Legislature(1993 - 1994)
03/15/1994 08:35 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSSB 338(L&C): An Act relating to the issuance of revenue bonds for acquisition and construction of the Northern Crossroads Discovery Center for the Ship Creek Landings Project; relating to a study of the feasibility and financial viability of the Northern Crossroads Discovery Center; relating to construction of the Northern Crossroads Discovery Center; and providing for an effective date. Mark LoPatin, LoPatin & Co., Developers, spoke in support of SB 338. Bob LeResche, LeResche & Co., Juneau, and Eric Wohlforth, Wohlforth Argetsinger Johnson & Brecht, attorneys, testified via telecon-ference from Anchorage regarding SB 338. The bill was HELD over until March 16, 1994. CS FOR SENATE BILL NO. 338(L&C): An Act relating to the issuance of revenue bonds for acquisition and construction of the Northern Crossroads Discovery Center for the Ship Creek Landings Project; relating to a study of the feasibility and financial viability of the Northern Crossroads Discovery Center; relating to construction of the Northern Crossroads Discovery Center; and providing for an effective date. MARK LOPATIN, LoPatin & Co., Developers, provided the committee with a handout titled "Northern Crossroads Discovery Center" (Attachment A, copy on file) and used slides to illustrate his presentation. He said that the land considered for Ship Creek Landing was surrounded by the Comfort Inn, the new Alaska Railroad headquarters office, as well as the Alaska Railroad depot. LoPatin & Co. had been paying lease payments on this land and intended to develop it into one of the finest mixed-use developments in this part of the United States. The development would contain four major components; a hotel, an office building, an upscale residential area, and a multi-attraction, tourist- oriented entertainment center. Mr. LoPatin wanted to speak to the last component, the proposed Northern Crossroads Discovery Center. End SFC-94 #41, Side 2 Begin SFC-94 #43, Side 1 Mr. LoPatin pointed out that in today's world of financing, it was difficult to get project financing, especially for leased land. However, his company was comfortable and confident that the hotel, office building, and upscale residential units would be conventionally financed. He placed the 42-year history of his company's success as a testimony that such financing would be achieved. In regard to the Northern Crossroads Discovery Center, he believed there was a unique opportunity allowing the railroad to issue tax-exempt bonds that could be sold for the development of a private-purpose corporation. This unique opportunity was part of federal legislation that allowed the railroad to be sold from the federal government to the state of Alaska. He said that Bob LeResche, LeResche & Co., Juneau, and Eric Wohlforth, Wohlforth Argetsinger Johnson & Brecht, attorneys, Anchorage, could attest to this fact. The Alaska Railroad, as an agency of the state, was free to sell tax-exempt bonds for trains, rails, office buildings, etc. for public and railroad purpose. The provision in the federal law that allowed the development for Ship Creek Landing had nothing to do with the railroad's ability to use tax-exempt financing for trains and railroad purposes. These tax-exempt bonds were something special and unique. He wanted to clarify that this was not something that the Railroad was using for private purpose. He attested to the fact that Anchorage was the center of a European and Asian crossroads and that could provide tremendous opportunities to market both the Northern Crossroads Discovery Center and Shipcreek Landing. LoPatin & Co. expected this facility to bring more international travelers, tourists, businesses, and companies to the Anchorage and Alaska area. With a slide (third page of the handout) Mr. LoPatin illustrated the proposed development on the leased land. In answer to Senator Jacko, he said the point of land already existed and was called Shipcreek Point. It was now a boat storage with an existing municipal launch facility. The next slide and page of the handout showed a closeup of the Northern Crossroads Discovery Center and its relationship to the hotel, conference center, residential, and railroad station. He explained that HB 338 addressed only the Northern Crossroads Discovery Center and not the other portions of the development. He went on to say that the Discovery Center was a public amenity, and the construction cost was estimated to be $58 million, not including some soft costs. It would be composed of three major pavilions, the Omnimax Theatre, the Hologram Theatre, and finally the Museum of St. Petersburg. In addition, there would be crafts, demonstrations, and other inter-activities for the public. It was designed around a study done by Economic Research Associates, Beverly Hills, California, who started with Disney. They had estimated this facility would generate an additional $41.6M to the area economy in lodging facilities, food, etc., not including revenues to the facility. He said the facility complements downtown and would not compete with existing shops. The concept was that it would give tourists the opportunity to see the beauty of Alaska and use Anchorage as a gateway to enter other areas of Alaska. In addition, the facility would allow residents of Anchorage an opportunity to view an Omnimax film series during the off-season. In answer to Co-chair Frank, Mr. LoPatin said the existing Alaska Experience Theater in downtown Anchorage was a wide screen theater, a different format than the Omnimax. Co- chair Pearce made the point that these were still additional theatres and the tourist would likely visit only one. Mr. LoPatin argued that this facility would bring a better market to the community and travelers would stay longer. He reiterated that financing was difficult to obtain for leased land and his company was not competing on equal ground in regard to the ability to finance. Co-chair Frank disagreed with that statement and indicated the location could be a cause for their problems with financing. Mr. LoPatin assured him that the Discovery Center was not in a bad location, and that financing and location were two separate issues. Mr. LoPatin went on to say that an exhibit by the Smithsonian shown in Juneau called "Crossroads of the World" brought together some of the finest pieces of Alaskan artifacts. Forty percent of them came from the museum in St. Petersburg, Russia. An agreement had been reached with the museum of St. Petersburg to have a permanent annex in the Discovery Center creating the first permanent annex of a foreign museum in America. Co-chair