East Lansing May Borrow $33 Million to Pay a $25 Million Debt. Who’s Getting that $8 Million?
Has the City of East Lansing given the Bell family of developers enough? Based on the advice of the City’s bond attorney – Bill Danhof of Miller Canfield – apparently not.
If local decision-makers take Danhof’s advice again, substantial public funds may again be used to pay not just the City’s bills, but the Bells’ own bills.
Who exactly will get paid how much from a new bond isn’t spelled out by Danhof. He suggests East Lansing’s Brownfield Redevelopment Authority (BRA) authorize him to work out the details of this bond – now ballooning as much as 30%, from $25.3 million to as much as $33.5 million – without coming back for additional review and approval.
Buried in the pages of Danhof’s advice, there’s this: Danhof’s firm “periodically” works for the Bells’ companies, too, “in unrelated matters.”
That conflict of interest will be legal if the BRA members are notified in writing of it and accept it. But whether all those voting will even notice they are accepting this conflict of interest in the 20 pages of provided materials is an open question.
Appointed by Council, the BRA is made up of the same people as the DDA – non-specialist citizens who tend to just do whatever the attorneys, including Bill Danhof, advise them to do. Many DDA/BRA members are small business owners with no experience in big finance or commercial construction. Only one is an attorney, and this isn’t his area.
Now, two members of City Council tell ELi they’re ready to open up the field to possible alternative bond lawyers for East Lansing. But that is unlikely to happen before this latest deal goes through under Danhof’s advice and counsel.
This decision is entirely in the hands of the BRA. And they may make that decision on Thursday.
The Center City District Project – All in the Family
Mark Bell of Harbor Bay Real Estate is the developer of the Center City District project – the public-private deal that brought East Lansing The Landmark student apartments, Target, Newman Lofts senior housing, and the big new parking garage on Albert Ave. The Ballein family is the local partner in the deal. (Greg Ballein is on the DDA and BRA, but he won’t vote on this.)
To make the Center City project happen, Bell got the golden ticket from City Council to redevelop the surface Parking Lot #1 on Albert Avenue without having to compete in an open bid.
His company now holds a 49-year lease on that public land, on which he’s built private, income-generating development. The deal he got has infuriated other developers, who would like to have had a shot at that land.
But the issue rising now isn’t about the land – it is about the way the project was funded.
Before construction started, Mark Bell couldn’t find enough of the usual bank funders to make his deal work. So his father, Peter Paul Bell, stepped in, under the name Scottsdale Capital.
Scottsdale Capital put up $25,265,000 to pay for bonds to get the deal to happen. Most (but not all) of that money went to pay to construct the new municipal parking garage. Some funds went to pay for private development expenses on The Landmark student apartments. Some went to pay Danhof. Some went to Bell’s lawyer and financial advisor. And some was set aside to make sure interim interest payments could be met.
Now Peter Paul Bell is making noises about wanting his money back. By the terms agreed to by both sides, he’s allowed to ask for it now.
This means the BRA has to try to “refund” or refinance the bonds – in other words, issue new bonds to pay Bell off.
Not too surprisingly, Danhof is advising East Lansing’s BRA to pay off the $25.2 million bond debt to Bell by offering up new bonds.
What is surprising is that Danhof is recommending up to $33.5 million in new bonds. He’s also suggesting that they be sold privately to an unnamed investor, at an unnamed interest rate, and be used for unnamed payouts.
What’s going on?
When a public bond like this is issued, a public entity has to set out a plan for how it will try to pay back the principal and interest.
In this case, City Council and East Lansing’s BRA agreed to set aside about $56 million in future taxes from this project – all the eligible property taxes for up to 30 years, plus payments from the project owners to the DDA – to pay off these bonds and the interest on them.
But why would it take $7 million extra to pay off these $25 million bonds? Because the bond pay-off is not the only thing the new public bonds might be used for.
As is customary, although he was paid $155,000 for no-bid work on the last round, Danhof wants to pay himself for work on the refinancing bond, too. Danhof says he won’t charge the usual fee, since this is a refund. It’ll only be another $80,000 – $100,000, he says.
City staff say they’ve “requested that attorney fees for the developer not be included in any new bond issuance related to this project.” About $353,000 from the last bond went to pay for the Bells’ lawyers.
Will the Bells’ financial advisor, Robert W. Baird & Co., be paid out of the new bond with public funds? Last time around, Baird was paid $115,000 from public money for advising the Bells. Notably, like Danhof’s firm, Baird works for both the City of East Lansing and the Bells.
Last time, public money was also used to pay Peter Paul Bell’s company $243,895 as an “origination fee.” Usually investors paid origination fees are third parties, unrelated to the core deal. Danhof never explained why the BRA should pay hundreds of thousands of dollars in public funds to Bell Sr. for essentially lending money to his own son to rescue the family’s project.
These, though, are all relatively small sums compared to what might get paid out from the new bond. The language the BRA is being asked by Danhof to approve at its noon meeting on July 9 allows for paying the developer yet more for the developer’s construction expenses for a project that is already finished.
Danhof has recommended the BRA allow for payoff of “certain eligible expenses of the Project.” What the expenses are, and why they weren’t already paid for out of the first bond, he doesn’t say.
A diagram provided in the packet just says this about the last step in this process: “Captured Tax Increment Revenue will be used to pay 2020 Refunding Bonds Debt Service and the additional Developer Equity or the City’s Public Infrastructure Improvements” (italics added).
