How Jersey Mall Bonds Damage Argument for Tax-Exemption

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An $800 million bond sale to finance New Jersey's American Dream retail development could provide fuel for critics of the municipal bond tax exemption, according to Municipal Market Analytics.

New Jersey officials last week gave the go-ahead for the $800 million tax-exempt bond transaction for a long-stalled mega mall project in East Rutherford, N.J., with bonds to be issued by the Wisconsin-based conduit Public Finance Authority.

MMA partner Matt Fabian wrote in an Aug. 16 report that the state's agreeing to subsidize developer Triple Five Group with access to the tax exemption is troubling because it will go toward a for-profit corporation to salvage a project plagued by a decade of delays and cost overruns. Fabian also noted that the bonds being backed by sales tax revenue keeps away taxes New Jersey cannot afford to lose given its current financial struggles.

"We believe the current developments in financing the American Dream project threatens the narrative (as advanced by public officials and municipal participants) which values the tax exemption as an incentive to construct infrastructure for public good," said Fabian. "The use of the exemption for a nonessential and probably-to-be-troubled project driven by deeply questionable motivations is optically unpleasing at best and at worst gives opponents of the exemption a fat new target."

Triple Five replaced Xanadu as developer three years ago after construction ground to a halt in 2009 when a subsidiary of Lehman Brothers missed loan payments following a bankruptcy filing. The massive mall next to MetLife Stadium is supposed to have 2.3 million square-feet of leasable retail and restaurant space as well as a 346,100 square-foot amusement park with an indoor water park.

Fabian added that the structure of the deal raises alarms including the fact that the bonds are nonrecourse and payable only from payments-in-lieu-of taxes from American Dream LLC, an affiliate of Triple Five. He also expressed concerns that more than 17% of the proceeds are not intended to finance construction with $88 million going toward paying interest on debt until 2019, $21.7 million for the borough of East Rutherford and $15.7 million in issuance costs. The bonds have maturity dates of 2041 and 2049, which increases overall interest costs and adds risks of balloon payments that would need to be paid or refinanced, he added.

"Municipal market investors should be wary of the American Dream financings," said Fabian. "Those that decide that the risk/reward tradeoff here is reasonable should be prepared to go quietly should history repeat itself and the American Dream project becomes another long-term, non-operational eyesore like its predecessor, Xanadu."

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