Despite several members expressing skepticism, hesitancy, and even distress over various aspects of a proposal to refinance the Center City District bond, the East Lansing Brownfield Redevelopment Authority (BRA) voted unanimously yesterday in favor of that proposal.
The group authorized its officers to sign off on up to $33.5 million in privately-placed new bonds, at rates up to 8%. The amount owed on the existing bond is around $25.3 million.
The new bonds will be paid off with up to $56 million in local property taxes captured from the Center City District project.
The BRA members also voted in favor of paying the developers over a million dollars out of the new bond – something they were under no legal obligation to do.
That million dollars of tax money includes reimbursing the developers for $822,000 in cost overruns for building the new Center City parking garage and other public infrastructure – overruns the developers agreed to pay in the deal City Council struck with them.
It also includes paying $215,000 in public money for developer Mark Bell of Harbor Bay Real Estate, so he doesn’t have to pay his advisors himself.
The City’s side is paying all its own expenses.
Initially, Mayor Pro Tem Aaron Stephens, sitting in for Mayor Ruth Beier, voted against the deal – the only member of the BRA to do so. He later voted in favor during a round that added a clause saying that the BRA would dedicate additional money to get itself a financial advisor for this deal.
That decision – to hire a financial advisor for the BRA for this deal – happened after it was just about all over, over two hours in.
More payouts for the developer
The bond this one will pay off was taken out chiefly to pay for the public infrastructure of the project. Investigative work by ELi discovered that the original bond paid out over $700K in public money (taxes) to pay for Mark Bell’s attorney, Mark Bell’s financial advisor, and an “origination fee” to Bell’s own father, Peter Paul Bell, for lending his son the money to do this project.
It seemed at the outset of yesterday’s meeting that City Manager George Lahanas didn’t want to catch criticism for a similar pay-out. He said in obvious frustration about the developers’ team expecting another round of pay-outs, “I think you already got paid.”
But ultimately he and his fellow members of the BRA – all except Stephens – agreed to pay more.
Out of the new bond, there will be $75,000 for legal services that Jarrod Smith of Dykema provided to Mark Bell. Another $90,000 will go to Brian Lefler of Robert W. Baird & Co. for giving Mark Bell financial advice.
The BRA also voted to approve $50,000 for an unexplained “developer’s fee.” Presumably that simply goes to Mark Bell himself.
BRA members were also reminded there will be an “origination fee” – some six-figure sum paid to whomever invests in the new bonds. That could well again be the developer’s father, Peter Paul Bell, who this time could get paid hundreds of thousands of dollars to recycle his own money.
The refinancing bonds will be “privately placed” – meaning they won’t be offered on the open market. Brian Lefler of Baird is set to find the investors. Last time he found the developer’s father and was paid $115,000 in public funds for the trouble.
A closer look at Lefler’s role in all this
Brian Lefler of Baird is actually contracted as the City of East Lansing’s financial advisor. But he wasn’t at this meeting to represent the City. He was there to ask to get paid by the City’s taxes to represent the developers.
Who Lefler was working for yesterday was not really made clear until more than two hours into the meeting – and only after the vote on the resolution including fees paid to him. In response to a question from BRA Vice Chair Jim Croom, Lefler said he was working for the developer, so he could not ethically also be working for the BRA.
The following video shows the moment where this happens. At the beginning, you can hear a City staff member noting the vote of 7-1, with Stephens against. Then Croom tries to ascertain Lefler’s role. Finally, the BRA decides it ought to have (had) a financial advisor for this.
After this happened, the BRA adopted a second amendment allowing for additional money to be added into the new bond to pay a financial advisor for the BRA, which City staff will have to scramble to hire before the bonds are signed.
On this second round, Stephens voted yes, making it a unanimous 8-0 vote. Stephens tells ELi he did not mean to vote yes on the bond resolution itself, only on the idea of obtaining a financial advisor for the BRA.
Stephens was not happy with how things went. He talked repeatedly in the meeting about the possibility of deferring and revisiting the issue at a later meeting. But he never made a motion to do so.
A last-minute chart seemed persuasive to the BRA
To persuade the BRA of their proposal, Lefler, Smith, and the rest of the developers’ six-person team used a simple chart they provided shortly before the meeting, allegedly demonstrating that refinancing the bond in the way they proposed will save the BRA money in the long run, even with the million dollars extra pay-out for the developers’ team.
The developers said this savings will happen because the new (refinancing) bond will come at a lower interest rate than the existing bond. But the chart they presented did not include any of the figures on which it was based, including what interest rate was being used in these calculations. Lefler said in passing that it would be about a 4.25% average when combining the various parts (taxable and tax exempt refinancing bonds).
