Who Really Benefited from the Center City Bonds’ Refinancing?

In the latest turn in the tale of East Lansing’s Center City District deal, an analysis by ELi of the paperwork for the refinancing of the bonds, which closed last week, shows a mysterious removal of all references to a key financial obligation of the developers. The implications are big.

And though the City announced that these refinancing bonds would save about $2.3 million in property tax revenues that would otherwise go to pay back the bonds, the reality appears otherwise.

In fact, following careful analysis of material released only after the closing, it appears that the bondholder’s refinancing of the 2017 bonds didn’t do the City of East Lansing any favors. 

Instead, with this refinancing, the bondholder did the Center City District developers a big favor.

That fact takes on a special meaning when you dig into the corporations involved, as ELi has done, and recognize this: The bondholder is a company owned by Peter Paul Bell. The lead developer who benefited from this refinancing is Mark Bell, Peter Paul Bell’s son.

So, who did the bondholder’s refinancing benefit? His own family.

This week, with yet another of the Center City District deal’s financial protections for the City seeming to fall away, former mayor Mark Meadows is saying that enough is enough and that “injunctive relief should be sought.”

Meadows is suggesting that it’s time for one or more citizens of East Lansing to ask a court to issue a declaratory judgement, to require adherence to the financial protections for the City that Meadows and the rest of the 2017 Council built into this $125 million public-private deal. 

Meadows says this because, time and again, the current Council, City staff, and Brownfield Redevelopment Authority have not acted to defend those protections.

Using released documents to unpack the reality of what just happened

Last Tuesday, Dec. 1, representatives of East Lansing’s Brownfield Redevelopment Authority (BRA) signed paperwork that closed the refinancing deal on the 2017 Center City District Bonds. They agreed to issue about $29.5 million in refinancing bonds because they were advised by paid external consultants that this refinance, structured by those consultants, was in the best interests of the City.

On the surface, it certainly looked like that was true. 

The BRA was short $2.4 million for the payment it owed on Dec. 1 to the bondholder for the 2017 bonds – and defaulting on a bond payment could be bad for the BRA’s and the City’s credit ratings. The external consultant warned of “considerable headline and reputational risk” if the BRA didn’t take the refinancing terms offered by the bondholder. 

In October, City staff had put out a call for a new bond investor. But – presumably recognizing this deal as a “hairy” one, mired in disputes – the 70 companies asked to consider investing in refinancing bonds all rebuffed the City.

So, with no other bond investors willing to touch this, it seemed a good thing that the existing bondholder agreed to refinance the bonds himself, rolling the $2.4 million shortfall into the new bonds. He even offered the BRA a lowered rate in the process. 

Perhaps most importantly, the financial consultant hired to analyze the deal said that, under the proposed refinancing, the new bonds would save about $2.3 million in tax revenue compared to the existing 2017 bonds. That’s essentially money that would be retained by the taxing authorities (East Lansing, Ingham County, CATA, etc.) instead of being used to pay interest to the bondholder.

This sounded like a no-brainer in terms of the public interest. And so, representatives of East Lansing’s BRA signed off.

But the financial analysis provided by the external consultants to the BRA before the closing appears to have totally ignored the fact that the 2017 deal included an unusual provision for the bonds, one that was incredibly valuable to the City: the Developer Debt Service Guaranty.

To explain what happened here, we have to step back a moment and explain how the 2017 bonds were structured.

The 2017 bonds were created as a way to pay for the public infrastructure in the Center City District deal, chiefly the new parking garage on Albert Ave. The idea was that the City would sell about $24.4 million in bonds to investors and promise to pay the bond investor(s) back, with 5 percent interest, using taxes captured from the new private development at Center City (Newman Lofts and The Landmark) in a Brownfield Tax Increment Financing (TIF) deal.

The project’s real estate developers were Harbor Bay Real Estate, whose CEO is Mark Bell, and Ballein Management, operating under a limited liability company called HB BM.

