N.Y. Liberty Development Corp. Plans State’s Largest RZ Deal So Far

New York’s largest recovery zone facility bond deal to date will likely price this week, just under the wire before the tax-exempt private-activity bond program expires.

Late Friday Gov. David Paterson issued an executive order that unused RZFB capacity currently allocated to other issuers that will not be used by the end of the year will be deemed waived and directed the Empire State Development Corp. The New York Liberty Development Corp., a subsidiary of the ESDC, plans to market RZFBs using waived allocations on behalf of Silverstein Properties Inc. for World Trade Center development.

The LDC is authorized to sell up to $200 million of bonds to help finance 3 World Trade Center, but a preliminary official statement released last week gave a par amount of only $50 million.

Winston & Strawn LLP is bond counsel. Goldman, Sachs & Co. is the underwriter. The bond proceeds will be escrowed until the developer can use them.

The state’s counties and cities were allocated $555.1 million of the tax-exempt private-activity bonds, but few deals have been done with just two weeks left before the program expires. New York asked cities and counties that weren’t planning to use their allocations to voluntarily waive them back to the state.

As of August, about $2 million had been waived back to the state. The ESDC, the lead state agency on RZFBs, hasn’t officially tallied the result of a second round of waiver requests. Sources said it was around $40 million. The LDC is a subsidiary of the ESDC.

With the recovery zone facility bond program expiring on Dec. 31, New York may take unused bond allocations rather than let them disappear, using a provision called “deemed waiver” that many states have used to consolidate RZFB capacity when municipalities weren’t able to use their allocations within a set time frame.

“We are exploring with counsel the possibility of this approach to recapture unused recovery zone facility bonds,” said Frances Walton, the ESDC chief financial officer.

It was unclear on Friday how much RZFB capacity was available. Thomson Reuters lists two RZFB transactions in the state totalling $28 million, one by the New York City Capital Resource Corp. and one by the Erie County Industrial Development Agency, but a handful of others have been completed and are listed on the Municipal Securities Rulemaking Board’s EMMA database or were closing last week. 

The private-activity bond program, created under the American Recovery and Reinvestment Act, was supposed to help jump-start shovel-ready projects and create jobs with tax-exempt financing. The bonds could be used for a wide range of private projects, provided they were in a geographic area designated by the municipality as a “recovery zone,” which was broadly defined as having high unemployment or experiencing economic distress.

The $15 billion program got off to a slow start but momentum has picked up. Last year, issuers sold $56.3 million of RZFBs, according to Thomson Reuters. In 2010, $2.24 billion have sold, with $1.86 billion of those pricing since July 1.

The states that have been most successful in using RZFBs have been those that used the deemed-waiver provision in Internal Revenue Service guidelines. IRS guidelines said in addition to cities and counties, states could issue RZFBs using “allocations waived or deemed waived by any county or large municipality.” Many states interpreted that to mean they could direct municipalities to use their allocations or lose them.

California has been the largest issuer of RZFBs with nine issues totaling $378.6 million, according to Thomson Reuters. The California Municipal Finance Authority issued $250 million of RZFBs on behalf of Chevron to finance a refinery. In Oregon, most municipalities didn’t have the authority to issue RZFBs on their own and the Oregon Business Development Commission this month issued $141.9 million of the bonds on behalf of Intel Corp. using allocations that were deemed waived.

“States that were able to get comfortable with taking back allocation and then reallocating them out to projects were more successful,” said Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies. “New York was pretty nervous about the deemed-waiver situation.”

Rittner said that 22 states adopted a deemed-waiver policy, sometime through executive orders by governors.

New York had sought an extension of the program that would include clarification of how states could redirect unused cap, but that extension never happened.

Many municipalities found their allocations too small to use. New York City had a $121.7 million allocation but Seneca County, N.Y., for example was allocated $120,000.

“You had counties and cities in states that got $400,000 in allocation or $16,000 in allocation,” Rittner said. “What are they going to do with that? They can’t issue bonds in that size and there’s no project that they’re ever going to be able to apply that to.”

The allocations went directly to municipalities, bypassing governors.

“I understand the logic behind it because they didn’t want governors to get their hands on this and do it toward pet projects,” Rittner said. The problem was that cities and counties were already struggling with fiscal and budget problems and unemployment, he said.

“They’re supposed to grasp a very complex concept of bond financing and know what to do with it quickly?” Rittner asked. “Two years is not a long time to figure out how to put it all in place.”

Also hampering issuance was a tough credit market and the long time it took for U.S. Treasury to issue guidance on the program, he said.

Hempstead on Long Island received a $42 million allocation, the second largest in the state after New York City, but didn’t issue any RZFBs.  “It’s just a reflection of the poor economy and the difficulty in putting deals together in what is relatively a short period of time that this program was in effect,” said Fred Parola executive director of the Hempstead Industrial Development Agency. “What may have taken six months three or four years ago is taking two years now by the time you get your ducks in a row, and this program didn’t have a lengthy enough shelf life to bring any project, at least for us, to fruition.”

Parola said the IDA met with the Nassau County Medical Center about a possible deal but nothing came of it and he didn’t know why not.

“We had a meeting this summer and whatever happened it just didn’t get off the ground,” he said. The IDA received other inquiries about the program but the projects never got to the financing stage, he said.

Westchester County received a $33.5 million allocation but none were issued there either.

“We never used the bonds,” said county spokeswoman Lynne Smith. “The market conditions just didn’t allow for the private equity part to be raised.”

Smith said that the change in county government may have also been a factor: Westchester County Executive Robert Astorino defeated incumbent Andrew Spano in the 2009 election.

“This administration came in in January and they were up against some time constraints and there just wasn’t a developer that had the funding that was ready to go,” she said.

Orange County expects to use all of its $15 million allocation, said James O’Donnell, acting director of the Orange County office of business assistance. Though one project fell through, a $5 million bond deal on behalf of President Containers, a corrugated cardboard manufacturer has already priced and the remainder is expected to be used by Continental Organics, a company that makes organic products.

New York City’s CRC has closed four transactions, including two last week closed expects to use all but $18.7 million of its allocation.

The Erie County IDA expects to issue the county’s entire $17.1 million allocation as well as Buffalo’s $7.1 million allocation. The IDA has closed two deals — one for a steel mill called Galvstar and the other for a project to redevelop a used car dealership into a mixed-use commercial development. A third, with $8 million to convert a former Larkin soap factory into mixed-use commercial office space is expected to close before the end of the year.

Those deals have benefited from another expiring ARRA provision that increased the size of bank qualified deals.

“This way the banks can buy them directly and hold them in their portfolio versus having to go out and find investors and go to the market and get a letter of credit and find a trustee,” said John Cappellino, IDA executive vice president and director of business development and marketing. “It’s a simpler process.”

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