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October 21, 2014

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DOWNTOWN DEVELOPMENT:

What led to plan to build city hall absent voter OK

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COURTESY CITY OF LAS VEGAS

The elaborate deal for a new city hall, rendered above, between Las Vegas and Forest City includes a land swap and a construction project to be named later.

City Council approves City Hall agreement

Members of Laborers Union Local 872 applaud as the Las Vegas City Council unanimously authorized a Launch slideshow »

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The chain of events leading to Las Vegas’ efforts to build a new city hall without voter approval began in 2005, when a pair of New York real estate investors started assembling property in a blighted part of downtown.

Some four years later, the Las Vegas City Council is moving headstrong on the project, seeking state approval to borrow as much as $267 million for construction and interest costs and using a financing strategy that, officials say, will protect the city from financial liability.

But first the city must contend with a challenge from the Culinary Union, which seeks to derail the project, saying officials are being fiscally irresponsible by taking on such debt at a time when the city faces a $150 million deficit over the next five years and has announced cuts to public services.

The council will vote today on whether to place two Culinary-backed questions on the June ballot. One would require voter approval for future redevelopment agency projects and prevent the agency from incurring debt. The other would require voters to sign off on “lease-purchase” projects, such as the new city hall.

The city has never pursued this sort of financing. In 2005 investors David Mitchell and Barnet Liberman unwittingly laid the groundwork. Over the next two years the two acquired downtown parcels piecemeal, eventually calling themselves the “LiveWork Las Vegas” group. They lobbied city officials to put a long-desired new city hall in the mix, saying it would help catalyze development. City officials, citing high interest rates, rejected the idea.

LiveWork, which bought at the height of the market and paid about $136 million for a five-block, 12.7-acre site, then sought a partner.

Scott Adams, director of the Office of Business Development and head of the city’s redevelopment agency, introduced LiveWork to Cleveland-based Forest City Enterprises.

The developer had earned a national reputation for progressive, large-scale projects. It was also known for playing hardball with city and state officials across the country to win financial incentives.

In July 2007, Forest City acquired a 60 percent interest in the LiveWork site. And the city, after years of failed efforts to build a new city hall, saw an opportunity. It envisioned a land swap with the new partnership, one that would enable another one of its longtime objectives: a new casino resort downtown, to be built by Forest City.

But city officials — Mayor Oscar Goodman in particular — didn’t want to finance the new city hall with general obligation bonds because any failure to repay them would affect the city’s credit. Forest City suggested another way: a lease-purchase agreement, financed by certificates of participation.

To pay Forest City to construct the city hall, the city would sell the certificates. The certificates, which offer higher returns, would be purchased by investors. The city would then lease the building, its payments repaying the certificate holders with interest.

For city officials, the benefits were clear: Because such agreements require governments to appropriate payments on an annual basis — and include a clause allowing them to walk away from the obligation in tough economic times — they are not considered long-term debt and do not count toward constitutional debt limits. For that reason they are also not subject to voter approval.

Outside of a public hearing last month, the public has had only a few chances to scrutinize the details, which council members themselves have a hard time understanding. “It is complicated and very hard to follow,” said City Councilwoman Lois Tarkanian, who voted against the project last year in part because of that complexity. She has since become a supporter, saying public finance experts have assured her the deal is viable.

Lease-purchase has become increasingly popular over the past two decades.

Dall Forsythe, a public finance expert at New York University’s Wagner School of Public Service, said New York has often used lease-purchase agreements to build controversial projects. He called such agreements “backdoor debt,” given voters did not approve the financing.

Forsythe noted that some lease-purchase projects, such as prisons and mental health facilities, were essential services that voters would likely have rejected.

In the 1980s the financing method was embraced by school districts across the country that were unable to win bond issue votes.

Selling voters on general obligation bonds can be difficult, especially when it means raising taxes. Officials can often spend a year or more preparing for a vote, surveying residents and hosting community meetings. Las Vegas officials got a taste of that challenge last month when they held a meeting on the new city hall in West Las Vegas. Attendees shouted down the officials, saying past redevelopment promises had not been kept.

While common, lease-purchase agreements have not been without controversy.

In 1993 voters in Loudoun County, Va., rejected by a 2-to-1 margin a $35.5 million bond to fund construction of a new government center. But county officials, arguing cost savings in rent, executed a lease-purchase pact and built it anyway. A year earlier voters in Brevard County, Fla., revolted against the board of commissioners for doing the same thing. They proposed a referendum to stop payments of interest and principal on the certificates of participation because they had not been consulted in the first place.

Nevada adopted a lease-purchase law in 1981 and, for the most part, local governments here have used such agreements to finance small items, such as copy machines and police cars. On occasion governments have used lease-purchase for capital projects, including a police and fire safety academy in Washoe County and a prison in Las Vegas, said John Swendseid, the bond counsel advising Las Vegas on the city hall project.

Still, neither of those projects approaches the sticker price of the new city hall. If approved, the Las Vegas lease-purchase would be the largest deal of its kind in state history, he said. The city wants to float as much as $267 million in certificates of participation. The Taxation Department must first approve Las Vegas’ plan, which depends on the “probable ability” of the city to cover the obligations.

Critics point out the speculative nature of the city’s plan, which relies on four separate projects coming to fruition, one of which — the proposed downtown arena — does not have a developer.

For the first three years starting in 2010, the city would pay no money in interest for the new city hall. For the four years after that, from 2013 to 2016, the city would pay $2 million in interest annually.

Officials hope to be able to purchase the city hall outright by 2017, at which point they would have begun paying off as much as $122 million. The city would then float a type of general obligation bond to cover the remainder that would not require voter approval.

But it’s unclear whether the deal will get off the ground to begin with, regardless of the Culinary’s ballot initiatives. Public finance experts said the shaky credit market could affect the city’s ability to market the certificates of participation, which are generally rated as riskier investments than general obligation bonds.

Swendseid, the city’s bond counsel, offered a sobering view: “With the turmoil we’ve seen in the financial market this year, nothing is done until it’s done. We’re optimistic but there’s no guarantee of anything.”

City officials offer a rosier — and often hyperbolic — perspective. Goodman, for one, told The New York Times last month that Las Vegas would be “cheating our future” if the city stopped development. “During the Great Depression, three buildings were built in New York City: the Empire State Building, the Chrysler Building and Rockefeller Center.”

Michael J. Mishak can be reached at 259-2347 or at [email protected]. Sam Skolnik can be reached at 229-6436 or at [email protected].

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