Recovery bond process creates confusion for developers, officials and local boards

by Jordan Green

Recovery bond process creates confusion for developers, officials and local boards

Since the US Treasury Department released recovery zone bond allocations to the states last June, a land rush of sorts has taken place in North Carolina with developers clamoring for access to the low-interest federal bonds designed to stimulate economic growth and put people back to work.

But local government officials, at least in Guilford County, have struggled to keep up with the breakneck pace of the timetable to sign up projects and induce bonds; local boards have found themselves perplexed about their responsibilities in vetting projects; developers have scrambled to meet confusing deadlines.

“We’re all flying by the seat of our pants,” said Donald Linder, a Greensboro developer proposing to build a retail center and hotel at the site of the old Carolina Circle Mall in northeast Greensboro, whose two requests did not make Guilford County’s first cut in the allocation process and likewise did not meet the city’s criteria.

The state received a total allocation of $627.2 million in Recovery Zone Facility Bonds, a financial instrument that allows developers to borrow money at a low interest rate made possible by exempting bond holders from paying taxes on their debt assets. Only one has been issued so far — a $7 million bond to finance an International Paper manufacturing facility in Columbus County.

Local governments issued notices of intent for proposed projects valued at $224 million. Many of those are not expected to receive final approval from the Local Government Commission in Raleigh, when it reviews the proposals this spring. So developers like Linder that got shoved aside in the first round are hoping for another crack in the second. Linder has been told that the deadline for the next reallocation is Feb. 15, but other than that he said he had little information about the process and was expecting details from city officials this week.

As a federal initiative to get the nation back on its feet, the execution of the bond program raises questions about who will receive access to the program, whether the tax-free bonds are in fact more affordable to borrowers than traditional financing, whether the financed projects will create more capacity across the nation than the market can support and indeed whether they will create more than a temporary bump in employment levels.

In Greensboro, council members voted to approve bond financing totaling $20.9 million, with the understanding that they were only making a preliminary decision to list three projects for the purpose of meeting a Dec. 15 deadline by the state and that they would have another opportunity to give final approval. It turned out that their decision was final. The vast majority of the allocation — $17 million — has been set aside for a proposed luxury downtown hotel that has been beset by controversy because of a series of feasibility reports that conclude that its occupancy and daily rate projections are unrealistic, and because two elected officials who are considered leaders of the black community stand to gain financially from its construction. A chorus of detractors and skeptics has called on the city council to rescind its decision to approve the hotel project.

So far, council members have resisted.

“Our job as city council was to do three things,” At-large Councilman Danny Thompson said last week, “Determine if the projects are in the recovery zone area. They had to be shovel-ready; it means that a developer had signed on to the project so that you didn’t get the stimulus funding and then you waited 18 months for something to happen. And it would produce at least one net new job over and above construction jobs.”

The controversy surrounding the hotel project has carried over to a county industrial authority with the power to induce the federal stimulus bonds. Chairman George Brumback, a contributor to Mayor Bill Knight’s election campaign last year, told a lawyer for the hotel group last week: “I think we’re all a little more sensitive about this situation than we would normally be just because of the controversial nature that seems to be generated.”

Brought into existence in 1975 by an act of the NC General Assembly, the county-level Industrial Facilities and Pollution Control Financing Authorities have until now been responsible mainly for issuing bonds to finance industrial parks, water and sewer extensions and other humdrum enterprises. Now, for the first time, the county authorities are responsible for issuing bonds for a host of projects from an entertainment complex in Halifax County to a power plant in Randolph County growing out of the American Recovery and Reinvestment Act signed by President Obama last year.

A meeting in the Blue Room at the Old County Courthouse in Greensboro marked the Guilford County industrial authority’s first review of a Recovery Zone Facility Bond project. The industrial authority dedicated the meeting solely to considering the downtown luxury hotel project, which has been submitted by both the county and the city, but decided to put off discussing two smaller projects on the city’s list. Two other sets of developers are requesting bond allocations of $2 million and $1.9 million respectively to finance a mixeduse restaurant and apartment development on South Elm Street and construction of a building for an expanded and relocated Deep Roots Market on North Eugene Street.

Considering the downtown luxury hotel project, members of the industrial authority seemed uncertain of their role.

“Does this board have a fiduciary duty to vet these projects?” member Herman Enochs asked.

Mary Nash K. Rusher, bond counsel for the county, struggled to answer the question but made it clear that the heretofore little-known boards enjoy wide latitude and discretion in determining which projects advance to Raleigh for final approval.

“In some counties, authorities will say, ‘Come to us for an issuing resolution when you have your package together — all the information that you need to get through this process,’” Rusher said. Authorities in other counties, she said, take a more lax approach.

