Monorail bonds in question

Adrienne Packer

Thursday, May 25, 2000 | 11:22 a.m.

The MGM Grand-Bally's Monorail LLC might not be eligible for a $650 million tax-exempt state bond because of a federal law that denies tax-free status to private activity bonds, a legal opinion says.

Patton Bonds LLP, a Washington, D.C.-based law firm, recently released a legal opinion saying the monorail company's requested bond issue appears to benefit the private sector because the system mostly caters to hotels.

Although the monorail group is turning the system over to a nonprofit organization, the LLC will construct, operate and benefit financially from the project, the report said.

The report, which is expected to be forwarded to the Department of Business and Industry, suggests the state would be fiscally irresponsible to issue the bonds without an advanced ruling from the Internal Revenue Service.

"The (monorail) plan contains features, which may lead the IRS to question whether bonds should be classified as 'private activity bonds' and thus not eligible for tax-exempt status," the report says.

Patton Bonds' legal opinion was sought by the Venetian hotel-casino, which has long opposed the monorail project. Patton Bonds said the report is based solely on the information it was provided and should not be considered as a formal legal opinion in relation to the status of the bond issue.

The report says if the state approves the bond issue, the IRS could audit the state and levy hefty fines if the bonds do not qualify for tax-exempt status. Bond investors could also be taxed, prompting a barrage of lawsuits.

"As you know from recent press accounts, the IRS has an active audit program with respect to tax-exempt bond issues," the report says, referring to an IRS move to bulk up tax-exempt bond enforcement.

A national team of bond specialists will fan out across the country and be "100 percent dedicated to tax-exempt bonds," the Wall Street Journal reported IRS veteran Mark Scott as saying.

In the case of bad bond deals, the federal government recovers some funds through settlements and the payments derived from the bond specialists involved in the project, not the bond issuer, the Journal reported.

Consultants Bob Broadbent and Cam Walker, who have led the way for the monorail group, said Patton Bonds offered no opinion in its report and instead simply outlined scenarios.

They also said that advance rulings from the IRS are "unheard of."

"You'd never do it; it's a delay tactic on the part of the Venetian," Walker said. "These types of projects never get an IRS ruling, that's why you have bond counsels form opinions and stick their necks out. They don't say what may or could or might happen."

The law firm Orrick, Herrington and Sutcliffe was hired by the state to review the tax structure on the bonds and determine whether they are eligible for tax exemption.

Attorney Bob Feyer said no formal determination will be made until the bonds are being prepared. He added that it is unusual for the IRS to review the tax structure in advance of the issuance of bonds.

"It's very, very rare," said Feyer, who is based in San Francisco. "The tax-exempt bond market operates on the legal opinions of bond attorneys. Only on a limited number of occasions are there questions submitted to the IRS for a ruling in advance."

Lance Earl, an attorney representing the Venetian, is somewhat confident the monorail project could be one of those occasions. He said that in the 12 years the industrial revenue bond program has existed in Nevada, $120 million have been issued.

"All of the sudden they're considering a $650 million bond for a single project?" Earl said. "Does the state incur some risk in what's being proposed? If an advanced ruling, even if it takes a couple months, will eliminate that risk, what's the rush?"

Patton Bonds' legal opinion outlines reasons why its lawyers believe the bond issue could be seen as serving a private purpose.

The stations are mostly built into hotel-casinos owned by Park Place or the MGM Grand and a portion of the bond proceeds will be funneled to the two private businesses for pre-development costs.

The opinion also says the system cannot be considered public because, although the Regional Transportation Commission has plans to build onto it in the future, there are no existing connections to public transit.

Patton Bonds suggests the IRS study the relationship between the newly created nonprofit organization and the monorail company. It says the nonprofit will enter a contract with the monorail company, which will be paid to construct and manage the system for 15 years.

The state is expected to receive a recommendation from its financial advisors and decide on the bond issue in June.