• Title: City Center II: The Facts about the BANs and the DDA’s Evergreen and 303 Abbot Properties
  • Author: Eliot Singer, East Lansing
  • Date: 10/30/2011

City Center II: The Facts about the BANs and the DDA’s Evergreen and 303 Abbot Properties

City Center II: The Facts about the BANs and the DDA’s Evergreen and 303 Abbot Properties

Eliot Singer for Public Response

Preface

Because there appears still to be considerable confusion, including by members of City Council, about the $5.495 million in Bond Anticipation Notes, coming due on April 1, 2012, and about the properties purchased by the city for the City Center II project, now owned by the citizens of East Lansing through the Downtown Development Authority, I am reposting and updating the facts about the BANs and the properties.

Recall that Vic Loomis told The State News for an April 9, 2010 article that, “The $5.5 million used to acquire property for City Center II will not impact taxpayers because the bond anticipation notes…will be paid for by parking and property revenue. If no parking garage is built, the city could regain money by reselling the properties… ‘There is plenty of protection to the taxpayers….’”

Also recall that the DDA bylaws obligate it to return any tax revenues it cannot put to good use to the taxing bodies from which it has been diverted (East Lansing operating and debt funds, Ingham County, CATA, LCC). This means that, even if covered by earmarked DDA tax revenues, past deficits related to the BANs, the properties, and other DDA City Center II expenditures, as well as any future deficits and losses, do very much impact taxpayers and all East Lansing citizens.

East Lansing City Council Approves the BANS

On May 19, 2009, as part of its “consent agenda,” moved by Roger Peters and seconded by Nathan Triplett, East Lansing City Council unanimously approved a “resolution authorizing issuance and sale of 2009 Downtown Development Bonds or Bond Anticipation Notes…

• Up to $7,000,000 of Bonds to purchase land for City Center II Project;
• Bond Anticipation Notes may be issued to pay costs which must be paid
before the City can issue Bonds;
• City to pay Bonds or Notes from DDA Revenues and to Pledge the City’s
Limited Tax Full Faith and Credit….”

“WHEREAS, as part of the DDA’s development program described in DDA Plan #2, the DDA is undertaking to acquire and construct public infrastructure improvements for the mixed use development project known as City Center II including parking structures, pedestrian walkways, public theater and exhibition space, water, sewer, street, streetscape, sidewalk, and related site acquisition (the “Project”); and WHEREAS, at this time it is necessary for the DDA to purchase land for the site of the Project, and it appears that the most practical means to finance the Project would be through the issuance of the City’s bonds as authorized by Section 16(1) of the DDA Act; and WHEREAS, the City published a Notice of Intent to issue Bonds for the Project and Right of Referendum thereon in The Lansing State Journal on Thursday, September 18, 2008 (the “Notice of Intent”) in compliance with the requirements of Section 5(g) of the Home Rule Cities Act, Act 279, Public Acts of Michigan, 1909, as amended, and no referendum on issuance of the bonds for the Project is required; and WHEREAS, under the provisions of Section 413 of the Revised Municipal Finance Act, Act 34, Public Acts of Michigan, 2001, as amended (“Act 34”), a City may issue short term bond anticipation notes in anticipation of the proceeds of bonds it proposes to issue… The first series of the bonds described in the Notice of Intent shall be issued in the aggregate principal amount of not to exceed Seven Million Dollars ($7,000,000), as finally determined by the Finance Director at the time of sale of the Bonds, for the purpose of paying the costs of the Project including payment of legal, engineering, financial and other expenses incident thereto, and capitalized interest in an amount to be designated by the Finance Director. The Bonds issued hereunder shall be designated as the 2009 DOWNTOWN DEVELOPMENT BONDS (GENERAL OBLIGATION LIMITED TAX)….”

The May 19, 2009 resolution references the September 16, 2008 resolution of intent:

“To issue and sell general obligation bonds in an amount not to exceed Thirty Million Dollars ($30,000,000) for the purpose of paying costs to acquire and construct public infrastructure improvements for the mixed use development project in downtown known as City Center II. The public infrastructure improvements include, but are not limited to, parking structures, pedestrian walkways, public theater and exhibition space, water, sewer, street, streetscape, sidewalk, and related site acquisition….

“The City intends to pay the principal of and interest on the Bonds from parking revenues and tax increment revenues of the Downtown Development Authority and the Brownfield Redevelopment Authority. In case of the insufficiency of these revenues, the principal of and interest on the Bonds shall be payable from the general funds of the City lawfully available for such purposes including property taxes levied within existing charter, statutory and constitutional limitations.”

