Investors Interested in $29M East Lansing Bond Offer Must RSVP Fast
With no press release and no discussion of the matter at Tuesday’s City Council meeting, staff for the City of East Lansing issued a call for investors on Wednesday for what will amount to $29M or more in refinancing bonds on the Center City District project.
Investors have a total of one week to express interest, with the deadline for that falling next Wednesday, Oct. 21, at 3 p.m.
Full pitches from those who have met that deadline will be heard in November, according to Tom Fehrenbach, Director of the City’s Department of Planning, Building and Development. Investors will have little time to do “due diligence” before being asked to commit.
East Lansing’s Brownfield Redevelopment Authority (BRA) approved refinancing the bonds for the Center City District at its Sept. 24, 2020, meeting. Earlier, in July, the BRA had approved and then rescinded a resolution to refinance the bonds during a tumultuous week that also involved pleas from the developer, the resignations of Ruth Beier and Mark Meadows and a sharp challenge to the refinancing process by Meadows, who had signed off on the whole $125M deal in 2017.
Following all that, the BRA hired a financial advisor, PFM, and was advised to refinance the bonds, which the BRA is now trying to do.
So continues the saga of the Center City District project, East Lansing’s largest-ever public-private redevelopment deal — and one with a long history of controversy.
The just-released call to potential investors gives no hint of the ongoing disagreements about the matter.
About this, the materials provided to potential investors are very clear: These bonds are no-recourse revenue bonds. The only security put up for them is future property taxes coming from the Center City District project for 30 years. There’s no other security (“no recourse”). If there ultimately isn’t enough revenue in taxes to pay back the principal and interest on the bonds, the bondholders are out of luck.
But in the materials provided, potential investors aren’t shown the City Council’s authorizing resolution that limited payment for the bond from taxes to about $50M. Instead they’re told there’s about $56M in taxes available to pay back the bonds’ principal and interest, the opinion of the City’s bond attorneys from the Miller Canfield law firm.
The information provided does say that $1.3M in taxes have been “captured” so far to pay what’s owed on the bond. But investors are not explicitly told that that amount saved is insufficient to make the Dec. 1, 2020, payment due by the BRA. In fact, there’s a shortfall of about $2.4M.
They’re also not told specifically that the trust indenture on the original bond requires the developer’s company to pay his father’s company — the bondholder — for the approximately $2.4M shortfall in the fund for the payment due and get reimbursed later if there’s money available. The shortfall is being rolled into the principal of the new bond.
They’re also not told City staff accidentally gave away $335,000 in interest income to the developer for public infrastructure cost overruns. That $335,000 in interest earned on the funds in the bank was supposed to go to pay the interest due. That cost, too, is just being rolled into the new bonds’ principal.
There’s a much bigger problem: the potential that these bonds contain worthless paper.
The taxes being captured from the project for paying back the bonds can’t be used to pay back whatever the BRA feels like paying for out of the bonds’ principal now. The TIF plan isn’t a piggy bank for the BRA.
The approved Center City Brownfield TIF plan specifically limits how much in taxes can be used to reimburse specific eligible expenses through the bonds. Here’s an example of what line-item TIF eligible expenses look like on this project — in this case, what the eligible expenses are for the parking garage construction:
The actual Center City TIF plan, with the limits imposed by Council and by state statute, don’t seem to allow for using taxes to reimburse all of what’s being paid for out of these bonds as “soft costs,” including large fees to various players.
If the TIF can’t be used to reimburse the ineligible expenses being paid for out of the bonds’ principal, the bondholder may be stuck with principal that has no mechanism for repayment. (Remember, these are no-recourse revenue bonds; the only security is the TIF, and the TIF is very specifically limited in what it’s allowed to be used to reimburse.)
Various experts who have looked at this matter for ELi refer to it all as being “hairy” or having “sharp edges” or in simpler terms…
None of this looks normal, including the very tight time frame for the refinancing.
Many aspects of the original bond have raised eyebrows among those who work in municipal finance:
– The original bond appears to have been written so that there is only just enough expected revenue to cover the amount due, if that, despite being a no-recourse revenue bond. Usually no-recourse revenue bonds would be expected to have a healthy revenue cushion so as to insure there would not be a default.
– There was no Debt Service Reserve established on the fund – a mechanism that would have stashed away a few extra million from the original bond in the bank to guarantee there was enough in the bank to meet payments if the tax revenue didn’t start flowing quickly enough. This means there was no provision made for making sure the BRA could pay the Dec. 1, 2020, payment, except perhaps through a refinance, which is never guaranteed to happen. The bond was always at serious risk of payment default.
– The original bond was designed with no interest payments due for three years, which we are told by experts is extremely irregular.
– The cost of issuance on the original bond came to 3.6% of the face value, which is extraordinarily high for a municipal bond. (That means lots of lawyers and consultants made out better than would ordinarily be expected, as they got their hands on the pie.)
– As alluded to above, using the original bond to pay these people raises questions because some of them cannot legally be reimbursed with the Brownfield TIF. It’s possible the BRA has essentially issued, in part, worthless paper, and may be about to do the same again.
– East Lansing’s BRA was suddenly advised for the very first time on Sept. 24 that it’s facing imminent default because of a shortfall in the fund to cover the first debt payment due on Dec. 1. For months prior to that warning, ELi repeatedly asked what is owed and how much is in the bank, getting no answers. Why wasn’t the BRA warned of possible payment default sooner?
– An astute reader pointed out that the original bond trust indenture states, clearly, that the BRA will not be in default so long as the BRA is channeling the taxes captured to the bond fund – which it has been doing. Yet the BRA is being told it will be in default and must rush to refinance.
– And, as we’ve pointed out following tips from former mayor Mark Meadows, the problem of the shortfall isn’t legally the problem of the BRA. Developer Mark Bell is supposed to have his company pay his father’s company, Scottsdale Capital, the original bond investor under a “Developer Debt Service Guaranty” if there’s a shortfall when the payments are due.
– The BRA had no financial advisor in 2017 to prevent problems like the ones it currently faces. The only financial advisor at the table, Brian Lefler of Robert W. Baird & Co., turned out to be working for the developers. His role as the developers’ paid advocate only became clearly evident to us when the closing letter was obtained by ELi via the Freedom of Information Act.
All this makes for a pretty strange situation. And it helps explain the unusual tussling over the issue of the refinancing bonds.
It’s hard to know how many investors will be interested in this scene.
What we do know is what Fehrenbach told ELi yesterday: “Any responses received will be carefully reviewed to determine what next steps, if any, are in the best interests of the BRA.”
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