Is East Lansing’s Brownfield Redevelopment Authority (BRA) about to issue over $2 million in essentially worthless bonds as it moves to refinance the existing Center City District bond?
Unless the BRA moves to correct a series of misunderstandings, it certainly looks that way.
That’s because votes taken by the BRA last week do not match up with how East Lansing’s City Council structured the $125 million Center City District public-private redevelopment deal.
Needless to say, this comes as something of a bombshell.
Problems with the BRA’s understanding have been identified to ELi by Council member Mark Meadows, who as mayor was a key player in the design of the 2017 deal. Meadows points to records that back up his reading.
Meadows also told ELi on Friday that he sent a letter in advance of last Thursday’s meeting to City Manager George Lahanas, City Attorney Tom Yeadon, and Mayor Pro Tem Aaron Stephens – all of whom were scheduled to attend and did attend the BRA meeting.
Meadows’ letter (see it here) was meant to alert them to key limits on the BRA’s ability to pay back principal and interest on the bonds.
We have not yet determined if those three received the email.
The key factual issue is this: The Brownfield Tax Increment Financing (TIF) plan for the project allowed for about $56 million in future taxes paid on the Center City District property to be captured to (a) pay back expenses related to the project plus (b) pay interest costs of the developer’s financing of those expenses.
But in June 2017, when Council approved the deal, Council put in a strict cost-controlling measure, limiting the use of TIF to pay only for environmental clean-up and public infrastructure, including the new parking garage.
Council unanimously passed a resolution in June 2017 that effectively chopped down the TIF available from $56 million to about $50 million.
Minutes show that, via the resolution, Council approved the TIF plan but “with the following condition. Only the expenses that are detailed in an approved Master Development Agreement Exhibit N ‘City Approved Eligible Activities’ shall be financed with Brownfield Revenue Bonds payable solely from the pledged tax increments revenues from the Eligible Property and payment of those bonds will be the only eligible expenses to be reimbursed for Brownfield Plan #24” (emphasis added).
At the BRA meeting last week, no one mentioned the significant limitations that Council had effectively instituted on how much tax money could go to fund the bonds used for construction.
Instead, what happened was that the BRA and developers acted last week as if they have $56 million to pay back bond principal and interest.
They really only have $50 million, specifically $24,389,518 for itemized expenses and interest of $25,828,307 (5% on the principal for up to 30 years) for a total payout from the TIF limited to $50,217,825. (Click here to see Exhibit N; other parts of the agreement specify that column 2 is the operational column.)
Importantly, to protect the City, the bond was designed as a “non-recourse revenue bond,” with no security other than the future TIF promised to pay it off.
That’s not a very attractive type of bond for investors, and when the original bond was issued, the developers couldn’t find anyone to buy it. To keep the project alive, the developers had to come up with the money for the bond.
So, Peter Paul Bell of Scottsdale Capital – father of the main developer, Mark Bell of Harbor Bay Real Estate – bought the bond, putting up the $24,389,518 for the environmental cleanup and public infrastructure costs.
To the surprise of many, when the bond closing paperwork became available, it showed that $875,482 in additional fees were tacked on as “costs of issuance.” That means that rather than putting up about $24.4M for the bond, Bell Sr. put up about $25.3M.
Those $875K in issuance costs included a $353K payout to the Bells’ attorney (Jarrod Smith of Dykema Gossett), $155K to the Bells’ financial advisor (Brian Lefler of Robert W. Baird & Co.), and $244K as an “origination fee” to Scottsdale Capital (a fee paid to Bell Sr. for funding Bell Jr.’s project).
When we found out about this, ELi called this a $700K giveaway of tax money to the developers. But it turns out that’s not true. And now we see why Meadows has long objected to the claim that $700K was earmarked in taxes for giveaways to the developers.
In fact, because Council strictly limited the use of TIF (tax money) to the $24.4 million needed for the environmental clean-up and public infrastructure, there is no TIF set aside to pay those $875K in costs of issuance. In other words, there’s no clear mechanism to pay Bell Sr. back for any of that $875K in original issuance costs.
It turns out that the City didn’t pay for Bell Sr.’s lawyer. He paid for the City’s. And the City is under no obligation to pay him back.
The developers’ team doesn’t seem to get this.
Last week, the developers came back to the BRA to ask for more money out of a refinancing bond.
They said they had spent $1.1 million more than expected on constructing the public infrastructure. Even though Council had made sure those overages would be the developers’ problem, not the City’s, Mark Bell insisted at the BRA meeting that he should be reimbursed for that $1.1 million overage.
City staff erroneously already paid Bell $335K in interest income earned on the bond fund for part of those overages. Now Bell wants the rest: $822K.
Besides voting through paying Bell that $822K out of the new refinancing bond – a bond meant to pay Bell Sr. back – last week the BRA also voted to add the following into the new bond: $75K more to Dykema for representing the developers, $90K more to Lefler of Baird for his representation of the developers, $50K more for an unexplained “developer’s fee.”
The BRA also plans to pay its own bond counsel (Bill Danhof of Miller Canfield) again out of the new bond, and to pay a yet-to-be-located financial advisor for the BRA out of the new bond, and to possibly pay another “origination fee.”
When all is said and done, between the previous bond’s costs of issuance and what’s planned for the new bond, the BRA has apparently agreed that the refunding bond can be marketed including more than $2 million of bond paper for which there is no clear payback mechanism or security.
There is no TIF revenue promised for this, because of Council’s imposed limitation on the TIF. There is no TIF revenue promised to pay for interest on this, either.
That means the BRA is in danger of writing over $2 million in apparently worthless bonds.
Meadows had been trying to explain this (without using that total sum) in his written communication before the BRA meeting. The only way more TIF could be used to pay for these items is if Council changes its original resolution – something that seems extremely unlikely.
According to Meadows’ reading of the agreements, new bonds could be written to pay all of those things that cannot be paid for with TIF (items whose bonding would not be secured by the City or BRA in any other way) so long as it is clear to investors that the developer would be “responsible for anything that TIF does not cover.”
But Meadows adds, “That the Developer would have to guarantee the excess may have been the reason that there was trouble marketing the original bond. I think they will have the same trouble with the new bond if it is ever issued.”
Stephens tells ELi he expects another BRA meeting soon, to reconsider the bonding resolution passed last week.
“I really believe that there wasn’t an adequate discussion on the matter for that vote to have occurred,” he said by email yesterday. “A meeting can be called from the chair, or by three members of the board, [and] I am hoping by Monday we can either decide to have a special meeting this week or have the resolution as an item to reconsider on next week’s meeting on the 23rd.”