To limit risk to the City of East Lansing in this deal, the 2017 City Council, and BRA made sure that the 2017 Center City District bonds were issued as no-recourse revenue bonds. The only thing the City and the BRA put up as security was 30 years of future tax revenues from the project. If there was ultimately not enough in tax revenue to pay back the bondholder, the bondholder would just be out of luck. The bond investors couldn’t come after any other asset of the City’s.

As it turned out, even in 2017, no one would sign up for such a risky deal at a relatively low interest rate – no one, that is, except someone who really wanted to get this project done. It had to be someone who thought there was enough money to be made otherwise in this redevelopment to make buying a risky, 5-percent, no-recourse revenue bond worth it. 

So, it fell to Mark Bell’s father, Peter Paul Bell, operating as Scottsdale Capital, to put up the money for the 2017 bonds to make his son’s East Lansing project happen. Without Peter Paul Bell’s investment in the original bonds, Mark Bell’s project would have died.

In order to push as much of the financial risk as possible onto the developers, Mark Meadows, who was mayor in 2017, arranged a second level of security for these bonds: the Developer Debt Service Guaranty. 

The Guaranty said that, if there hadn’t been enough taxes captured from the new development to make a given payment due to the bondholder, any shortfall would be made up by the developers, HB BM.  

That meant in effect that, if a payment came due and there wasn’t enough to pay Peter Paul Bell’s company what was due, Mark Bell’s company would have to write a check to make up the gap in what was owed. 

As we specifically detailed in October, this Developer Debt Service Guaranty was inscribed in the Master Development Agreement, the 2017 Trust Indenture for the bonds, and the term sheet letter for the bonds. The Bells — as bondholders and developers — agreed to the Guaranty.

For three years (2017-2020), no payment was due by the BRA to the bondholder, Scottsdale Capital, according to the way the bonds had been structured. The interest on the bonds simply accrued. The first payment of about $3.7 million was always scheduled to be paid on Dec. 1, 2020. 

But as Dec. 1, 2020, approached, it became clear that the BRA had only collected about $1.3 million in new taxes. The project was completed relatively recently, so it hadn’t produced much in new tax revenues yet. Although the original plan had been to stash extra money in a debt service reserve fund for the bond account to avoid any chance of default, as it turned out, Peter Paul Bell hadn’t put up millions extra in the 2017 bonds as insurance against a shortfall in 2020.

All that left the shortfall of about $2.4 million for the Dec. 1, 2020, payment due by the BRA to Peter Paul Bell’s company.

You might think, heading towards Dec. 1 and knowing here was a shortfall looming, City staff would have let Mark Bell’s company, HB BM, know it was going to have to send a check for about $2.4 million to the bonds’ trustee under the Developer Debt Service Guaranty, to make sure there was going to be enough in the bank to make the payment due.

Instead, the BRA was advised by staff that it had to refinance or it would be in default. That turned out not really to be true – later, in November 2020, bond counsel Bill Danhof of Miller Canfield admitted that the 2017 bond Trust Indenture says there is no legal default so long as the BRA is turning over what taxes have been collected. 

But, in September 2020, the BRA members were pressed to vote to refinance under the claim from City staff that they were going to face default.

And, on Sept. 24, the BRA members did just that: they voted through a resolution to pursue this refinance. 

Nevertheless, the understanding at that point (Sept. 2020) was that a refinance would not happen if the refinancing terms weren’t in the best interests of the BRA and the City. 

A financial advisor, a company called PFM, was hired to tackle that “best interests” question about possible refinancing options.

The decision to hire PFM is worth explaining. Before PFM came on the scene, back in July 2020, the BRA had heard from another financial advisor that refinancing the bonds was definitely in the BRA’s interests. That advisor was Brian Lefler of Robert W. Baird & Co. At the July 9 meeting of the BRA, Lefler used a simple chart that made refinancing look like it was absolutely in the BRA’s best interest.

In fact, the chart presented by Lefler (above) was so lacking in details as to be almost meaningless. But the starkness of the chart’s message seemed persuasive to the BRA. They voted to refinance then.

