Paulson stadium deal more delusional every day
Both Willy and the O are reporting that the sort-of-deal that the Portland City Council passed this month to fund the crazy Henry Paulson stadiums project has lots of holes that make it an iffy proposition. In addition to the fact that the mortgages on the new stadiums will be subprime in the extreme -- today the O estimates that the interest rate will be 9%, with no interest and no payments for 11 years -- now it appears that a key part of the plan is that some of the bonds will bear tax-exempt, as opposed to taxable, interest.
Whoever thinks that that will happen is exhibiting some serious naïveté.
As the O explains it:
[Eric] Johansen [the city's debt manager] says the city's current plan is to sell taxable, zero-coupon bonds. But there's virtually no demand for such bonds in the public debt markets.They make it sound as though the issue of tax exemption for the bond interest is somehow controlled by the wizards of Wall Street. Unfortunately for Paulson and Johansen, it's not. It's a question of federal tax law, and under that law it is notoriously difficult for interest on bonds being used to benefit private companies (such as Paulson's) to qualify as tax-exempt.
Public officials elsewhere have successfully used similar bonds for stadiums.
The Louisville Arena Authority offered $349 million in bonds -- including $30 million in zero-coupon bonds -- to finance a new arena.
Unlike Portland's proposal, the Louisville zero-coupon bonds were tax-exempt and a relatively small amount of the overall package, said Jim Host, the authority's chairman. Despite those advantages, "they ended up becoming the most difficult to sell," he said.
Johansen said he, the city's underwriters and Paulson's contacts at Goldman Sachs will search for ways to turn some borrowing, including the zero-coupon bonds, from taxable to tax-exempt. That move could reduce the interest rates and financing gap.
Indeed, so tough are these rules that even the bonds that the city recently floated to some day build a new Multnomah County Courthouse don't qualify as tax-exempt. Because they were part of an "urban renewal" bond measure with potential private benefit, the city went ahead and agreed to pay interest on those bonds at taxable rates. It pays those relatively high rates to this day, while the proceeds of the bonds are sitting in some investment account, earning much less, if anything at all. (The courthouse won't be built for many years, if ever.)
If you can't float tax-exempt bonds to build a county courthouse, can you float them to create a "soccer only" stadium, thereby restricting existing public uses of the facility, and build a new baseball stadium, to be leased to a private company to make a private profit? It's a lovely, but seemingly unrealistic, hope.
The fact of the matter is that in order to produce even a modest 6% return on the $130 million or so total investment that will be needed from all corners to make this deal fly -- and in order to pay everyone back their investment over 25 years -- the soccer and baseball teams would have to generate about $10.2 million a year above operating costs. If a third of the investment commands a 9% return, they'd have to clear $11.2 million a year. And if Paulson's partners want a 12% return on their third, the required annual net is $13.2 million.
It's truly ludicrous to think any such thing is ever going to happen.