It takes a village to issue a bond

April 30, 2012
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The general obligation bonds the Grand Rapids Brownfield Redevelopment Authority plans to sell in mid-June for the Urban Market project would likely carry a much higher interest rate if the Downtown Development Authority and the city weren’t on board as backers.

Not having the DDA and the city as parts of the agreement, of course, would make the bonds more expensive to issue, or possibly not be issued at all.

A few weeks ago, the brownfield authority agreed to sell bonds worth up to $2.3 million that will be spent on improving the streetscape surrounding the 3.5-acre site on Ionia Avenue SW near Wealthy Street the market will call home. The term of the tax-free bonds is for 20 years; the projected interest rate is 4 percent per annum.

Mayor George Heartwell recently told the DDA that if the city hadn’t attached its full faith and credit to the bonds, the resulting interest rate for the securities could have been as much as 1.75 percent higher. That is because the bond buyers will be paid by tax revenue, specifically property tax increment receipts that will come from the improvements that are made to the site, which will make the parcel’s taxable value rise.

The city’s pledge provides an incentive — and an assurance — for bond buyers.

“TIF credits are very difficult to sell in the current municipal bond market, especially if there is no history of a revenue stream,” said Jana Wallace, city debt and finance officer and DDA treasurer.

Both the DDA and the brownfield authority will collect that tax-increment financing, or TIF, revenue.

As for the DDA’s role, the board has pledged to pay the first $75,000 of the annual debt payment each year from the tax-increment revenues it collects annually.

“The DDA is picking up the first $75,000 in annual debt service because it will realize tax-increment revenues from the development of its property on which the Urban Market will be constructed and because the Urban Market is expected to bring many, many people to downtown Grand Rapids,” said Wallace.

The DDA’s participation in this project is vital because the agency has a larger property area to capture tax-increment revenue from than the brownfield authority has. In this case, the brownfield authority’s capture would be limited to the Urban Market site. With the way property values have fallen the past several years, bond buyers would have wanted a bigger payoff for their risk if the site’s TIF was the only source of revenue for payment.

Also, the DDA isn’t as restricted as the brownfield authority in how it can use its tax-increment revenue.

“Unlike the city’s other tax-increment districts, the city’s brownfield tax-increment revenues result only from developer reimbursement agreements with each individual project’s developer. So unless a developer-reimbursement agreement stated that the tax-increment proceeds may be used for another developer’s project, we would not be able to use any other brownfield TIF to support the brownfield bonds for streetscape improvements near the Urban Market development project,” said Wallace.

“If we had a Local Site Remediation Revolving Fund, which is capitalized by TIF from completed projects and the activities were eligible, we could use those funds to repay debt. We currently don’t have a LSRRF yet, but we hope to in the near future,” said City Economic Development Director Kara Wood, also executive director of the brownfield authority.

The role the brownfield authority is playing is also vital and very beneficial to the DDA. Without the authority agreeing to issue the bonds, the DDA may have had to cover the full tab for the $2.3 million of infrastructure and street improvements that will be made around the site.

“The reality is that, if the deal weren’t structured to include both brownfield and developer support, it is likely the DDA would have been responsible for footing the entire cost of these streetscape improvements,” said Wallace.

The DDA expects its total tax-increment revenues to reach $4.5 million this fiscal year. The brownfield authority should see $2.8 million in those revenues this year, but much of that fund will be reimbursed to developers who own and have developed the brownfield properties.

The agreement the DDA and brownfield authority made stipulates that the tax-increment revenue that will come from the project will first be used to make the bond’s principal and interest payments. The second priority is to pay the brownfield authority’s cost to administer the bonds. Repayment of the DDA is the third priority.

Fourth is a reimbursement to the project’s official developer, Urban Market Holdings LLC, for the public improvements it will make in the project’s construction, which has been estimated at costing between $27 million and $30 million. The fifth and last priority has the revenue going into a brownfield revolving fund.

Another provision in the agreement has UMH picking up any shortfall for a bond payment when the DDA’s funding and the tax-increment revenue that is available isn’t enough to make a payment. UMH won’t receive any funds from the project until both authorities are made whole.

The year-round Urban Market is being developed by the DDA and the Grand Action Committee, who together created UMH as a for-profit entity so the property would qualify for brownfield status, which it will have for the next 30 years.

The DDA has owned the site since 2008, having bought it for $2 million, and has leased it to UMH for 99 years. City commissioners recently pledged the city’s full faith and credit to the bond package after receiving reassurances that five safety measures are in place to protect the general operating fund.

The DDA expanded its capture district five years ago to include the area the Urban Market property sits in because downtown had been growing in that southerly direction since the Van Andel Arena opened in 1996.

“The DDA has invested in streetscape improvements throughout downtown and, in particular, Ionia Avenue from Michigan Street all the way down to Wealthy Street,” said Wallace. “These improvements along Ionia south to Wealthy continue the DDA’s pattern of streetscape investment.”

The Robert W. Baird Co. is the bond’s underwriter and the Bank of New York Mellon Trust Co. is the registrar and paying and transfer agent. The market is projected to open in July 2013.

One negative element was mentioned by DDA Chairman Brian Harris, who noted that the board may have fewer dollars available for other projects in the near future due to its commitment to the bond payments. “We won’t be as generous as in the past, with the commitments the DDA will have on its budget next year,” he said.

The next fiscal year begins July 1.

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