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May 21, 2009
Tax-free bonds: public vs. private
Gumby Fresh blogger Gari N. Corp appended the following comment to an Atlantic Yards Report post regarding a story this week in the NY Observer by Eliot Brown, clarifying a point about the market for tax-free debt. Still with us?
One sentence jumped out at me from the Observer article. "The arena would be financed by tax-free bonds, the market for which is far more robust than the broader credit market." I think Mr. Brown has not made a distinction between tax-free bonds issued by governments and other essential service providers, and tax-free private activity bonds, which are issued for the benefit of private developers for projects that are deemed to have a public use, such as private power plants, privately-run toll roads and, yes, unnecessary arena projects.
The distinction is important because the credit work is much easier for public activity bonds. You look at a government's tax base, budget, and a rating, hope they don't default, and off you go (though there's an emerging school that says that it's not so simple).
For private activity bonds you have to spend much more time analysing cashflows and looking at how the project will perform. This is subject to a much larger number of uncertainties, including the economy, the health of the customer(s), construction, and so forth. It's MUCH more complex, and there have not been a massive number of private tax-exempt deals done recently. I need hardly rehearse just how speculative a venture moving the Nets to Brooklyn will be.
Kudos to Mr. Brown for looking at the uncertainty about the financing (it is rarely a rewarding task to predict whether deals will happen or not). I think he does have to look at how difficult a financing prospect a Nets arena is.
Posted by eric at May 21, 2009 10:32 AM