Faced with this chart, the BRA members seemed to accept the claim that a refinance bond that is larger will in fact save them money because the new interest rate will surely be lower.
But then they all voted for a resolution that allows for an interest rate as much as 3% higher than the current bond. They made no motion to ensure the new bond will, in fact, save money.
The BRA did have a bond attorney present – Bill Danhof of Miller Canfield. He stayed largely silent through the meeting. The resolution his firm had drafted made clear about his role: “Bond Counsel is not retained to provide financial consultant services.”
At one point, Croom, an attorney, asked Danhof if his firm had conflicts of interest in the matter. Danhof firmly said there were none. There was no follow-up. Danhof did not explain why the resolution that was adopted, which his firm drafted, states:
“The Authority hereby requests Miller, Canfield, Paddock and Stone, P.L.C. to continue to serve as Bond Counsel to the Authority for the Refunding Bonds notwithstanding the periodic representation by Bond Counsel of other parties to this transaction in unrelated matters.”
City staff apparently gave away bond interest earnings to the developers
A little background is needed for this next part of reporting: When the Center City District deal was struck, City Council put in a number of provisions to try to make sure costs did not spiral out of control.
They capped how much the City would pay for the new public infrastructure, including the big new parking garage, making clear in the Master Development Agreement that any cost overruns would be the developers’ problem:
“Developer shall make up any shortfall and pay for, or cause to be paid, the completion of [the parking garage] and the Infrastructure Improvements.”
But at yesterday’s meeting, it became clear that – for whatever reason – City staff hasn’t stuck to that deal.
Because the original bond had been created to pay for the public infrastructure, for a while, the money just sat in a bank account, waiting until it was time to pay the contractors. It earned interest.
That interest was supposed to be used to pay the interest owed to the bond holder, Peter Paul Bell, developer Mark Bell’s father.
But at yesterday’s meeting, Mark Bell revealed that staff used $335,000 of the interest earned to pay for overrun expenses for which Mark Bell’s company was supposed to be responsible.
Again, that didn’t have to happen – according to the agreements, the BRA was not obligated to pay those funds until after the principal and interest was fully paid off on all bonds related to this project.
So, now the BRA will have to borrow additional money in the new bonds – and pay interest on that additional amount – to pay Bell Sr. the interest he is owed, because $335,000 in interest earnings was given by City staff to Bell Jr.
At yesterday’s meeting, Mark Bell made clear that that $335,000 favor wasn’t enough. He wanted the rest of the cost overruns to also be paid to him now: $828,000.
Everyone weighing in agreed the BRA was under no obligation to pay that until decades from now, if then – not until after the bonds are fully paid off.
On that point, City Attorney Tom Yeadon joined the discussion near the end to say he thought, in fact, that the BRA could not pay that $828,000 out of the new bond without amending the Master Development Agreement, something which would require approval of City Council.
But then Harbor Bay’s lawyer, Jarrod Smith of Dykema, correctly informed Yeadon that that Master Development Agreement had terminated with the completion of the project.
To be clear: The fact that the agreement terminated just means Council doesn’t have a say; it doesn’t mean the BRA had to pay that money now.
But in the end, Lefler and others on Bell’s team convinced the BRA that paying the developers $828,000 more now will save the taxpayers money, because, they claimed, the BRA would otherwise have to pay that amount back with 5% interest at the back-end, after the bonds’ principal and interest are fully paid off.
Asked by Croom to confirm that obligation to pay 5% on those funds, a representative from Danhof’s office said the Development Agreement does require that. But, like Yeadon, Danhof’s associate didn’t seem to know the Development Agreement had terminated with completion of the project. So, is the BRA really required to pay those funds and interest on it?
Regardless, the BRA now will.
So, Mark Bell got what he came for.
Developer Mark Bell’s tone changed over the course of the meeting as his team met tough questions from BRA members.
He began by talking about the moment as “a celebration of a public private partnership where countless people came together.” He claimed the project has resulted in thousands of construction jobs and hundreds of permanent jobs, and he declared the new garage the best that East Lansing owns.
But Bell called having to potentially eat the $822,000 for which he hasn’t been reimbursed a “tough pill to swallow.”
Now, he won’t have to take his medicine.
Although Stephens, Lahanas, Croom, and BRA member Jeff Smith repeatedly expressed skepticism – sometimes even distress – over the way this matter was being presented and handled, in the end, no one on the BRA moved to reduce the refinancing bond’s potential size from $33.5 million, and none voted to require an average interest rate lower than the current one.
The officers of the BRA are now authorized to sign off on bonds within the parameters described in the resolution. Those officers are Croom, Lahanas, and Chair Peter Dewan.
Chris Root and Andrew Graham contributed reporting.