More taxpayer money may be on line for Red Wings arena bonds
Bonds to build the $450 million new arena for the Detroit Red Wings were approved by the state Wednesday, but Wall Street jitters about the city’s bankruptcy means more taxpayer money may be on the line than originally intended, documents shows.
The Michigan Strategic Fund, an autonomous board of the Michigan Economic Development Corp., approved issuing two series of 30-year bonds to pay for the new arena. One series of bonds for $250 million will be backed by property and school taxes captured by Detroit’s Downtown Development Authority. The others series of bonds for $200 million will be backed by Olympia Development of Michigan, the real estate arm of the Detroit Red Wing’s owner Mike Ilitch.
In 2012, the state legislature originally approved paying for the arena through the bonds. But concerns from Wall Street analysts about Detroit’s bankruptcy meant changing some key details in the $250 millions bonds backed by taxes, according to documents provided by Detroit’s development authority.
The state legislature originally approved that Detroit’s DDA could collect up to $15 million a year in taxes for the project. But the buyer of the taxpayer-backed bonds, Merrill Lynch, demanded that cap be removed.
Merrill Lynch wanted the $15 million cap removed because of the low rating the bonds are likely to receive. Bond ratings are used by investment professionals to assess the likelihood the debt will be repaid. The construction bonds backed by the taxpayer money are likely to be rated “BB,” which is one category below investment grade.
The change doesn’t mean the development authority will pay more than $15 million a year to pay off the bonds. But Wall Street wanted a reserve account as assurance.
The downtown development authority collects taxes within the central business district and the funds can be used only to pay for downtown projects. The development authority also taps into a school millage to capture some tax revenue, but the state reimburses that money so the schools don’t lose any funding.
Another new demand made by Wall Street is the bonds now have a set interest rate for 4.5 years instead of a long-term fixed rate. That’s due to “current market projections” of the city’s “bankruptcy,” according to the documents. In five years, the bonds will be “re-marketed ... at a new interest rate.”
Construction work at the arena site is scheduled to begin next week. The venue will be the anchor of a planned 45-block, $650 million district of “five new neighborhoods” between downtown and Midtown.
In a written statement released Tuesday, Christopher Ilitch, President and CEO of Ilitch Holdings, said the new 45-block district is vital to “the transformation of downtown.” He added: “This initiative will produce 8,300 construction and construction-related jobs, and deliver $1.8 billion in economic impact to our city, region and state.”
Besides the arena, Olympia Development is committed to investing, or causing to invest an additional $200 million in new residential, retail and office development in a 45-block area that generally reaches from Grand Circus Park to Charlotte Street between Woodward and Grand River. Overall, at least 56 percent of the total district development costs will be privately funded.
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