Responding to the controversies over the Center City District bonds, East Lansing City Council member Lisa Babcock arranged a special discussion of the matter at Council on Tuesday night. And until Mayor Aaron Stephens cut off discussion – he wanted to move along on the very long agenda – Babcock managed to get City staff and bond attorney Bill Danhof of Miller Canfield to answer a number of key questions.
In the course of the lively, 45-minute discussion, neither Danhof or City Planning Director Tom Fehrenbach explicitly acknowledged one important aspect of the scenario: that the bondholder, Scottsdale Capital, is a company of Peter Paul Bell, who is the father of the project’s lead developer, Harbor Bay Real Estate’s Mark Bell.
Bell Senior put up the funds for the original bond to help Bell Junior get the redevelopment deal done.
Now there’s a question of whether refinancing of the bond will happen – whether investor Peter Paul Bell will get his capital back anytime soon through a refinance. His son has made clear he wants more money out of the new refinancing bond if it does happen. He wants the money built into the new bonds to pay his financial advisor, his attorney, and his own company.
Tuesday night’s discussion suggested that the City’s representatives have now determined to do only what can be understood as being in the best interests of the City. That may make life harder for the Bells.
Babcock’s many questions got key information onto the public record.
Bond counsel Bill Danhof wasn’t asked on Tuesday night about whether the tax repayment cap on these bonds is approximately $50M or $56M, a point of major contention.
But in answering Babcock’s questions, Danhof did confirm that the only legal obligation the City of East Lansing and its Brownfield Redevelopment Authority (BRA) have is paying back the bonds’ principal and interest with the dedicated taxes captured from the property under the Brownfield Tax Increment Financing (TIF) plan.
The City and BRA have put up no other security whatsoever. If the taxes captured aren’t enough to pay what is owed at any given time, that’s not a financial problem for the City or BRA, said Danhof.
City staff had told the BRA on Sept. 24 that the BRA is in imminent danger of default on these bonds because the BRA is short about $2.4M for the $3.74M payment due to the bondholder on Dec. 1, 2020. A sense of urgency about possible default led the BRA to vote for a refinancing.
But on Tuesday, for the first time, Danhof finally acknowledged publicly what ELi has reported: the agreements indicate that the BRA is not in default so long as it is turning over the captured taxes to the bond trustee, which it is doing.
That means there is not really any danger of legal default, which seems to take off some of the perceived pressure to get a refinancing done.
Danhof also publicly acknowledged, for the first time, the “Developer Debt Service Guaranty.” This is a legal agreement that makes clear that if the tax capture leads to a shortfall in the trustee fund when that payment is due to Peter Paul Bell’s company, it is the developer – Mark Bell’s company – that is supposed to cover the gap. The son, not the BRA, has to make up the current $2.4M shortfall.
Danhof also told Council this week that the BRA hasn’t yet asked Mark Bell’s company to pay up what is owed to Peter Paul Bell’s company. He expressed some doubt about operationalizing that requirement.
Danhof also acknowledged on Tuesday that he didn’t build a Debt Service Reserve Fund (DSRF) into the original bond. A DSRF ensures there are adequate funds to pay back the bondholder if there is a shortfall in the revenue (in this case, taxes) meant to pay back the bond. On Tuesday, Danhof said there was no DSRF set up because the bondholder – Peter Paul Bell – didn’t want to put up the extra money that would have been required.
Danhof told Council on Tuesday that the plan was always to refinance before the Dec. 1, 2020, payment would be due. He said that the pandemic has made the refinance hard to accomplish in that period of time. (This claim about the pandemic being the problem is one that experts in the market tell ELi is specious.)
Danhof also confirmed for Babcock on Tuesday night that Peter Paul Bell’s company, Scottsdale Capital, has the legal right to ask to be paid back in full (to “call” the bonds). But at Tuesday’s meeting, Council was told that Scottsdale Capital has not yet done so.
So, the refinance attempt is happening now not because the bondholder has asked to be repaid in full at this time. It’s happening, Danhof says, because it was always expected to happen this year. (The records of the deal confirm that a refinancing attempt was expected this year.)
Danhof explained on Tuesday night that the BRA is only obligated to try to find a new buyer for refinancing bonds. If there’s no buyer found for what the BRA is willing to offer, the original bondholder is just out of luck and must hold onto the bonds and be paid back slowly by the tax increment financing (TIF) from the deal.
Danhof also confirmed that the existing bonds pay just 5% simple interest. Given that refinancing bonds would likely have to pay more because of the risky nature of the deal, and given that the new bonds would almost certainly have to roll in hundreds of thousands of dollars in new closing costs, millions of dollars for a debt service reserve fund, millions to cover the interest payment gap, and more, it seems unlikely that refinancing bonds that are in the public’s best interest can attract an investor.
And this time around, City Manager George Lahanas and Planning Director Tom Fehrenbach made clear: If the BRA can’t find an investor for refinancing bonds that are structured in a way that is in “the best financial interest” of the BRA and City, the refinancing won’t occur, even if the developers’ team wants to see a refinancing happen.
Babcock asks: Why did the Bells agree to all this?
Once she gained a fuller understanding of the structure of the original bonds, Babcock asked a question many do: “Why on earth” did the original bondholder ever agree to these terms? Why did they agree to all these risks?
Mayor Pro Tem Jessy Gregg answered Babcock’s question: The developers, Harbor Bay Real Estate and Ballein Management, operating as a corporation called HB BM, knew they couldn’t build their lucrative student-housing project on Grand River Ave. if they didn’t agree to also build the senior housing Newman Lofts on top of a new parking garage on Albert Ave.
And the only way to build that parking garage was for Peter Paul Bell to put up the money to buy the bonds to pay for the garage. That’s why, operating as Scottsdale Capital, Peter Paul Bell put up about $25M to buy the original bonds and get the parking garage built.
Lahanas chimed in to also point out that HB BM needed that parking garage to rent out the student housing in The Landmark and to draw Target to the first-floor retail space.
In short, Peter Paul Bell signed up for the original bonds because they were needed to make his son’s project happen.
But a new investor won’t have that familial incentive. They will just be looking at the terms of new bonds. And, given the interest in making sure the BRA and City get the best deal, those terms probably won’t be great for these non-recourse revenue refinancing bonds.
Will someone decide to invest in the refinancing bonds anyway? If so, who is getting paid what out of the new bonds? Stay tuned.
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