County EDC: Money to Loan, But No Deals

Washtenaw County Economic Development Corporation board meeting (March 15, 2010): On Monday, the EDC board met for just the second time since 2005. On the agenda: A discussion about the availability of federal bonds that have been allocated to Washtenaw County, but not used, for projects by private firms.

Though federal legislation expanded the types of businesses that can use the bonds, a national credit crunch has essentially slowed potential deals to a halt. “We await the projects,” said John Axe, the EDC’s bond counsel. Unless extended by Congress, the program expires at the end of 2010.

Recovery Zone Facility Bonds: No Takers Yet

Washtenaw County has been allocated just over $33 million in Recovery Zone Facility Bonds, as part of the American Recovery and Reinvestment Act – the federal stimulus bill –  passed in February 2009. Designed to spur private-sector investment, these tax-free bonds must be used for projects within a defined “recovery zone.” In September 2009, the county board of commissioners designated the entire county as a recovery zone for those purposes. The EDC board, which handles applications for these bonds, reconvened that same month, for the first time since March 2005.

In the past, facility bonds were mostly restricted to use by manufacturers. But last year’s legislation expanded the range of businesses that can apply for the bonds. Now, the only exceptions are: 1) rental or residential properties; 2) private or commercial golf courses; 3) massage parlors, hot tub or suntan facilities; 4) race tracks or other gambling establishments; or 5) any store whose principal business is the sale of alcoholic beverages for consumption off premises.

“This opens it up big-time,” said John Axe of Axe & Ecklund, a Grosse Pointe Farms firm that provides bond counsel services to public entities across the state.

Though the county would issue the bonds, other elements are required. Most importantly, a business would need to secure financing – and banks aren’t making many loans these days, Axe said. The situation isn’t unique to Washtenaw County, he said. [This issue was highlighted recently in a March 15 Wall Street Journal article, which used Ypsilanti-based Michigan Ladder Co. and the Bank of Ann Arbor as examples of how small businesses are being squeezed by a national credit crunch.]

Banks are needed to do a credit analysis on the deal, Axe said, and to buy the bonds or issue a letter of credit. From the EDC’s perspective, he added, if the deal is satisfactory to a bank, it would be satisfactory to the county.

Stephen Ranzini, an EDC board member and president of University Bank, noted that community banks are more likely than big banks to make loans at this point. But because of their smaller size, community banks are more limited in the size of loans they can make. Ranzini said that’s why he has contacted his peers at other local community banks, hoping to form a consortium that would allow them, as a group, to finance larger deals.

In addition to the county’s available allocation of recovery zone bonds for the private sector, the city of Ann Arbor was also allocated about $17 million under the same program. Ranzini – who also serves on the Ann Arbor EDC board – reported that like the county, the city hasn’t yet done any deals. [There are 10 EDCs countywide, but only Ann Arbor and Washtenaw County have been allocated recovery bond funds through this program.]

However, Ranzini said there are some potential projects that might move forward: 1) a company that’s working with the University of Michigan, possibly to lease lab space at the former Pfizer complex, which UM now owns; 2) a hotel in the Briarwood Mall area, and 3) a hotel/conference center development proposed by Valiant Group on the city-owned Library Lot site.

Mike Finney, CEO of Ann Arbor SPARK – the region’s economic development agency – attended Monday’s meeting and said he had recently sent a potential deal to Axe for review, as a project for the county’s recovery bonds. It involves a data center project, he said, at roughly $30 million. However, the business has not yet secured bank financing, Finney said.

There was some discussion about the minimum amount that would qualify a deal for consideration. Finney had been under the impression that the total project had to be at least $10 million. Axe and Ranzini clarified that there was no such minimum. Axe said that as a practical matter, anything under $2 million probably wasn’t worth doing from the perspective of the business – given the fees, legal costs and other expenses associated with completing a deal.

At the EDC board’s September 2009 meeting, a fee schedule had been distributed to board members. For private-sector financing, fees include: 1) $500 to apply, 2) $500 at the time when a “resolution of inducement” is issued, 3) $500 when the project’s plan is approved, and 4) 1/8% of the face amount of the bond issue, paid at closing. In addition, processing costs – which vary, depending on the deal – would be charged to the applicant, and include the cost of the bond counsel. For deals over $1 million, the minimum fee for the bond counsel is $12,000.

Deadline Approaches, Possibility of Extension Discussed

John Axe told the EDC board that it typically takes five to six months to complete a deal, though it might be possible to do one in four months or so. But if they don’t have a “live project” by August or September at the very latest, they probably wouldn’t have time to get it done by the end of the year, when the bond program expires.

Washtenaw County administrator Bob Guenzel asked whether Congress might extend the program. Axe said it was difficult to know – currently, health care legislation is taking priority in Washington. It doesn’t look promising, he added, but like the Michigan legislature, Congress often acts at the last minute in the midnight hour, when no one is watching.

