Tag: MOA

STRIB has a new story on the MOA Waterpark saga indicating the negotiations between Triple 5 and the city are taking longer than expected.

That is no surprise given the complexities involved and the tight rope that the city must walk, meeting Triple 5’s business demands while satisfying the federal tax law requirements for the use of 501(c)(3) tax exempt bonds. Just to review:

MOA’s interests and role. Triple 5 (MOA’s owner) obviously wants (1) to put as little of its own capital as possible into the Waterpark and (2) the park to be operated as a successful feeder of customers to MOA and its tenants. This has led Triple 5 to retain ownership of the land, leasing it to the nonprofit that will operate the park, and to manage the waterpark through an affiliate (I assume to ensure that it functions according to MOA’s interests). In essence, the park is really just part of MOA’s overall business plan – they hatched the idea to make Phase II work. But MOA’s owners want to reduce their capital costs by borrowing (real estate entities are almost always highly leveraged) the project costs at tax exempt rates, necessitating use of an “independent” nonprofit and governmental bond issuer.

Bloomington’s interests and role. The city’s interests are linked to MOA. The linkage was effectively locked in 35 years ago when the city opted to go with the megamall plan for the site. As the article reveals, MOA is now 10% of the city’s property tax base. But it is a risky 10% given the shaky state of business of operating shopping malls these days. MOA’s success so far is, in part, due to the city’s partnership (paying for the parking ramps and other infrastructure with TIF). But, as I suggested in another post, the city is riding on the back of a tiger – there really is no easy way to get off. It MOA fails, the city will have a big mess on its hands. So it wants the waterpark to succeed; the city is on the hook to build, own, and operate a big parking ramp for the facility. But city also wants to minimize its exposure if the waterpark isn’t successful (i.e., fails to breaks even or worse). Hence, the city’s decision to put as much distance as possible between itself and the tax exempt bonds – i.e., the decision to use an Arizona entity to issue the bonds – which may (or may not) help minimize the halo effect on the city’s own credit if the waterpark’s finances go south. Nevertheless, it probably would prefer MOA put more money into the waterpark, rather than less, because failure of the waterpark part of the project probably has more negative ramifications for the city than MOA having financial trouble with its lenders or a lower return on equity.

Demands of the tax law. By using tax exempt bonds for a 501(c)(3) entity (the Louisiana nonprofit that will own the waterpark), the deal/project must thread a needle that is complicated by its close linkage to MOA, a for-profit business. Federal tax law says the project must be under either a 10-percent “use” or 10-percent”security interest” threshold test to avoid making the bonds taxable. Those tests essentially say a for-profit business (MOA obviously or related entities) cannot constitute more than 10 percent of the security for the bonds (i.e., either pay them or comprise property that bondholders could look to for payment) and use of the project. I assume that the project llunks the use tax because the business arrangements make MOA a de facto user of the park. The security interest test means land rent and management fees must be set at close to fair market amounts (arms length deals) to be sure that MOA is not subsidizing the waterpark with the subsidies that count toward either of the 10-percent thresholds.

Louisiana nonprofit and Arizona governmental bond issuer interests and role. One might assume that these two entities are just sort of straw men or hired service providers that are totally under the thumbs of Bloomington and MOA, the entities that are driving the deal and are putting up the equity capital for the project (to the extent there is any). But I assume that the two entities actually are independent actors (or this won’t work legally) with their own interests. I assume they have their own lawyers and maybe financial advisers. The Arizona bond issuer is responsible for ensuring that the bond issue complies with the requirements of the federal tax law – not just when the bonds are issued but for as long as they are outstanding. That is a big responsibility with important consequences if the bonds flunk (they retroactively become taxable and bond covenants will likely be violated). Among many other things, it means policing the security interest test described above. This will have long term implications for the ongoing operations of the waterpark as I note below. The Louisiana nonprofit has some similar interests, as well as its business reputation.

What doesn’t compute to me. The STRIB story says that the federal tax law limits MOA’s ability to make donations to the waterpark. I understand that if it means that MOA cannot make ad hoc contributions that would establish a pattern of MOA propping up or supporting the parks operation or, worse, be done under a binding legal commitment to subsidize the park under specified conditions. Either would likely be counted against the security interest thresholds. It would seem to me, though, that MOA could make an initial “no strings” contribution or donation to the water park (i.e., the Louisiana nonprofit entity), such as giving it the land outright so (with more equity and no need to pay $2 million in rent) it is more likely to operate in the black. That would not mean that MOA is either securing the project; it’s a one-time fully completed transaction that occurred before operations or financing of the waterpark began. Maybe I’m wrong, but it seems fishy to me.. Rather, I would speculate that MOA chose not to do that because (1) it wants to keep the land on its balance sheet and the rent on its P/L statement and/or (2) if the waterpark fails financially, MOA wants to control or have a say in what happens, which owning the land will allow it to do. I’m guessing it is mainly (1), but some of (2)..

Longer run issues. If the waterpark flops financially or even more likely just struggles a bit, this financing arrangement has important consequences for the city, I think. The strictures of the federal tax law essentially can be argued to insulate MOA and its owners from chipping in to make the park work. That is so because they can argue (accurately!) that doing so may cause the bonds to be taxable. Those limits will not apply to Bloomington, because it is a governmental entity. You can see how that dynamic is likely to play out. Of course, the city’s ace in the hole would be to insist on triggering the goofy MOA sales tax (see here for my discussion of that), which apparently the lawyers think will count as government revenue and not violate the tests.

My policy take-aways:

• The lack of a national interest in permitting these sorts of uses of tax exempt bonds for essentially a private, for-profit business operation, even though it is operated through a nonprofit shell seems clear. Congress needs to tighten these rules up so that nonprofit bonds are limited to colleges, hospitals, and other functions with clear public benefits. This is as bad as building pro sports facilities (like US Bank Stadium to name one) with tax exempt bonds.
• We can be thankful that these bonds will apparently not be exempt from Minnesota income tax because they will be issued by an Arizona governmental unit.
• Bloomington’s ongoing saga in dealing with MOA should be a cautionary lesson for other cities and counties thinking about signing on with private developers for big signature and risky developments. Decades later you may be de facto on the hook to ante up more and more, as compared with leaving real estate development to the private market and providing actual city public services.