CHICAGO -- Wayne County, Mich., may sell both tax-exempt and taxable bonds to finance a new Detroit Tigers baseball stadium under a plan outlined by the county in a recent request for qualifications sent to potential senior managing underwriters.
The Tax Reform Act of 1986 ended tax-exempt financing for sports facilities, and the transition rules that allowed certain local governments to issue bonds for stadiums and arenas expired on Dec. 31, 1990. But Wayne County officials apparently believe they can structure a bond deal in such a way that the tax-exempt portion of it passes Internal Revenue Service muster.
The county's exact plan to overcome the tax act's prohibition and the question of whether they can split tax-exempt and taxable financing has not been revealed. But public finance sources speculate that there is still room for "creativity" regarding the use of tax-exempts for stadiums.
According to one source, the parties to the deal seem to have developed a plan under which they expect the bonds would not exceed the 10% private payments test and become taxable private-activity bonds. Under the tax law, bonds are private-activity bonds if more than 10% of the proceeds are used by private parties and more than 10% of the debt service is derived from, or secured by, private payments.
According to another source, the county's theory for issuing a mixture of tax-exempt and taxable bonds for the stadium may be supported by a recently published private letter ruling by the IRS. The ruling addressed the use of tax-exempt financing of a facility with joint public and private use.
The letter ruling said a 501(c)(3) foundation's nonprofit laboratory, which was to be used simultaneously for both public and private research, could be partially financed with tax-exempt bonds based on the amount of public revenues that would be derived from the research.
The IRS, in the ruling, only allowed this approach because no other more straight-forward approach would work, such as looking at the square footage of the lab that would be devoted to private and public research.
One public finance source said the ruling may imply that there could be two separate financings within one facility -- one tax-expempt and one taxable. However, the IRS typically cautions against applying private letter rulings beyond the situation of the particular taxpayer that requested the ruling, and it is unclear exactly how the parties to the deal would apply the ruling to the stadium financing.
The request for qualifications for underwriters that was due back to the county last week, outlined a plan for two bond issues -- one issue secured by county-generated revenues, such as a proposed 25-year, 5% tax on hotel rooms in the county, and the other issue secured by baseball team-related revenues.
How much money the Detroit tigers organization will contributed to the stadium is still up in the air, according to Bill Haase, the Tigers' senior vice president for future planning and administration. He said the team was awaiting an Aug. 1 deadline to receive the county's proposal on where and how to build the stadium.
"Our position on the financing is that we will review those proposals and look at the dollars and attempt a projection of revenues that might be generated from the new stadium," Mr. Haase explained. "We'll do whatever we can to help the process along, but we need to be competitive in major league baseball, so whatever revenues we won't need to stay competitive, we will consider for possible debt service."
The request for qualifications pegged the size of the transaction at $150 million to $200 million and did not indicate any breakdown between how much would be sold taxable or tax-exempt. The county asked the firms for recommendations on how "any excess coverage generated by publicly supported funds in the tax-exempt bonds" can be used to support the taxable bonds.
County officials did not return telephone calls by deadline.
Wayne Workman, a senior vice president at Tucker Anthony Inc., Wayne County's financial adviser, declined to comment on the legal aspects of the proposed financing.
He said the request for qualifications was sent last month to firms that had book-running experience on stadium and arena financings over the last five years. Those firms were Bear, Stearns & Co.; Donaldson Lufkin & Jenrette Securities Corp.; Goldman, Sachs & Co.; Lehman Brothers; Smith Barney, Harris Upham & Co.; First Boston Corp.; Merrill Lynch & Co.; Morgan Stanley & Co.; PaineWebber Inc.; and Prudential Securities Inc.
Once the senior manager is selected, the county will select a woman- or minority-owned firm to serve as a co-senior managing underwriter, according to the request for qualifications.
Public finance sources said Bear Stearns had the inside trsact on the senior manager slot because the firm had alreadybeen working with the county on structuring the deal. A spokeman for Bear Stearns declined to comment.
Mr. Workman said the selection process for the senior manager position, as well as co-underwriting firms would take place in August "after the county, the city, and the Tigers reach some kind of agreement,"
With the Aug. 1 deadline approaching, Detroit, the owner of the Tiger's current home, and the county have yet to reach an agreement on a new stadium. Teresa Blossom, a spokeman for Mayor Coleman Young said the major stumbling block was the ownership of the facility. "We're not saying the county cannot be a partner," she explained. "We are saying it cannot have total ownership or control."
Ms. Blossom added that the mayor's negotiating team was aware of the county's request for qualifications, but she pointed out that team members "could not understand how Wayne County can make [the financing] fly without an understanding of the city's role in the new stadium."
The city holds what one legal source has characterized as an air-tight lease with the team for the 79-year-old stadium until 2008. In addition, Ms. Blossom said all the possible sites mentioned by Wayne County officials for the new stadium are owned by the city.
"They have a lot of political hurdles to building a stadium in Detroit if they want to do eminent domain," she said.
Mr. Haase said while the Tigers have agreed no to look at any sites outside of Detroit, the team would renew its option to look outside the city if its negotiations with Wayne County and Detroit officials breakdown.
Yet another hitch in the stadium deal is a bill pending before the Michigan Senate. That bill would ban local governments from financing professional sports stadiums of more than 25,000 seats and place a $75 million cap on the renovation of existing stadiums. Sen. John Kelly, D-Grosse Pointe, the bill's sponsor, said he was waiting for a clearer indication of what the county's plans are to finance the stadium before calling the bill for a vote.
