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Wednesday, August 24, 2011

With the decision being the Flaherty-&-Collins thing is being put on ice for the duration, and it is "See how the train stop happens" mode at Town Center, I think exploratory attention should be given David Elvig's idea of the entire ramp-wrap-rental adventure being done on '"pass-through" bonding. If for nothing else, to see if there is any viability to the thinking.

In first hearing it with Elvig talking face-to-face after the last HRA worksession to David Flaherty, I have to admit my initial reaction was to be skeptical.

Yet now, with time I believe, (Nelson and Landform needing no involvement distracting from other things), Lund and bond advisors should be tasked to explore things. My understanding is any bonding for a private adventure would have to be taxable, and not sold as tax-free municipal bonding.

Elvig's idea, [and I hope he reads this in case I misunderstand - I have no email address for him - he posts none on the city website], is to look at the hocus-pocus stuff done with PACT school. The entire cost of their building was done as "pass through" bonding where the city issues the bonds but, all assurances were the city was really not on the hook for a penny of it, the bonds were conditioned as non-recourse against the city but only against the property as it being bond security.

If that understanding is wrong in a detail or two, Elvig as HRA chair can work along with Lund and bond advisors, to assure the key feature, the city being off the hook and not on the hook for a penny of Mr. Flaherty and Mr. Collins adventuring, with the ramp-wrap-rental building being the entire security, per express terms of the bonds.

Obviously Flaherty would be involved, but why would he be expected to be a deal killer? It is his project and when he and Elvig spoke I could see he was receptive to the idea.

Again, it stinks unless the city is not on the hook for a penny. But that is what the exploration is all about.

The determinations of merit would be two-fold, is there a rate of return suitably set to where such bonds would sell for the entire cost of construction; where interest rates on bonds always are made up of a basic cost of money, and a risk premium.

The bonding would be for the entire cost of construction. PNC in a first position would be a non-factor. PNC would remain in Pittsburgh and not be a player at all in Ramsey Town Center.

Again it is only something making sense to Ramsey if there is a guarantee that the city would never be on the hook for a penny of principle or interest.

The second factor, would such a thing adversely impact the city's AA+ bond rating, to make borrowing for actual city purposes vs. to subsidize Mr. Flaherty and Mr. Collins, more costly. If the determination in exploration is that the bond rating would go south, then it's a totally bad thought.

But until it is explored to see feasibility, it remains an unknown, but possible answer to meet objections of Tossey on council, wanting to not see a deal where the city plays banker and risk taker and where he, as a policy matter, believes all risk of a private venture should remain with the risk-reward adventurer, and not be socialized in whole or in part. He is not dead set against it if it is done out of Flaherty's pocketbook. [Fair disclosure, I oppose it because I believe it will not rent at levels they are talking, price will be compromised, then with cash flow lessened upkeep will be compromised, and it will end up a massive dump but at least not too far from the cop shop].

Certainly if Mr. Flaherty has his heart in things, and gets financing this way, he would not carp and complain about any rate that the market might set as commensurable with bondholder risk. He would have to be a disingenous parasite to do that. And the cut of his jib at the meeting suggested there was none of that. So, Flaherty would be on board no matter what rate would be needed to attract a bond purchase. Ideally, one would want the issue to be a private placement with a sophisticated institutional investor, where disclosure-based securities litigation roping in the city would be unlikely because the buyer would be relying upon its due diligence and sophistication.

Flaherty could be obligated to pay for the marketing of the bond issue. He has probably been in structured finance of this kind before. And besides the property being the security Flaherty might favor some personal and LLC guarantee if it gets him a lower bond interest rate. There is flexibility.

Again, it is only viable if the city is not on the hook for a penny of the risk, principal, or interest; and if the bond rating is not put into the toilet in trying the financing.

There is time now for staff to be doing all of that exploration, and bond advisors should be willing to earn and receive a fee to assist the exploration. It Elvig's idea proves feasible I would be the first to say my initial skepticism was wrong, and to publicly favor that direction; so long as the city is not at risk for a penny of the financing, principal and interest.

Yet with PACT school the "pass through" hocus-pocus being marketable was a surprise to me, and always seemed an artifice and strange. But there it apparently worked and still works. The AA+ bond rating, and PACT financing not snapping and costing the city anything seems to be the reality, now, years after the approach was adopted.