The same Allentown, Pa., developer that's parlayed the Neighborhood Improvement Zone into more than $100 million in taxpayer-funded subsidies can now use tax-free municipal bonds to save millions more.
City Center Investment Corp. has been approved by the city's arena zone authority to sell public revenue bonds to refinance as much as $250 million in debt it has accumulated by building in downtown Allentown.
Financing the debt through the Allentown Neighborhood Improvement Zone Development Authority could give the city's largest developer lower interest rates, saving it as much as $40 million to $50 million over the 25-year life of the bonds. Critics call it double-dipping at the public trough, but several financial experts said that while the amount is unusually high for a local development company, it's not unusual for private developers to take advantage of the tax-free status of municipal authorities to lighten their debt.
"That's very cheap money for the developer, but it's not uncommon," said Bill Brenn, senior trader for municipal bonds Stoever Glass & Co. in New York. "The authority assumes no risk."
Federal regulations require that any tax-free financing be used for projects that benefit the public, such as streets, sidewalks, parks or parking garages, sewer systems or even nursing homes and hospitals. Tax-exempt bonds can also be used by private manufacturing companies, said John Kingsley, vice president of finance for the Lehigh Valley Economic Development Corp.
By approving City Center's borrowing, ANIZDA did not approve the bonds being tax-exempt. Bond attorneys will have to decide later how many, if any, of the bonds can be sold as tax-free.
Toby Rittner, president of the Council of Development Finance Agencies in Columbus, Ohio, commended the NIZ-fueled development downtown, but was skeptical that the tax-free financing could be used to build much of Five City Center.
"They have to use it for public purpose such as sidewalks or utilities or parking," Rittner said. "But they're not going to be able to get vertical development past the lawyers."
Private companies that range from small developers to PPL Corp. have arranged financing through Lehigh and Northampton County financing authorities. PPL last year sold $230 million in bonds through the Lehigh County Industrial Development Authority, but financing for most for-profit, private companies tends to be smaller. In recent years, the LCIDA has sold $3.5 million bonds for the former Davis Beverage Group of Bethlehem, and $4.5 million for Fitzpatrick Container Co. of Upper Macungie Township, said Frank Kane, Lehigh County's director of community and economic development.
But the almost runaway development in the NIZ has upped the ante on those smaller sales. In the NIZ, developers can harness most state taxes created by their projects to pay off their construction debts, and City Center has used that tax incentive like no one else. While spending $400 million to build four office buildings, more than 300 apartments, retail shops and the Renaissance Hotel, it was able to use $29 million in state tax revenue in 2016 alone, and $111 million since it began building in 2012.
The roughly $15 million annual payment on the bonds will come from the tax subsidies City Center gets for building in the NIZ. Enabling a developer to use free money to pay off tax-free bonds is certainly an overly generous use of public money, said Greg LeRoy, executive director of Good Jobs First, a national public funds watchdog group based in Washington, D.C. But his problem wasn't with the financing vehicle.
"The refinancing through revenue bonds doesn't sound out of bounds to me," LeRoy said. "It's the NIZ that's out of bounds. I have a big problem with a hyper-juiced tax incentive zone that subsidizes a few developers, but not with the refinancing."
That may be because City Center and the people who buy the bonds assume all the risk if the bonds financing defaults later.
"There's no impact on ANIZDA," said Scott Shearer, managing director of Public Financial Management Inc. of Harrisburg, which is handling the bond sale. "For all intents and purposes, things are business as usual."
To finance all of that building, City Center has used $325 million in short-term debt with a variable rate that could go up quickly, depending on market conditions.
To insulate itself from that, City Center wants to refinance up to $250 million by having ANIZDA sell revenue bonds through underwriter Citigroup Global Markets Inc. Selling the bonds through ANIZDA may make some or all of themtax-free, so long as bond attorneys determine City Center's projects are eligible. That means the investors won't have to pay federal taxes on the interest the bonds bring.
Depending on the rating, tax-free bonds can sell with an interest of about 5 percent -- as much 11/2 percentage points less than if they were taxable -- said City Center CEO J.B. Reilly.
Reilly said he expects that about $200 million to $215 million will be sold. The sale essentially converts the short-term debt into a 25-year financing.
The refinancing will be enough to enable City Center to forge ahead with its next project, the more than $250 million Five City Center campus along Walnut Street, between Seventh and Eighth streets. The project, which would include the tallest building in the Lehigh Valley, 225 apartments, a parking garage and a 1.7-acre public park, could break ground as early as October, assuming it gets city and ANIZDA approvals.
"This allows us to fix the rate and by amortizing the debt over 25 years it frees up capacity that we can use to invest in additional NIZ projects," Reilly said. "It helps us to continue redeveloping downtown Allentown."
Before the bonds can be sold, Moody's will have to review the sale and assign a rating to the bonds. Reilly said it has not been determined if the bonds will be sold to the public on the open market, or whether they'll be sold largely to investment banks.