Apparently confusion about these BANs extends even to former City Manager, Ted Staton, who had been at the forefront of all things City Center II. For, in a September 7, 2011 email to the city’s financial director (obtained through FOIA), he asked, “Are they just an obligation of the DDA or are they backed in some way by the full faith and credit of the city?” Ms. Haskell replied, “They are backed by the full faith and credit of the city. However, if you will recall, your DDA board passed a resolution pledging the necessary revenue to reimburse the City for any debt service it may pay on the DDA’s behalf in relation to this borrowing.”

More accurately, the city pledged its “limited tax full faith and credit,” but for all intents and purposes “limited” still means taxpayers are on the hook for the bonds and defaulting is not an option. If revenue bonds that did not pledge full faith and credit had been used instead, defaulting would be possible (albeit with likely harm to the city’s credit rating), which is why investors demand higher interest for revenue bonds, and for very high risk projects, like City Center II, it may not be possible to find investors willing to buy revenue bonds, period.

Of course, the DDA’s pledge is apocryphal, since the DDA is in effect a special interest shell company fully owned by the city, and it is just reimbursing the city with revenues diverted from the city (county, etc.). However, if the DDA is cash-strapped, as currently appears to be happening, because of increasing debt and other fixed expenditures combined with falling property values, the city must pay for the debt servicing anyway. The difference is that instead of the debt payment coming from funds that the DDA would probably have used for its own projects and programs, instead of returning funds to the city (county, etc,), the payment comes directly from the city’s operating or debt fund budgets.

The $5,495,000 Bond Anticipation Notes

Shortly after the May 19, 2009 vote, Robert W. Baird & Co. issued three series of East Lansing bonds: “$5,495,000 2009 Downtown Development Bond Anticipation Notes (General Obligation Limited Tax), $515,000 2009 General Obligation Limited Tax Bonds Series A, $415,000 2009 General Obligation Limited Tax Bonds, Series B – Taxable.”

The $5.495 million 3-year BANs pay 3.5% interest, or $192,825 annually (FY 2012 Preliminary Budget, p. 16). So the total interest payment will be $578,475. There was also a $50,000 premium on bond issuance (a.k.a., commission), which is being paid off over the life of the BANs.

Refinancing the BANs

The BANs mature on April 1, 2012, at which time the $5.495 million plus the final 6-months interest payment of $96,412.50 will come due, a total of $5,591,412.50. An earlier FY 2011-2012 semi-annual interest payment will have been made October 1, 2011. There will also be a final installment on the commission in FY2012, but that is itemized separately.

“The FY 2012 budget assumes the DDA will secure some sort of long term debt, however the details have not been finalized and will depend on the status of the proposed City Center II project” (p. xi).

However, Fitch was told: “The city's five-year capital improvement plan includes $17.5 million in bonding, including $16 million to refinance an outstanding $5.6 million BAN and also provide funds to construct a parking deck in downtown East Lansing. The parking project is expected to be self-supporting from tax increment and parking fee revenues” (March 24, 2011 press release).

The 2011 Baird debt service schedule obtained through FOIA calls for $34 million in bonds to be paid for by tax increment and parking fee revenues at an average of about $2.28 million per year for 30 years starting in 2013 or about $2.64 million per year for 28 years starting in 2015. Of course, this plan assumes City Center II will be completed and successful, despite the developer’s track record and troubles and despite the current glut in the downtown real estate market. It also assumes that by the 2014, City Center II will be producing $613,438 in parking ramp revenues (with 1% annual increases thereafter) and $1,128,127 in tax increment financing (with 2.5% annual increases thereafter).

The other alternative, which apparently city officials do not want to consider, is refinancing the BANs at the amount due and continuing to hold onto the properties until such time as a less risky alternative to pursuing City Center II in its current conception with its current developer avails itself. Using the Baird $2.28 million 30-year annual debt-servicing estimate for $34 million as a guideline, figuring $5.75 million for refinancing (including commission), this would come to $385,588 annually. It is likely the real cost would be somewhat higher.

The DDA Evergreen Buildings

The East Lansing Downtown Development Authority using the BANs, purchased five properties on Evergreen for $5,107,194, using the “capital outlay” numbers of $4,779,376 in FY2009 and $327,818 in FY2010, one property having been purchased after June 30, 2009 (FY2011 budget p.16, FY2012 budget, p. 15). (The sales figures listed in assessment documents only come to about $4.5 million, but there had been other money in purchase agreements, etc.)

