ELi reported on Friday of last week that the Chair of East Lansing’s Brownfield Redevelopment Authority (BRA) was asking the City’s new lawyers from the firm of Foster Swift to take a fresh look at the disputes involving the Center City District bonds.
But this morning, BRA Chair Peter Dewan advised ELi that’s not the case – that we misunderstood what he was saying. Dewan has asked Miller Canfield, the law firm that arranged the now-disputed bonds in 2017, to weigh in yet again.
Not too surprisingly, Miller Canfield is continuing to maintain they did everything correctly – which means they are maintaining that former Mayor Mark Meadows, who set up the deal, misunderstands it to the tune of $6 million in taxes.
Presented today with the memo Miller Canfield wrote in answer to Dewan’s request, Meadows sent ELi a communication he provided to Dewan on Thursday of last week warning that Dewan and the BRA “may be found liable” if the bonds are refinanced “without an explanation of the limitations” Meadows is pointing to.
Dewan didn’t share Meadows’ message publicly, but Miller Canfield’s new memo appears to have been solicited and produced as a response to Meadows’ message to Dewan – to try to reassure Dewan that he and the BRA will not be liable.
Whatever Dewan thinks of it all – so far, he hasn’t said – Meadows has made clear he finds Miller Canfield’s response wanting.
Miller Canfield never set up anticipated special funds to avoid repayment shortfalls.
The new 11-page memo to the BRA – provided only in the name of “Miller Canfield” and no specific attorney – has now been posted under the innocuous title “Memo Regarding 2017 BRA Bonds” at the BRA’s website.
There are several points of interest in the memo, and chief among them is that Miller Canfield quotes numerous documents, which appear to have anticipated that the 2017 bonds would be set up with financial safety mechanisms to avoid having insufficient funds on hand when the first payment comes due, on Dec. 1, 2020.
The idea appears to have been to set up the original bonds to keep enough cash on hand from the original bond principal to pay debt service (principal and interest owed on particular dates). In technical language, the expectation was to use capitalized interest and a debt service reserve fund to make sure the BRA wasn’t short money to pay what was owed.
Similarly, as we noted in our reporting on Friday, attorney Bill Danhof of Miller Canfield told the City Council in 2017 that that’s how he was going to set it up, in order to avoid the problem of a payment shortfall.
Why didn’t Danhof set up capitalized interest and a debt service reserve fund to avoid this problem? We have sent a question to Miller Canfield about that.
Surprisingly, the new memo from Miller Canfield also reproduces an email exchange I had in 2017 with then-Mayor Pro Tem Ruth Beier about the very problem the BRA is now facing – not having enough taxes captured from the project to pay what was due. (Miller Canfield refers to me as an “East Lansing Info blogger,” apparently unaware that we do investigative journalism at ELi.)
In the 2017 email exchange, Beier and I were talking about Danhof’s concept of the bonds at the time. Danhof was noting to Beier, and she was relaying to me, that the plan was to deal with the shortfall by refinancing the bond by June 2020, before the December 2020 payment became due.
But there’s no way Miller Canfield could have known for sure it would be able to refinance – which is why they would have been expected to set up the financial backstops (capitalized interest and a debt service reserve fund) to avoid the problem now being faced.
By including that exchange I had with Beier, Miller Canfield now seems to be acknowledging that the plan was to set up a risky bond and to just hope everything worked out with the refinance.
Now Miller Canfield says there’s not a default happening – so why didn’t it tell the BRA that two months ago?
Interestingly, the new memo also acknowledges what I reported on Oct. 16, namely that if the BRA is short millions of dollars for the Dec. 1 payment (which it is), the BRA is not actually in default according to the agreements. That’s because the agreements say the BRA can’t be said to be in default so long as it is turning over the tax revenues captured to pay the bond (which it is).
So, Miller Canfield now says, the BRA is not really at risk of legal default on Dec. 1.
What the memo doesn’t explain is why the BRA was told on Sept. 24 that it is facing imminent default when Miller Canfield now says it is not.
