On May 5, the council will vote on the financing agreement with RED Development for the $1 billion development.
Handing each councilman a dictionary-sized packet of documents, the city's financial and legal staff explained the basics.
"Our intent is to march through each of these documents and discuss what the documents do and provide the council with a roadmap," said Sparks Finance Director Tom Minton.
The city committed to using public financing methods as part of its Development, Disposition and Financing Agreement with the Sparks Legends Development Inc.
Two forms of the public financing include limited obligation improvement (LID) bonds and the sales tax anticipation revenue (STAR) Bonds.
There are three levels of STAR bonds - senior bonds, mezzanine bonds and subordinate bonds, said Greg Herrington, city financial advisor.
Senior STAR bonds are issued to the public through the city. The tax revenue collected from the development will pay off the senior bonds first.
Developer-issued subordinate STAR bonds will provide a means for the developer to fund private construction work. The principal amount is not to exceed $90 million in senior STAR bonds, and not to exceed $40 million in subordinate STAR bonds.
"The STAR Bonds are to fund costs of the development, primarily within the retail and entertainment core, including support of the costs of construction of the Scheels All Sports store," the summary states.
The limited obligation improvement (LID) Bonds are funded by tax assessments on the RED and Olympia Gaming properties within a local improvement district (Legends at Sparks Marina.)
These LID bonds will be issued to the city on behalf of the Legends improvement district, to fund public road and utility infrastructure, which will be owned by the city.
The principal amount of the LID Bonds is about $26 million, according to Sparks Finance Department staff.
"The proceeds of the LID Bonds are to be applied to fund certain public improvements, including roadway and utility infrastructure for the development," the summary states.
All bonds will be repaid through sales tax, because it is illegal to use property taxes in this kind of funding agreement, staff said.
"The LID bonds are like a super-mortgage; they involve a real estate transfer," said attorney John Murphy. "The STAR Bonds involve a revenue transfer. Investors ask, 'what is the value of the property today?', and 'What is liable to happen to the value of the property in the future?' Investors are interested in the enhancement to the value of the land."
No "mezzanine" bonds would be issued at this point, but council should reserve that possibility, Herrington said.
"If they are unable to finish financing the project with senior bonds, or the subordinate bonds are not paid off, it would provide the flexibility we may need in the future," Herrington said. "We anticipate (issuing) additional bonds."
The finance staff stated clearly that Limited Obligation Bonds are different from General Obligation Bonds, in that the city and taxpayers will not be on the hook for repaying the bonds, should the development fail to meet its high sales tax expectations.
"The fact is, there bonds are limited obligation bonds - not general obligation bonds," said Adam Mayberry, Sparks public information officer. "If the tax revenues fall short of projections, they taxpayers and the city will not be held liable for that. If the (tax) revenues aren't there to pay the bonds, they simply don't get paid, or the investors would have to wait longer to get paid. That's the bottom line."
Sparks City Attorney Chet Adams said he reviewed the documents along with 12-15 other staff members, financial and legal staff. The person who had the greatest knowledge and participation in the effort was Greg Salter, a former Sparks deputy city attorney who now works for the Washoe County District Attorney's Office, he said.
"Greg Salter has a banking background and much experience and knowledge of the terminology," Adams said. "He did an outstanding job."
Adams explained the process.
"As far as legal protections go, the city is not guaranteeing its 'full faith and credit' to repay the bonds," Adams said. "By the city not pledging its full faith and credit, we're not going to be obligated to raise taxes and we are not guaranteeing the loan. The city is simply pledging those increased tax revenues resulting from the improvement to the property. As it's developed, the taxable value (of the land) will increase. It's that that we're committing to repay."
The city or city councilmen could only be held liable if they made misrepresentations about the financing agreement.
"The city's general fund is not going to be liable for the STAR bonds," Murphy said. "The (documents) are not required to be registered under the federal Securities Law. Under the law, the issuer has the primary responsibility. If something of material fact is false, or if something is omitted, the city could have liability and its general fund could be exposed."
Such things as, if the city knows of earthquake faults or buried artifacts on the property and does not disclose this information, or if the original value of the land is grossly overstated, these could be considered serious misrepresentations in the legal documents, Murphy said.
"I'm pretty confident that (council members) are adequately protected from a criminal liability standpoint," Adams said. "In these cases, a person has to show you knew something was false and that you deliberately included (the falsehood) in documents and entered into a legal agreement."
Sparks Mayor Geno Martini asked who will monitor to ensure the agreement is upheld.
City inspectors will monitor the construction of the Legends project, as is usually the case, said Sparks Community Development Director Neil Krutz.
The procedure is that the developer would bring in a request with cost breakdowns to Krutz and he would audit those costs to ensure they are paid "actual, reasonable costs," and only then will the payment request be signed.
"There is no third party in the funding agreement process," Herrington said.
Councilman Phil Salerno asked if Krutz would be involved in the change order process, if or when the construction budget changes. Krutz said the change order process would occur between Q&D Construction and RED Development. Krutz would assist at the end of the process.
"I would be involved at the tail-end of the process, to make sure costs are reasonable, it's something we should be paying for, and that the request is complete," Krutz said.
Councilman Ron Schmitt asked that if cost overruns exceeded 30 percent, for example, what checks and balances would be used to track or prevent that.
Herrington said the LID bonds offer protection, in that costs must be as estimated or less. However, the STAR bonds do not have such protection.
"It's really the private improvements that are paid for; it's nothing the city is acquiring," Herrington said. "The check is that the cost needs to be reasonable."
"If the list of potential improvements is greater than the amount of money that is reasonable, the developer will have to pay it; it will have to come out of their pockets," Herrington said.
"So, whatever the bill is, the bill is," Schmitt said. "What is reasonable to one person is not reasonable to another."
"The city reviews the invoice, and at the same time, Key Bank is reviewing their request," Herrington said. "I expect Key Bank is not lending indiscriminately. Key Bank must sign off on the payment as well."
"If the STAR bonds are all used up, and not all contractors have been paid yet, is there a trigger on the public financing side?" Schmitt asked.
"There is no formal notification process," Herrington said. "But I'd expect you would know."
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