Yesterday the Vice Mayor sent to the Council two presentations from the October 29th Convention Center Authority meeting. One came from the good people at Goldman Sachs who we have hired to underwrite the bonds for the Convention Center and Hotel.
Let's leave aside the question of why a group of unelected people (save the Vice Mayor) now have more information about possible financing structures than the folks responsible for approving it and look closely at Goldman's information.
There appear to be two approaches. The first approach is traditional tax exempt debt. The second approach is a mixture of tax exempt debt and something called "Build America Bonds." Build America Bonds are issued under a federal program that allows the local government to issue taxable bonds which normally bear an interest rate 30-40% higher than tax-exempt bonds. The federal government then returns to the local government the difference between the typical taxable rate and the tax free rate - or 35% of the interest cost. The federal government does not guarantee the debt nor does it pay for the project.
Whether we use Build America Bonds or traditional tax-exempt debt, the proposed structure looks similar. Goldman is suggesting that there be two types of bonds - let's call them Senior and Junior. Senior will have claim to all revenues earmarked for the project and will get paid before anyone else except for the operations of the building. To review, those revenues are:
- 3% of the 6% County-wide Hotel Occupancy Tax ( about $14 million a year but falling)
- $2.00 County-wide convention center fee (about $9 million a year)
- 1% County-wide rental car fee (about $1 million)
- $2.00 Airport Ground Transportation Tax ($365,000)
- All redirected sales tax from the Tourist Development Zone (your guess is as good as mine)
- All redirected sales taxes from the MCC campus (which definition is likely to include the convention center, the HQ hotel and another hotel - presumably the Renaissance)
Junior will only get paid for his bonds after Senior has his money. Because that puts Junior in a pretty precarious position were the revenues to come up short, Goldman is recommending a general fund pledge. Since state law prohibits the direct use of property taxes and the administration has promised not to use sales taxes, the part of the general fund being targeted are what we call "non-tax revenues."
Non-tax revenues make up about 9% of total revenue for Metro. It is collected from builders and developers in the form of permit fees. From homeowners in the form of alarm registration fees and fines levied for all sorts of stuff. We use the money for general government operations like fire, police, codes, zoning, etc.
Non-tax revenues are also pledged to the Sports Authority for LP Field and a Predator's associated bond issue. So, Junior will only get his money from these revenues after the Sports Authority. For the record, I do not think that the Sports Authority has ever used these non-tax revenues to pay bond holders but we are talking about much smaller amounts of money. Total Sports Authority debt secured by non-tax revenues is, I believe, a little less than $100 million. Goldman estimates that about $128 million will be available for Convention Center debt service.
If I am understanding Goldman's presentation, Senior will require something called 2 times coverage. Coverage is a bond term that refers to how much revenue you have versus how much debt service you pay. So, if your debt service for a year is $12 million, then 2 times coverage means you want to be taking in $24 million a year in revenue. Interestingly, total revenue available from known collections (excluding prospective collections of the TDZ and MCC campus) of tourist related taxes is about $24. Goldman appears to be suggesting that Senior will want 2x coverage today and is assuming no growth in collections over time. If that is the case, senior is only willing to assume risk for the project using numbers he knows today. He isn't going to depend on growth projections or the success of the project.
In some respects, Junior is a bit more of a gambler. He will only want 1 times coverage - meaning the the amount of revenue we collect will be equal to the amount of principle and interest we will pay him. Junior is also ok with using growth projections to get to that 1x coverage. But he isn't stupid. Junior needs a back up plan and that plan is the general fund pledge. So, if the project doesn't turn out like he thinks it will, he will require Metro to dig into the general fund to pay him.
Depending on which approach is used, total principle and interest owed bond holders will be between $39 and $45 million. With only about $24 million in known collections, this means that growth in existing and prospective collections from the TDZ and the MCC will need to be between $15 and $21 million a year . Just to put the MCC sales tax collection number in context, the estimated sales tax collections (7.75%) at the current convention center are estimated at about $800,000 (source: Johnson Consulting). Sales tax collections from the current Renaissance Hotel are estimated at $3.2 million (source: Johnson Consulting).
It appears that the bond issue will be structured to defer retirement of debt from the early years 2013-2015 to the later years, 2016-2043. This deferral will allow more time for those prospective revenues to grow but they are still going to have to move steeply up the curve -almost doubling in 4 years.
Here are a couple things to keep in mind as this proposal unfolds:
WHAT ABOUT THE HOTEL?
If all the existing and prospective taxes are going to pay for the convention center, how will the hotel be funded? At the meeting in September, Goldman all but ruled out private capital. The most skin Marriott/Phelps Portman appears willing to put in the game is about $10 million in "key money." Is the plan to get Nashville pregnant with a convention center so we have to approved a hotel that is supported mostly or entirely by the general fund? That was the plan in Knoxville. Voters caught on and took it to a referendum and won. But the prospective revenues presume a 1,000 room HQ hotel. Who will buy the convention center bonds with such a big missing piece? Or perhaps we should just wait and the hotel financing will be presented at the next convention center authority meeting.
Reserve funds protect bond holders not the city.
In Dallas, the public apparently thought that reserve funds would protect their general fund in case their new hotel project went bad. What no one told them until after the deal was inked is that if a city needs to tap its reserve funds to pay bondholders, there is a requirement that those reserves be replaced - sometimes within 30 days. In Dallas, the replacement money will come from the General Fund.
Capitalized Interest in a neat trick to make sure there are no bad news stories for the first few years.
Capitalized Interest is actually an accepted tool whereby you over-borrow, put the excess in the bank and use it to pay bondholders while the project is being constructed and hence, not making any revenue. One Goldman term sheet I saw, has that over-borrowing paying the bills until 2016. I will let you figure out why they chose 2016.
Revenue projections rarely meet expectations - especially when there is some sort of general fund pledge.
Because there is likely to be a general fund pledge for the majority of this project, the professional bond investors are not going to care what the projections are. They know Nashville's credit is good and they will look to that to pay them if the project hits the skids. So, the projections are really more a political tool than a financing tool. The projections are to make elected officials feel like they can vote for the project because the professionals have assured them everything will be fine. If it turns out everything is not fine, elected officials can then blame the professionals for their poor projections.
Without a general fund pledge, the checks and balances of the market work much better. The professional bond investors would then carefully scrutinize the projections, do their own analysis and decide if the investment was sound.
Finally, as you review the financing always remember what Warren Buffet said: "If you want a really short career became a convention center consultant that recommends against building a convention center."
As always, call me if you have any questions.