The claim “you are facing default” was the reason the BRA hastened on Sept. 24 to vote through a refinancing resolution – one that, by the way, includes more money for Miller Canfield. Attorneys from Miller Canfield were at that Sept. 24 BRA meeting, yet they did not correct the misrepresentation about default at that time.
On the $6M question, Meadows insists that the Council was not “duplicitous” and that the BRA cannot legally turn over a total of $56M in taxes.
The new Miller Canfield memo also argues explicitly against Meadows on the $6M question of the cap on the total taxes that can be used to pay back these bonds. Miller Canfield says the total cap is about $56M. Meadows says (correctly) that in June 2017, Council voted to limit that to about $50M.
In the memo, to defend their reading, Miller Canfield quotes selectively from existing documents and also correctly notes that Meadows voted in favor of various agreements that were contradictory on this point.
But Meadows says in his recent message to Dewan that if there was a $6M contradiction in the agreements, it was Miller Canfield’s job to catch that and fix it:
“Since our bond counsel [Bill Danhof of Miller Canfield] was in the room when the Council decision [to limit the tax capture use to about $50M] was announced, it would seem that he would have had a duty to advise the Council that there was conflicting language in the Development Agreement at that time. He did not so advise.”
In other words, if there are problems now, that’s at least partly Miller Canfield’s fault.
Meadows says that there’s no way Council would have intentionally approved documents that didn’t match.
“The Council has been accused of many things,” wrote Meadows to Dewan last week, “but this kind of duplicity has not occurred in the 30 years I have been associated with the City.”
Miller Canfield defends other payouts that Meadows says are not permissible.
Miller Canfield’s memo also claims that City staff was right to take $335,000 in interest earned in the bond fund and give it to the developers for construction cost overages, a point strenuously disputed by Meadows. (Had that not been done, that money would now be available to use toward the Dec. 1 payment on the bond.)
Miller Canfield’s new memo also says that the various items being paid out of the bonds can ultimately be reimbursed by taxes because state law allows for Miller Canfield’s reading of the matter. The bonds are not creating millions of dollars in worthless paper, they say. But, about this, Meadows continues to disagree.
Finally, on the last page of the memo, Miller Canfield answers the question: “Does the Developer and its team need to be involved in the process of issuing the Refunding [Refinancing] Bonds?”
Writes Miller Canfield, “From a legal standpoint – no.”
But Miller Canfield then goes on to justify the BRA paying the developers’ team what may turn out to be hundreds of thousands of dollars more from public refinancing bonds. It looks as if these fees will be paid to Harbor Bay Real Estate Advisors (Mark Bell’s company) along with their financial advisor, Brian Leffler of Robert W. Baird & Co.
Here’s the logic Miller Canfield gives for this: “the Developer is best positioned to provide the information concerning the Development to provide to potential investors during the marketing of the Refunding Bonds.”
But potential investors could also obtain that information from City staff and PFM, the financial advisor who is being paid $47,500 by the BRA for work on this refinancing bond, without having to pay the developers’ team yet more.
Said one local attorney who does not wish to be named for professional reasons, “This is a heist. They are backing a truck up to City Hall and taking your money.”
Whether or not that is true, in every one of the items noted above, Miller Canfield’s reading for its client – the BRA – costs City taxpayers more.
In total, Miller Canfield’s reading costs at least $6M more in taxes than an alternate reading – an alternative reading firmly held by Meadows and Beier, who told City Manager George Lahanas on July 14, just before they resigned from Council, to defend the $6M-lower cap on use of the taxes for bond payments.
Mayor Aaron Stephens and BRA Vice Chair Jim Croom received Meadows’ message last week, along with Dewan. None have said anything publicly about it.
“I would assume it was shared with the other members of the BRA,” Meadows told us this afternoon.
One thing is now crystal clear: If the BRA wants to try to claw back some of this money, it won’t find Miller Canfield ready to do that.
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