July 15, the BRA came back to the table to reconsider its July 9 resolution to refinance the bond. The plan in advance of that meeting had been to have then-Council member Mark Meadows sit in for then-Mayor Ruth Beier, so that he could explain the limits of the deal to the BRA. 

But then, on the night of July 14, Meadows and Beier suddenly quit Council in protest of the firing of City Attorney Tom Yeadon, leaving Stephens as Mayor for the July 15 BRA meeting. 

On July 15, the BRA voted 6-3 to rescind the refinancing resolution and also voted to hire an independent financial advisor to advise them about what to do on this matter. 

Two months later, on Sept. 10, the BRA voted to hire PFM Financial Services to advise it on the financial aspects of the bond, and to pay PFM $47,500 for this work. 

Just two weeks after that – last week – PFM relayed its findings along with a recommendation for the BRA: move to refinance the bond fast, or risk default. The BRA voted to follow the advice.

But Meadows, who was not at the meeting, insists that the Council set a cap on the total amount of the taxes captured available to pay principal and interest on the bond – a cap that was $6 million lower than the current advisors are assuming. 

He also says that payments to the developers’ attorneys and financial advisor from captured taxes are prohibited under state statute because they were not eligible expenses. 

And, as explained above, he notes that the shortfall isn’t the BRA’s problem, legally – it’s the developers’, because that’s how the Master Development Agreement and Trust Indenture were set up.

So, what happens now? 

The refinancing isn’t a done deal. Besides having an independent financial advisor (PFM) hired to help the BRA, the City also gets a new set of legal eyes on the whole thing this week, as attorneys from the law firm Foster Swift take over as the chief counsel to the City and the BRA. 

It’s reasonable to expect that Foster Swift’s attorneys will be looking at the documents to which Meadows is referring. At that point, they may or may not agree with Meadows.

It’s also reasonable to expect that if millions in taxes can be saved, at least some City leaders will be interested in trying to do that. 

But the road to potentially saving millions in tax dollars won’t be simple, as  provisions in many of the documents in this complex deal contradict each other.  

Disclosure: Harbor Bay has been attacking ELi for our reporting, including on the bond issue. Read more here.

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Note: After publication, in response to a reader question, we added this sentence: “The principal of the original bond stands at $25.265M.”