Just after that July 9 vote, ELi reported that, when Lefler was giving that advice to the BRA in advance of the BRA’s vote, Lefler didn’t make clear that he was really working for the developers. Our reporting about that meeting caused turmoil (and apparently contributed to Mark Bell’s decision to launch a PR attack against ELi). 

A week later, in spite of Mark Bell back-channel pleading for refinancing, the BRA rescinded the refinance bonding resolution and voted to get themselves a financial advisor before they took another step.

A few weeks later, the BRA hired PFM to be the BRA’s own advisors. PFM agreed to a fee of $47,500, to be paid only if the BRA closed on refinancing bonds (perversely creating an incentive for PFM to recommend refinancing). 

PFM then turned around and recommended the BRA also pay Lefler to help with the refinancing. In the end, PFM was paid $47,500 out of the new bonds for advising the BRA, and Lefler was paid an additional $47,500 for “Restructuring Expense” out of the new bonds.

So, let’s talk about that restructuring and the curious analysis given to the BRA officers.

Based on what the City has said about the refinancing bonds, the claim that the new bonds would save about $2.3 million in taxes over their lifetime (compared to leaving the 2017 bonds in place) appears to have been very significant to the decision to agree to issue and sell the new bonds to Peter Paul Bell’s companies under the terms recommended.

But here’s the thing: The schedule on which the alleged savings of $2.3 million is calculated – an attachment called Appendix A – does not appear to be based on the real structuring of the original bonds. In the first line of the calculations, PFM shows a whopping big payment of about $4.3 million to the bondholder by the BRA in 2020/21. That’s not really what would have happened if the 2017 bonds had not been refinanced.

The truth is that the BRA is short $2.4 million for the first payment, and may well have been short for the next payment due, too. That means that, under the Developer Debt Service Guaranty, if the bonds hadn’t been refinanced, at least $2.4 million of that $4.3 million shown in line 1 would actually have been paid now by the developers, not from captured taxes.

What’s critical to understand at this juncture is just how bizarre and valuable the Developer Debt Service Guaranty really was.

Not only did it require the developers to make up any shortfalls when payments were due, it did not require the BRA to pay any interest to the developers for the money they put up under the Guaranty. And, it did not require the BRA to pay the developers back until the bonds were completely paid off, and then only if there was enough tax money left under the tax-capture Brownfield TIF plan.

The result of the Guaranty was that, if made now, the developers’ $2.4 million shortfall-patch would not have to be paid back by the BRA for as many as 27 years, and even then with no interest. Because of inflation, by the time the BRA paid that shortfall-patch back, $2.4 million would be worth far, far less than it is today. A $2.4 million interest-free loan from the developers to the BRA paid back in 27 years would be worth over $5 million in today’s dollars.

There would have been additional payment shortfalls in the future, too – making the Guaranty terrifically valuable to the BRA over the life of the bonds.

Yet, instead of calculating for the cost of the 2017 bonds by including the huge financial benefit of the Developer Debt Service Guaranty, Appendix A appears to assume the Guaranty didn’t exist and the BRA has all the money it needs to make the payments. The result of that is to cause a huge payout by the BRA in the first year – when a dollar is worth a lot more, relatively – skewing the apparent cost of the 2017 bonds to the BRA.

In short, the way that PFM ran the analysis makes the 2017 bonds look much more expensive than they really would have been. That makes the 2020 bonds look like they save $2.3 million.

A footnote to Appendix A suggests that the calculation given for the 2017 bonds is “conservative.” But the opposite effect actually appears to have occurred by ignoring the Developer Debt Service Guaranty. 

Even if the developers defaulted on their obligation – if they didn’t make the payments due under the Guaranty – Appendix A appears to be misleading. That’s because, in the event the developers didn’t pay, the BRA would really have pushed off the amount owed now to later years, when taxes accrued to be able to make the payments, when a dollar would be worth relatively less. 

