CHICAGO — Indianapolis would float $86 million of tax-increment financing bonds to finance construction of a new corporate campus for Eli Lilly and Co.— the pharmaceutical giant that is the city’s top private-sector employer — under a plan Mayor Greg Ballard will submit to the City-County Council next week.
The project relies on a mix of public and private money for the private hotel and retail development. Officials hope to tap Indiana’s allocation of Midwestern disaster-area bonds under the 2008 program, allowing the debt that would benefit a for-profit company to be sold as tax-exempt.
Officials said they expect to enter the bond market in December or January if the deal wins city and state approval. A bill authorizing the borrowing is expected to be introduced to Indianapolis-Marion County officials Monday.
JPMorgan would be senior underwriter on the offering. The city has not yet selected other members of the underwriting team. Crowe Horwath LLP is financial adviser and Barnes & Thornburg LLP is bond counsel.
The debt would feature a pledge of revenues from Indianapolis’ ’s sprawling and lucrative downtown TIF district, though the city does not expect to tap the existing revenue. The borrowing would also carry a moral obligation pledge from the triple-A rated municipality. The developer is expected to make most of the debt-service payments from income generated by the project.
The new issuance would add to the TIF district’s current debt burden of $600 million, most of which is rated double-A based on the city’s backup pledge.
The debt would mature in 25 years, but Indianapolis would expect to call the bonds in 10 years when the developer would refinance the debt with a traditional bank loan. Officials plan to meet with rating agencies in the next few weeks.
The $155 million mixed-use project would mark the latest in a series of complex financings and quasi-public-private partnerships crafted by the Ballard administration.
The council on Monday is expected to vote on the first-term mayor’s controversial plan to privatize the city’s parking meters.
Indianapolis officials said they view the TIF deal as a means to help the developer secure financing. It is needed because banks were reluctant to offer private financing for the project, officials said.
“In today’s environment, this deal makes a lot of sense,” said Deron Kintner, executive director and general counsel for the Indianapolis Local Public Improvement Bond Bank, the city’s borrowing arm.
The development includes a hotel with a small conference center, 300 apartments, retail, and a new YMCA. It would be located on acreage currently owned by Eli Lilly that represents the largest chunk of vacant land downtown.
The project would mark the latest large-scale project in the city’s downtown area, which has enjoyed a resurgence since the 1980s.
Kintner said Eli Lilly and the developer, Buckingham Cos., approached the city a year ago. The pharmaceutical giant was expanding its research and development business and wanted to build a corporate campus that would help attract employees and compete with cities like Boston and San Diego, Kintner said.
“Eli Lilly employs 15,000 people in this area, and when they come to us and say they wanted this project to attract and retain top talent, we’re certainly going to listen,” he said. “The only reason we’re doing this is because it’s a valuable project to the city and traditional private financing is not available. Necessity is the mother of all invention, and that’s what happened here.”
The deal relies on a mix of public and private money. Eli Lilly would donate the land — about 14 acres — to the city, which puts the value at around $15 million. The company would donate another $15 million to the project. Buckingham would donate $7 million. The YMCA would finance construction of its new building through fundraising. The state is expected to chip in $6 million that would come from federal grants, and the city has committed $9 million for infrastructure improvements.
The remaining $86 million would come from Indianapolis’ bond sale.
The downtown TIF district generates about $60 million annually, according to the city. Between $35 million and $40 million of that is already committed to existing debt service.
The new bonds would cost $7 million in annual payments, and the project would generate $9 million, Kintner said.
The city plans to capitalize interest until 2014.
Of the $7 million in annual debt payments, $5.5 million is expected to come from project income and $1.5 million from new TIF revenue tied to the project, officials estimate.
The deal has already sparked some criticism, and Kintner said the administration will tout the project’s importance and what it believes is a relatively risk-free structure to City-County Council members.
“We understand the uniqueness of this deal,” Kintner said. “It’s just a matter of helping them understand why this project is important and how we’ve protected ourselves.”
The protections include a city-held mortgage, three years of capitalized interest, and a year’s worth of debt-service payments funded by the developer in addition to a traditional debt-service reserve fund backed by bond proceeds, Kintner said. The city also expects that project revenue would provide strong coverage for the debt payments.
Potential bond buyers should be attracted to the city’s credit strength and the strength of the downtown TIF district, said Eric Rockhold, a managing director in JPMorgan’s Chicago office. Rockhold is working on the deal.
“Indianapolis is one of the few cities in the country with triple-A ratings across the board. It’s backed by a downtown development TIF district and has the city’s moral obligation standing behind it.” Rockhold said. “It’s a credit that the city has brought to market a number of times.”
The city issued its first TIF deal for downtown development in 1986.
Issuing the debt as Midwestern disaster-area bonds allows the city to issue them as tax-exempt instead of taxable. The federal government created the program as part of the Heartland Disaster Tax Relief Act of 2008 to aid in redeveloping areas — like Marion County — that were damaged by storms in the spring of 2008.
The program allocates tax-exempt private-activity bonding that does not count against a state’s volume cap. Indiana got $3 billion.
The deadline for issuing the bonds is 2013.
The corporate campus proposal marks the latest in a series of complex financings crafted by the city under Ballard and deputy mayor Michael Huber.
This summer, the city approved a high-profile plan to sell its water and sewer system to a nonprofit utility. The deal, which still needs state approval, calls for Citizens Energy Group to give the city $425 million cash and assume nearly $1.5 billion of outstanding debt.
A few weeks after winning city approval, the bond bank sold just under $160 million of water revenue debt backed by annual payments in lieu of taxes from whoever ends up the owner, the city or Citizens.
Meanwhile, the City-County Council is expected to vote Monday on Ballard’s parking meter privatization plan.
Much of the controversy stems from the 50-year lease of the proposal. The administration recently revised some terms of the deal to dampen the criticism, adding in the ability to opt out every 10 years, for a fee.
The new agreement decreases to $20 million from $35 million the up-front payment Indianapolis would get from Affiliated Computer Services Inc., the Dallas-based technology company that won the bid to take over the meters.
The agreement boosts the city’s share of annual revenue to 30% of the first $7 million in annual revenue and 60% after that — up from 20% of the first $8.4 million and 55% after that.
In announcing the revised deal three weeks ago, Ballard said the increased share means the city would get $620 million over 50 years, up from $400 million in the original proposal.