According to the Master Development Agreement, if the public infrastructure improvements cost more than the original bond had in it, the Bells were supposed to pay the additional cost. (“Developer shall make up any shortfall and pay for, or cause to be paid, the completion of [the parking garage] and the Infrastructure Improvements.”)
This line in the development agreement was put in to protect the City from spiraling and unpredictable construction costs. But now it looks like the expectation is the developers might get paid still more from public funds.
A lot else is going unspecified, with Danhof suggesting the BRA just trust him.
For example, Danhof hasn’t advised the BRA how much interest it will end up paying on the new bonds – not even a ballpark figure is given. That will be figured out later, negotiated between Danhof and the people probably being paid with public money to represent the Bells:
“The final terms of the deal, including the rate structure, will be primarily contained in the trust indenture, which will be the subject of negotiation with the purchaser.”
Who is that private purchaser for the new bond? The investor is also not named. All we know is that Danhof “anticipates that Baird will find a purchaser for the Refunding Bonds through a private placement with a qualified bank or other sophisticated institutional investor.”
The “new” investor could well again be Bell Sr. If it is, will Peter Paul Bell again be paid an “origination fee” out of public funds – this time not for lending his son money, but for putting up money to pay off himself?
One thing we do know: Danhof is recommending that to the fullest extent possible, the bonds be issued as tax-free bonds. This will allow the private purchaser to avoid paying federal and state (and local?) income taxes. That makes the bonds a much better deal for the investor privately picked.
In the end, the large sum of $33.5 million is recommended by Danhof “to allow for flexibility in terms of various potential deal structures,” virtually all of them unnamed.
All in all, it comes to about $7 million of “to be determined.” It’s possible the bonds issued won’t come to that much. But Danhof wants the BRA’s approval to go that high, just in case.
This next bit is a little complicated but critical:
The last time around, the bond had to be privately sold to Bell Sr. That’s because it appeared to be a lemon.
The project was not set to produce enough property taxes to make the pay-off of the bond work. Only Mark Bell’s father would take the risk, and he did so to get the project done.
City Council was careful to make sure the City would not be on the hook for any leftover debt if the taxes were insufficient to pay off the debt. Ruth Beier, now mayor, was especially adamant about this: The bond can only be paid out of captured taxes on the project and money that’s supposed to go to the DDA from the project. The City is not on the hook for any leftover BRA bond debt on this.
But as it turns out, since the time when the first bond was issued, the City’s tax assessor changed how he assesses these big apartment buildings, determining a much higher taxable value on the Landmark apartments than when the original bond was designed.
So now, unexpectedly, there’s plenty of tax coming from this project to be captured over the next few decades to pay off the bond.
That means the BRA could go out on the open market with these refund bonds – and possibly pay a lot less in interest over the term of the bond by taking them to the open market?
Today, it looks as if, because of the new tax assessment method, if kept essentially no bigger than they are now, rather than ending with a shortfall, the Center City bonds could be paid off years in advance of the 30-year limit.
That’s a big deal, not only because it means taxes might start flowing to public agencies rather than the big bond investors before the 30 years are up. It’s a big deal because when debt this big is paid off years early, millions of dollars in interest is saved by the public.
But instead of having an earlier payoff, it looks like Danhof and City staff are considering maxing out the payout – hitting the full $56 million – paying the Bells the most they can pay them.
We’d like to explain more. But so much is left unexplained.
There’s no account, in the materials presented for the meeting, of what expenses the original bond funds went to pay. We’ve asked and gotten no response so far.
There’s no explanation of why tax dollars continue to be used to pay a private developer’s expenses, when Council has specifically said, over and over, it wants such tax capture plans to only be used for public infrastructure and environmental clean-up.
There’s no explanation of why the developer can come back and ask to be paid more for the public infrastructure costs now, even though the Master Development Agreement said the developer would pay any cost overruns on that.
There’s no explanation of why these bonds should be offered only privately to specially selected investors.
There’s no explanation of why Danhof thinks the new bonds should be structured so that the big investors don’t have to pay income tax on their earnings. (Will that really net the people of East Lansing the best deal?)
And because this deal doesn’t involve the City putting up collateral, City Council will have no say in the matter – the BRA has complete power over this decision.
As noted at the start of this report, East Lansing’s BRA is made up of non-specialist citizens who tend to just do what their attorney, Bill Danhof, recommends.
Danhof is supposed to protect the public interest.
Asked yesterday by ELi, Mayor Pro Tem Aaron Stephens says he thinks it’s a reasonable time to see who else might be interested in becoming the City’s bond counsel.
He would like to see a Request for Proposals sent out to see who wants to apply. This, he says, is just prudent practice where the public interest is concerned, as sending work out for bid allows the City to consider its options.
If Council bids out the work, the Council can consider cost, advice, and conflicts of interest. So far as we can ascertain, the City has never bid out this work, just sticking with Danhof for years.
Council member Jessy Gregg agrees with Stephens that it’s time to bid this out. The other members of Council – Ruth Beier, Mark Meadows, and Lisa Babcock – haven’t answered the question yet.
In any event, the call for bids for bond counsel may not happen before the BRA needs to sign off on a resolution stating terms – however vague – about refinancing of the Center City bond. They won’t have to vote this through on Thursday. But they are likely to be instructed they have to vote soon.
Information about Thursday’s meeting is at this page. You can call in to participate with a short comment, and you can also write to the BRA by sending an email message to Director of Planning Tom Fehrenbach. (Be sure to indicate you want your email to go to the BRA.)