In sum, it appears that the way the 2017 bonds were calculated in Appendix A assumed, wrongly, that the BRA had the money to make the full payment that was due on Dec. 1, 2020. Appendix A also appears to have pretended the Developer Debt Service Guaranty didn’t exist. It was not a reality-based analysis of the 2017 bonds. 

But it was what caused the BRA officers to think they would save $2.3 million in tax revenues by accepting the refinancing offered.

Now comes the kicker.

We’ve already seen how the refinance meant that the developer didn’t have to now pony up $2.4 million that would only be paid back in something like 27 years, without interest, and only if there were enough taxes left in the deal. What’s more significant is that the refinance bonds’ paperwork also completely removed all mention of the Developer Debt Service Guaranty.

PFM’s material simply makes no mention of it.

Troublingly, there is also no mention of the Guaranty in the 2020 Trust Indenture, the critical legal paperwork for the 2020 bonds prepared by bond counsel Bill Danhof of Miller Canfield.

While one might wonder if PFM knew about the Guaranty, it seems very likely Lefler know of it, and Danhof surely knew about it. Danhof prepared the 2017 Trust Indenture that had the Guaranty in it.

Moreover, just three weeks before the refinancing bonds closed on Dec. 1, Council member Lisa Babcock called Danhof to Council to ask him questions about the bonds, including about the Developer Debt Service Guaranty. At that meeting, on Nov. 10, 2020, Danhof unequivocally acknowledged the existence of the Guaranty. Watch the video:

Note that there, Danhof suggested the BRA would not seek to get the $2.4M gap money out of the developer because the bondholder hadn’t specifically asked the BRA to do so. The truth is that the BRA never needed Peter Paul Bell’s permission to ask Mark Bell’s company to pay up under the Developer Debt Service Guaranty.

Importantly, PFM, Danhof, and the BRA’s representatives who signed the refinancing do not appear to have had the legal right to eliminate the Developer Debt Service Guaranty from the new bonds. 

The Guaranty was part of the 2017 Master Development Agreement voted on by City Council and the BRA, and there has been no vote to change this element of the Agreement. 

PFM’s Nate Watson, Baird’s Brian Lefler, and Miller Canfield’s Bill Danhof have not responded to ELi’s messages from last Friday presenting our analysis of the paperwork and asking for explanations about what happened. 

City Manager George Lahanas, BRA Chair Peter Dewan, and BRA Vice Chair Jim Croom have also not responded. On Council, only Ron Bacon and Mayor Pro Tem Jessy Gregg have answered.

Bacon simply replied, “no comment.” 

Gregg answered by saying that, while she agrees that the removal of the Guaranty was a gift to the developers, she believes that the no-recourse nature of the bond ultimately protects the City. (The new bonds retain the no-recourse, TIF-revenue-only feature.) She also said she trusts PFM’s interpretation and that the City was “allowed under the terms” of the Development Agreement to refinance the bonds. 

But Mark Meadows thinks much more should be done. 

Finding Gregg’s understanding of the matter frustratingly “shallow,” and seeing that the current City Council, City staff, and BRA are making no moves to defend the original protections build into the 2017 deal, former mayor Mark Meadows told ELi by email on Monday that he believes it’s time for court action.

Meadows is frustrated by what he sees as the disregard for the Developer Debt Service Guaranty in the refinancing. But he’s also troubled by the current BRA’s and current Council’s failure to recognize and defend a $6 million reduction in total tax capture voted through unanimously by the 2017 Council, and by the Council’s recent 4-1 vote to let the developer continue to rent to people under age 55 at Newman Lofts, contrary to the deal made. (Lisa Babcock was in the minority in wanting to hold the developer accountable for the age restriction.)

Meadows, who resigned from Council in the midst of all this, is now suggesting that one or more citizens could “seek a declaratory judgement” from a court with regard to the 2017 deal, determining “that those limitations and responsibilities still exist and the relief would be that the City, the BRA and the Developer would have to abide by them.”

Here’s an audio version of this article with a Q&A follow up:

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