To avoid “considerable headline and reputational risk as well as a negative impact on future credit worthiness,” financial advisors to East Lansing’s Brownfield Redevelopment Authority (BRA) are recommending signing off on the sale of $29.36M in refinancing bonds on the Center City District project.
Financial advisor Nate Watson of PFM has drafted a letter containing the above reasoning and telling the BRA it also makes sense to sell these bonds because, according to Watson, lower interest rates on the refinancing bonds means the BRA will ultimately save about $2.36M in interest payments.
But those savings are only realized if one assumes, as Watson does, that the cap on the amount of the taxes that can be used to pay back these bonds comes to about $56M.
Former mayors Mark Meadows and Ruth Beier, who signed off on this deal in 2017, have vigorously insisted that City Council capped the total tax payout to about $50M. Video and written records clearly show that that prior Council unanimously voted through a $50M cap in June 2017.
Reached for comment this evening, Meadows told ELi, “I stand by my analysis of it and what the council intended originally.”
But the current City Council and BRA have done nothing to defend that lower cap.
Meanwhile, bond counsel Bill Danhof of Miller Canfield has repeatedly written off the claim of the $50M cap as legally meaningless, fending off Meadows and Beier in ways that are necessary to defend his own prior work on the deal — a $125M development deal in which all agree the myriad of agreements don’t match up.
While Danhof was recently called to Council to answer questions about the bonds, the current City Council and the BRA have not elected to ask independent legal counsel to consider what ELi has called “the $6M question.” (The new City Attorneys from the law firm of Foster Swift are said to have asked a five-figure fee for weighing in on this issue.)
Council members Dana Watson and Ron Bacon, when reached for comment this evening, declined. Watson indicated she wasn’t comfortable commenting publicly until she’d had time to better understand the letter, obtained late today by ELi. Bacon told ELi he was on vacation and hadn’t had proper time to review it.
Mayor Aaron Stephens was also reached on Monday evening, and offered to comment once he could take more time to read the letter, which he hadn’t had the chance to read fully.
Council member Lisa Babcock, who has been pushing for public answers on this matter and pushing to hold the developers to other elements of the deal, told ELi tonight that it is “extremely concerning” to get the draft letter from PFM days, even hours, away from the signing of a refinancing deal on behalf of a city of 50,000 people.
“I have 54 million questions and no answers,” Babcock said.
Mayor Pro Tem Jessy Gregg delivered a different message, saying in an email this evening: “I’m satisfied that this is a reasonable conclusion to this process. Our contract with these developers included a provision for refinancing the bonds as long term debt after the construction was complete, and this is an arrangement that accomplishes that and reduces our costs in the long term by lowering our interest rate. I know there’s been some debate about the amount of the bonds but by my thinking the most important factor in that is the contract that was signed and I think this refinance meets the details of that contract.”
According to PFM Director Nate Watson’s letter, 70 potential investors were asked to consider buying these refinancing bonds. None were interested.
That is almost certainly because — as ELi has previously reported — the bonds are mired in controversy and uncertainty, including most significantly the $6M question.
So, who is putting up the money for the refinancing bonds? Two companies: Scottsdale Capital Partners and Bartlett Capital. These are both owned by Peter Paul Bell, the father of Center City District developer Mark Bell.
Scottsdale Capital holds the original bonds, which pay 5 percent. The new bonds will come to an overall rate of 4.2%
That’s right: Peter Paul Bell will be putting up millions more and receiving a lower interest rate to pay himself back.
Why would he do this?
Tomorrow (Tuesday, Dec. 1, 2020), the BRA owes Scottsdale Capital the first payment on the bonds, about $3.7M. But taxes captured from the property to pay back the bonds have so far come to only about $1.3M. That leaves, roughly, a gap of $2.4M between what the BRA has in the bank and what it owes on the payment tomorrow.
As we’ve reported, the agreements Meadows et al. arranged say quite clearly that if such a gap occurs, it is the developers — Mark Bell’s company — that must make up the gap.
That means for tomorrow’s payment, the BRA should ask Mark Bell’s company to cover the approximately $2.4M shortfall to the bond trustee (Huntington Bank) so that the BRA can cover what it owes Mark Bell’s father’s company.
So, by pushing through a refinancing on Dec. 1, 2020, the Bells are undoubtedly hoping — as is the BRA — to dodge that “considerable headline and reputational risk as well as a negative impact on future credit worthiness” caused by the payment gap.
Regulatory scrutiny of this deeply unusual deal might also be avoided with this refinance.
Significantly, by pushing through this refinance, the Bells will also be getting the BRA to agree that the tax cap is the approximately $56M sum. It will be much harder for anyone in City government to argue for the lower cap if this deal goes through.
And who else might get paid out of the new bonds?
That remains to be seen. We can expect based on prior discussion that Danhof will also be paid more as legal counsel on all this. We know for sure that PFM is due to be paid $47,500 if this new deal goes through. But the new draft letter from PFM also indicates that some other unnamed entity who is a “non-Authority advisor” will also be paid $47,500.
These large payments to third parties from the public bonds are an issue Meadows has raised before. The Brownfield Tax Increment Financing (TIF) plan approved by Council does not appear to allow for taxes to be used for all of these fees, nor all of the fees paid out of the original bond. (One local attorney has called the approach “a heist.”) Meadows’ analysis suggests the BRA has written, and will again write, what amounts to worthless paper. Danhof and his colleague at Miller Canfield disagree.
The City Council has no say in signing off on these refinancing bonds, although they’ve been advised by the City Manager of the plans, and of course Council members have the power to speak and to attempt action of various types.
But it is BRA Chair Peter Dewan and Vice Chair Jim Croom who are authorized to sign off on these refinancing bonds and are authorized to do so with no further consultation with the BRA. The BRA voted through that authorization at a special meeting convened in Sept. at which they were put under pressure while being told erroneously that the BRA was at risk of default if they didn’t approve refinancing.
ELi had reached out to Dewan and Croom for comment on Monday evening and received a response from Dewan on Tuesday afternoon.
“Principally,” Dewan wrote in a statement, “the ELBRA sought three overall objectives: 1) to secure a lower interest rate; 2) realize savings for the ELBRA and, 3) successfully address the scheduled payment required on December 1st.”
The City is expected to make an announcement about the refinancing on Tuesday.
UPDATE: At 4:15 p.m. on Tuesday (Dec. 1), the City announced the bonds have been refinanced. See the material released here. It shows that Miller Canfield is being paid another $120,000 (not the $80-100,000 the BRA was told to expect) and that the extra $47,500 went to pay Brian Lefler of Robert W. Baird & Co. for “restructuring expense” on behalf of the developers’ team. All of that is expected to be repaid out of future taxes captured.
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