“There are other counties that will do an inducement resolution when they get the first hint of a project,” she said, “because they want to induce the project to come to their county or their city and they understand that all that is, is a piece of paper that says, ‘Look, if you can get all of your approvals you need and if you can get a bank underwriter, we are willing to act as a conduit — “touch it as it goes by” issuer.’” County Attorney Mark Payne did little to clarify the authority members’ confusion.

“You do have a duty and that is to do what the law tells you to, and to do it responsibly,” he said. “But it’s not a fiduciary duty. But you do have a duty to make a decision to issue inducement resolutions or not.”

Brumback indicated that as chairman of the industrial authority, he intends to err on the side of caution with the hotel project.

“We have some flexibility here, but at the same time, our normal procedure — and again, this is not normal — our normal procedure is to see that the bonds are basically sold, and that we have bond counsel that represents the authority, which we can approve,” Brumback told the lawyer for the hotel group. “And we like to see a business plan.”

Pristell challenged Brumback to cite written guidelines specifying what documentation the authority is entitled to review.

“We don’t have written guidelines,” Brumback admitted. “This legislation didn’t provide us with much in the way of written guidelines.”

Pristell said the hotel group could provide the authority with the same documentation it has submitted to the city and the county: a business proposal with projections, an identified bond counsel and “some kind of preliminary term sheet.”

Brumback responded, “I think we’re all struggling with what our role needs to be. We don’t want to vet this project room by room. What we would like to see is a financial commitment from a lender that says, ‘We think this is viable because then we know it’s been vetted.’ That’s normally what we see.”

Rusher said she has reviewed a number of other Recovery Zone Facility Bond proposals, noting that the hotel developers offered less documentation to substantiate the viability of their project than what she is accustomed to.

“It’s not like the financing was buttoned up, but there was usually some kind of term sheet or indication, and they knew: ‘This is a BB&T deal. This is a Wachovia deal. This is a Bank of America deal. This is a First Citizens deal,’” she said. “You’ve got a bank that is showing enough interest.”

The authority recessed without approving an inducement resolution, which the hotel developers will need by mid-April in order to receive consideration by the Local Government Commission in Raleigh. Pristell plans to confer with the county’s counsel to determine which documents will be needed. Brumback indicated the authority could reconvene as soon as the hotel group is ready, but no later than its next scheduled meeting on Feb. 24.

George House, member in one of the partnerships in the hotel, insisted that the project was viable, but his responses introduced a hint of doubt. The project edged out all other contenders in the county’s designation and absorbed the vast majority of the city’s allocation for one reason: the number of jobs promised. House said the developers expect to hire 300 to 400 people in all for temporary construction jobs, and 100 people to staff the hotel once it is built.

“There’s no question those jobs are real,” he said during the hearing. “The only question is how long the hundred jobs will stay in operation. But I think they’ll stay in operation for many years.”

Bob Isner, a downtown developer involved in the Deep Roots Market project, said he expects his request to clear the industrial authority without trouble. The $1.9 million figure is significantly less than the combined $26 million facility bond request by the downtown

hotel group, and even if he’s turned down for the low-interest bonds, Isner said his project is viable with conventional financing.

“In my original package there was a checklist that I was supposed to follow: planning, financing, business pro forma,” he said. “I’ve met those criteria. I’ve got to move along and have a financial institution sign on. You have to get some corporate financial horsepower behind you. My banker knows about the process. I’m in good shape.”

Payne said he assumes that a lot of the projects currently under review will not survive the vetting process, and new projects or projects that didn’t make the city and county’s initial list could gain consideration. In addition to two projects submitted by developer Don Linder totaling $19 million, the county also received requests from developer Jerone Pearson for a total allocation of $18 million to finance two separate solar energy plants and from Summerfield Veterinary Hospital for a $340,000 allocation.

Linder said he plans to apply for the second round of allocations, but he said he remains unconvinced that the recovery bonds even pose an advantage over traditional financing options.

“The underwriting costs are about 10 times the cost of traditional financing vehicles, and it may work out that there’s not any lesser cost than this one,” he said. “There’s a lot of bank fees because the banks are the ones who are guaranteeing these bonds. They are going to require some fees. When you add all that up the interest rates may not be all that much lower. There’s some conflicting information. There’s some information saying the rates may be around 4.5 percent. Other information indicates it could be a couple points higher.”

Notwithstanding possible action by Congress, at the end of this year the county industrial authority’s ability to issue the tax-exempt federal recovery bonds will expire.

“I think everybody involved — from the developer to the city and the county — we’re learning as we go,” Linder said.