Wednesday, February 3, 2010

The Library Lot Parking Spaces and the Developers

One of the open questions surrounding the proposals for development on the Library Lot is just how many of those new parking spaces will be allocated to the development, if it proceeds, and how many will be for public parking. Comments from the two proposers of hotels and conference centers seemed to indicate that they were expecting to use a substantial part of the parking structure to support their development.

Another aspect of the city’s financing of the parking structure is that costs of site preparation and structural hardening that a developer would normally bear are included in the city’s construction costs, and therefore constitute a developer subsidy.

Ann Arbor attorney and CPA Karen Sidney has been watching this issue carefully, especially with regard to the legal questions this raises with regard to the city’s bond offering. There are some special twists due to the city’s using the Federal stimulus Build America Bonds, which carry some restrictions.

Here is part of the summary she has prepared, and the questions she asked Ann Arbor Chief Financial Officer Tom Crawford. (The text of her original email has been shortened and lightly edited.)

The on-line offering for the LTGO capital improvement bonds of $49,420,000 indicates that the city will elect to have these bonds treated as direct payment Build America Bonds. Among the requirements for direct payment Build America bonds under the statute and IRS Notice 2009-26 is that the bonds cannot be private activity bonds (IRC 141). This means that costs to support private interests (including non-profits) cannot be more than $13.8 million (the total of the fund equity used plus 10% of the bond proceeds). (Ed. note: “fund equity” refers to money the city puts in directly from local fund accounts, in this case the DDA TIF and parking funds.)

The project includes footings to support a 25 story building and other items designed to benefit a private development partner... The IRC 10% limit could easily be exceeded if a portion of the parking structure or the parking spaces themselves are leased to or otherwise benefit the developer.

The bond offering indicates the city will pay up to 8% interest on the bonds. The city will receive a federal tax credit for 35% of the coupon interest. As stated in the bond offering, failure to comply with the Build America Bond requirements “may cause loss of the Refundable Credit to be retroactive to the date of issuance of the Bonds.” The federal credit is worth nearly $20 million over the life of the bond. It would seem prudent to take every precaution that these bonds will not cross the line to become private activity bonds with $20 million at stake.


1. Has the city calculated how much of the parking structure could be leased to a private business and still avoid classification of the bonds as private activity bonds? Will this information be included in the RFP for the library lot site?

2. The Council resolution authorizing these bonds includes a provision allowing the city to ask for a private letter ruling. Has the city applied for a private ruling? If the city has not applied for a private ruling, has the city asked bond counsel for an opinion on whether the bonds will qualify as Build America Bonds under specific fact situations that include any contemplated use of the parking structure by a private party under specific lease arrangements?

3. The Advisory Committee on Tax Exempt and Government Entities recommends that governments have procedures to monitor compliance with bond requirements during the life of the bonds, including advance review of contemplated sales, leases or other contractual arrangements involving bond-financed property. Does the city have such procedures? In the case of parking structure bonds, is the city or DDA staff responsible for compliance?


Sidney never received a reply in writing, other than to say that the city was aware of the limit, though Crawford told her verbally that some permit parking assigned to the developer could be shifted to the Liberty Square (fully paid up) parking structure. She has since received estimates that indicate that total development subsidies (not including use of the parking spaces) are about $10.8 million. Those include the extra supports needed for a large building (which apparently cost about $5.3 million), and the construction of Library Lane. Additionally, the city is charging an administrative bond fee (that will be returned to the General Fund), that may be part of the limitation amount.

As the City Council contemplates the risk and expense to the city of financing a development above the Library Lot parking structure, this is just one more factor they will have to consider.

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