314 Evergreen (the commercial property with Evergreen Cycles. the Mitchell PR firm, and student rentals) was bought by the DDA on June 30, 2009, for $2,500,000. A deed of March 27, 2007, on file with Ingham County, shows a transfer from 100% ownership by Seyfarth-Tuck to 50% by Seyfarth-Tuck, 30% by Avenue Apartments of East Lansing, and 20% by Brittania Houses II, the latter two associated with the DDA-connected Crons. The 2009 assessed market value for this property was $996,000. Its 2011 assessed market value has declined to $877,000.

328 Evergreen (active student rental) was bought by the DDA on August 10, 2009 for $312,500 from First Houses, LLC. For 2009, the assessed market value was $151,600, same in 2011.

334 Evergreen was bought by the DDA on June 30, 2009 from Gregory Spiridakos for $0. (Possibly this was included with other Spiridakos properties or else explains most of the missing money to add up to $4.9 million; the deed give no price, just indicates a Real Estate Transfer Tax Valuation Affidavit.) For 2009, the assessed market value was $285,000, same in 2011.

340 and 344 Evergreen were sold by Gregory and Effie Spiridakos to the DDA for $1,704,000 on June 30, 2009. For 2009, the assessed market value was $221,800, same in 2011.

Purchase Price 2009 Market Value 2011 Market Value
314 Evergreen $2,500,000 $996,000 $877,000
328 Evergreen $312,500 $151,600 $151,600
334 Evergreen $0 $285,000 $285,000
340-344 Evergreen$1,704,000 $221,800 $221,800
Totals $4,516,500 $1,634,500 $1,535,400
($5,107,194)

So the total assessed market value on the five properties (four tax parcels) at the time of purchase was $1,634,400, less than 30% of the $5,495,000 BANs. The total current assessed market value is $1,535,400, almost $4 million less than the $5.495 in principal due on the BANs, April 1, 2012, plus the final interest installment.


City as Landlord for the Evergreen Properties

The FY 2012 Preliminary Budget (p.15) shows that for FY 2011 the Evergreen properties were expected to generate $262,665 in rental income, with $173,809 operating costs. Ignoring debt servicing on the BANs, income minus operating costs comes to $88,840 in the black. Including the interest-only debt servicing, the net FY 2011 deficit was $103,969.

Because the expectation has been that these buildings will shortly be torn down, they probably have not undergone the upkeep they need for continuing as rental properties. Such upkeep might cut into future net operating revenue, although it might also allow for increased rents.

Holding onto the buildings, instead of destroying them in anticipation of a highly speculative City Center II, would not only save deconstruction costs and provide some net revenues to help cover bond servicing, it would also allow for more future possibilities if market conditions improve.


303 Abbot

On November 2, 2001, the East Lansing Downtown Development Authority purchased the former Old Kent Bank building at 303 Abbott from DDA-connected Ballein Management LLC for $700,000. The purchase was financed by a no-interest loan from the Michigan Economic Growth Authority (MEGA). In 2009, $350,000 was forgiven by MEGA. The other $350,000 was due July 1, 2011. Whether another postponement was obtained or the city paid the bill has not been made public.

How much Ballein Management, formed as a Michigan Limited Liability Company by Howard and Bradley Ballein on December 2, 1993, paid Old Kent in March 1997 is not indicated on the deed, but the mortgage to Old Kent was for $412,500. Old Kent had purchased the building in 1992.

The city has refused to divulge the breakdown for how taxes on DDA properties are distributed between being returned to the DDA through its TIF district versus other taxing bodies. In 2006, 303 Abbot paid $20,946.62 in summer and $2,215.57 in winter taxes. In 2007, this was reduced to $70.98 in summer and $0 in winter taxes.

Despite paying this small amount of taxes, 303 Abbot is assessed at $0 for 2011, as it was for 2010 and 2009. Even the value of the land is listed as $0. In contrast, the land value of 136 W. Grand River, a roughly analogous Strathmore CC II property, bought by the previous owner in 2001 for $520,000, is $529,020.


Current Assessed Market Values of the Strathmore CC II Properties

Address Mo. Purchased/ Purchase Price/2011 Market Value
100 W. Grand River/October 2004 $1,700,000 $968,200
124 W. Grand River/May 2008 $485,000 $166,200
124 W. Grand River/May 2008 $300,000 $127,600
130 W. Grand River/January 2008 $300,000 $135,800
136 W. Grand River/January 2006 $660,000 $540,000
140 W. Grand River/May 2008 $450,000 $155,000
341-345 Evergreen/May 2008 $2,400,000 $1,181,200
Total $6,295,000 $3,274,000

The State News framed its “time to give up on Strathmore” editorial last July as “time to sell.” But that is not realistic given the mortgages and the market values.
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