Axe also noted that a congressman from Michigan – Rep. Sandy Levin (D-Royal Oak) – recently became chairman of the powerful House Ways & Means Committee. It’s possible that Levin can provide more information, and indicate what he’d be willing to do to extend the legislation, given that it’s not a particularly partisan issue, Axe said.

Marketing the Recovery Bond Program

During Monday’s meeting, Ranzini pressed Finney about marketing the bond program. Ranzini had raised the issue at the September 2009 EDC board meeting as well. From the meeting minutes:

Stephen Lange Ranzini asked Mike Finney about the kinds of advertising or marketing SPARK has in place for getting the word out regarding the allocation to the WCEDC. Finney replied that none was in place due to the new nature of the funding opportunity. He added that it would be advantageous for the WCEDC to examine SPARK’s “pipeline” of current projects and find ways to reach the 300 or so companies that are in their retention program using other methods of marketing. Finney committed to create a one-page marketing program outlining how SPARK would get the word out to the business community regarding the Recovery Zone Bond opportunity.

On Monday, Ranzini said he hadn’t seen mention of the bond program in SPARK’s weekly newsletter, which he described as one of SPARK’s primary marketing tools. Finney replied that information had been included in the newsletter, and that the program had received good media coverage. Finney said SPARK had issued a press release, and had posted information on its website.

Ranzini said he thought that SPARK should refresh its marketing efforts, saying that executives he’d talked with at McKinley and DTE hadn’t heard about the program. “I think more could be done,” he said.

Finney said it would always be possible to find people who weren’t aware of a program, and noted that executives of both McKinley and DTE are involved with SPARK and have received information about the bonds. [McKinley CEO Albert Berriz is on SPARK's board; Trevor Lauer, DTE Energy's vice president of marketing, is on SPARK's executive committee.]

Rob Aldrich, the EDC board’s chair, asked Finney to loop in EDC board members with whatever marketing materials SPARK distributes.

Ottawa County Request

The EDC board also discussed a request from Al Vanderberg, administrator of Ottawa County. Vanderberg is asking that Washtenaw County transfer any unused allocation of its recovery bonds to Ottawa County. In a March 8, 2010 email sent to Bob Guenzel, Vanderberg wrote that Ottawa County has used its allocation of $31 million and has at least another $60 million of projects that could use the bond funding. “We believe that the state might be willing to transfer unused RZFB allocations between counties if both counties are willing,” he wrote.

John Axe suggested holding off on any decision at this point, given that there’s still time for projects in Washtenaw County to come forward. He also pointed out that even if Washtenaw County relinquished its allocation back to the state, there’s no guarantee that the state would reallocate that amount to Ottawa County.

There was some discussion about what Ottawa County is doing to attract projects that require the additional bond financing. [According to a Feb. 24, 2010 article in the Grand Haven Tribune, Ottawa County's entire $31 million recovery bond allocation will be used for a proposed $90 million powdered milk processing facility at a former Delphi plant in Coopersville, northwest of Grand Rapids.]

Mike Finney offered to try to find out whether there are actual additional projects in the works, or whether Ottawa County officials are just “tire kicking.”

Guenzel said he’d inform Vanderberg that the earliest they’d make a decision is at their next meeting, on June 15.

Memorandum of Understanding with Ann Arbor SPARK

During Monday’s meeting, the EDC board also discussed revising a memorandum of understanding (MOU) with Ann Arbor SPARK. The existing MOU was executed in 2002 between the EDC and the Washtenaw Development Council – the predecessor to Ann Arbor SPARK – outlining support services that the WDC would provide, such as marketing and outreach. [.pdf file of current MOU]

Under the MOU, the EDC makes payments to the WDC – now SPARK – only when the EDC collects fees from completed deals.  Mike Finney, SPARK’s CEO, said because there’s so little activity, the existing agreement would be fine. The workload for SPARK’s staff won’t change because the demand for work related to the EDC is so low, he said. The county staff is handling administrative tasks related to the EDC, such as taking minutes at board meetings.

Rob Aldrich, the board’s chair, questioned whether the existing MOU was still valid, given that Ann Arbor SPARK had merged with WDC. Finney clarified that after the merger, the WDC was actually the surviving entity – it had simply been renamed Ann Arbor SPARK.

Aldrich said the document should be reviewed – Jim Libs, the board’s treasurer, will take on that task. Libs was chair of the EDC board when the original MOU was completed.

Board members present: Rob Aldrich (chair), Stephen Ranzini (vice chair), Ingrid Ault, Bob Guenzel, Pam Horiszny, Jeff Irwin, Jim Libs, Michael Simon, Conan Smith. Others: Mark Ouimet, Curtis Hedger, Verna McDaniel, John Axe, Stephanie Jensen.

Next meeting: The EDC board has scheduled quarterly meetings, with the next one on June 15, 2010. The meetings begin at 3:30 p.m. in the county administration building’s board room, 220 N. Main St. in Ann Arbor.