~ by Bob Volpe ~
The Downtown Development Authority (DDA) has found itself in the middle of another legal dispute.
This time the issue is whether the DDA has the authority to sell parts of Woodland Station for a profit, a break-even scenario, or have to give the property away to a developer.
Last January, the DDA sent an amendment to the city council for approval.
The amendment (amendment 2) aims to change the wording of the original Woodland Station Disposition and Development Agreement, which was drafted in 2009. The 2009 contract stipulates that, “the DDA will transfer the property to a developer or developers for no cash consideration but for fair value.”
This amendment set off a fire storm of legal skirmishes among City Attorney Jason Meyers, Senior Vice President of Vectra Bank, Conrad Freeman, Mario Trimble of Kutak Rock (the bond attorney), and DDA attorney Paul Benedetti.
Meyers argues that the sale of Woodland Station for cash is a violation of IRS code, but under certain circumstances it could be done. Meyers stance is that, “The IRS rules/laws require the property
to be transferred without cash consideration to maintain tax exempt status.”
According to Meyers, “As long as we vet and design a transaction in advance, the IRS rules/law will be satisfied and payment could be accepted.”
In short, the IRS code “requires” transfer without private funding but contemplates and provides an option around this restriction.
DDA Attorney Benedetti argued that, “The no cash covenant was eliminated by bond attorneys when the hardware site sold for $200,000-plus in 2009 in connection with the tax-exempt Vectra financing. The sale proceeds can be used for a public purpose such as paying for public improvements, pre-paying debt, or for a variety of other uses that in no way endanger the tax-exempt status of the Vectra bonds. Carrying out the Plan of Development itself is a public purpose.”
Vectra Bank Senior Vice President Conrad Freeman chimed in with his take on the issue. He stated, “I am confused, while I am certainly not a tax attorney, I have always understood the primary tax issue to
be inurement (normal practice), that is allowing benefit from the tax exemption to be realized by a ‘taxpayer.’ Allowing the property to pass to a ‘taxpayer’ developer’ without market value consideration would be creating exactly that situation.”
Freeman gave several examples to support his position regarding past projects, such as O’Reilly Auto Parts, Family Dollar and the Woodland Hardware store. In these cases, the developers and project proponents purchased property at Woodland Station from the DDA, but in turn, the DDA/city foot the bill for necessary infrastructure improvements. This is a slightly different arrangement than what the city is now proposing.
Bond Attorney Mario Trimble agreed with Benedetti’s interpretation.
Now the legal ball is in the court of the city and DDA.
City Interpretation of Woodland Station Give-away
According to City Manager Darrin Tangeman, “What was agreed upon by our attorney and Benedetti is that yes, the default is that you can’t give the land away because of the IRS code. According to state
statute, you can give away land for free, but you have to give it away for certain considerations.”
These considerations include possibly trading infrastructure value that may be done by the developer.
Tangeman gave this example as to the kind of fair market value trade off. “Say the land is worth $500,000. Say the building needs $200,000 in parking spaces and some road improvements that are about $150,000.
“The total of $350,000 can reduce the cost of that $500,000 appraisal down to $150,000 to account for those improvements.”
Back to the IRS code. There are two things the DDA can use proceeds from the sale of Woodland Station land for. One is to pay down their debt of the loan. The other is to put the money back into infrastructure that is directly related to the property for the public benefit, according to Tangeman. This explanation is consistent with Meyers’ assessment.
The proposed amendment contract, hashed out by Meyers, has been sent to the DDA’s attorney for approval or proposed changes. The next step, if the DDA attorney accepts the document, is to go before council.