Pearce questioned the total visitor numbers used in Mr. LoPatin's presentation. Mr. LoPatin quoted the number, 764,000 visitors to Anchorage, as confirmed by the Anchorage Economic Development Corp., the Tourist Bureau in Alaska, and McDowell & Associates of Juneau. Other calculations had been made based on that number. He also remained convinced that an additional 125,000 business related travel trips were made to Anchorage. Co-chair Pearce said those numbers did not seem to match any Division of Tourism statistics. In answer to Co-chair Frank, Mr. LoPatin said that the second largest tourist attraction was the Museum in Anchorage which boasted a high rate of 40 percent penetration. He said Denali was the highest reported with Portage Glacier also an important attraction. Co-chair Frank asked Mr. LoPatin if he was estimating 60 percent of 765,000 visitors at $30 each. Mr. LoPatin noted that the McDowell Group believed the $30 admission price could be raised. He had met with two large tour companies and interest was strong. The biggest problem in Anchorage was finding hotel rooms. He made the point that 76 percent of the 765,000 tourists arrived in a three and half month period so any facility needed to be able to handle a "bulge" of visitors over a short span of time. Co-chair Pearce asked how many of the 765,000 overnight in Anchorage. She explained that tour ships bring tourists from Seward and Whittier on buses to Anchorage giving the tourist a small amount of free time to see anything. She was afraid that the Discovery Center would just displace other Anchorage attractions that were home owned. Mr. LoPatin felt that Anchorage was a gateway (point of departure or arrival) for most cruise ships and there was the opportunity to catch tourists the day before their cruise begins or the day after their cruise ends. The cruise ships were not encouraging people to stay because rooms were not available and they cannot afford passengers staying in rooms that are reserved for in-coming cruising passengers in those hotels. The hotel in this new facility alone would have a large effect on Anchorage. It would not decrease people's activities but increase Anchorage's capacity for more overnight tourists. Co-chair Pearce asked if financing through this bond proposal would facilitate more conventional financing for the hotel, since the hotel would be needed to provide the rooms for these visitors. Mr. LoPatin felt that the room generator (the Discovery Center) needed to be created before the rooms were created. He expected other hotels to be generated in addition to the hotel in this facility because of the interest created by the Discovery Center. In answer to Co-chair Pearce, Mr. LoPatin said that the first phase of this facility would require about $125-150 million. Co-chair Pearce noted that in testimony from the railroad, and in her opinion, building a new World Trade Center was fine, but all that was being done was a displacement of people from the Tudor Road facility. Some of the departments of the state were also interested in moving to the new building and might negotiate lower rental agreements. She reiterated that new businesses were not being created to fill the new building. Mr. LoPatin said he would not deny that tenants would move from one facility to another but he maintained that if the World Trade Center could operate efficiently, it would bring new businesses to the area and help existing businesses expand. He felt the World Trade Center was a much better advocate of that. He repeated their belief that there were businesses in the international markets looking for a home that would come to Anchorage if it had a real World Trade Center. Also, businesses in Anchorage would be able to expand if they could go to a World Trade Center for one-stop shopping. He had met with the Russian ambassador in Seattle where the Russian council office operates even though over 50 percent of its business is with Alaska. He felt a much better case could be made for their relocation if Anchorage had a first class World Trade Center. At a public hearing at the Anchorage Assembly, an Alaskan company said they were being solicited by Seattle to leave Anchorage. Mr. LoPatin felt a World Trade Center in this new location would be a huge step in the right direction in helping keep local businesses in Anchorage. In answer to Co-chair Pearce, Mr. LoPatin said that the World Trade Center's inability to attract new businesses and their lack of success was due to location and an inadequate facility. He felt the World Trade Center needed to be first class with meeting and conference space at a downtown location. In answer to Co-chair Frank, Mr. LoPatin said that expenses on this kind of facility available for debt service would be about 75 percent of the revenue, and $14M would go towards operating, maintenance, and capital improvement expenses. In answer to Co-chair Frank, Mr. LoPatin agreed that $3.5M would be available to service debt. In answer to Co-chair Frank's question regarding projected debt service, Mr. LoPatin said that the project was about 300 basis points above matching treasuries, placing the project at about 8 and half to 9 percent. BOB LERESCHE, LeResche & Co., Juneau, via teleconference from Anchorage, added that it would be 3 to 4 points about treasuries, putting the project at about 9 to 10 percent and debt service would be pushing that suggested $3.5M figure. Co-chair Frank said that $55M times 10 percent would be $5.5M. Mr. LeResche said that bonds would not be sold for the entire $55M. In answer to Co-chair Frank, Mr. LoPatin agreed that his company would provide equity of roughly 40 percent or $20M cash. Mr. LoPatin said that today it was not possible to borrow $55M or any amount of money without putting in some equity. Co-chair Frank said that 40 percent equity seemed high. Mr. LoPatin argued that 25 to 33 percent was a standard cash equity requirement needed for any financing. Co-chair Frank asked Mr. LoPatin what return on their investment was expected on the $20M. Mr. LoPatin said that he could not give the committee an answer to that question but his company was as demanding as a bank on their expected return. He said they were not doing this not to make money, and five, six, seven or eight percent would not make money for them. Co-chair Frank said that the proposed $3.5M, to cover interest and a little principle, would leave no return on their investment at all. He then asked if the Discovery Center was a "lost leader" for the hotels. Mr. LoPatin said that some of that would be factored into the return but was not able to give them an answer as to the exact expected percentage of return on their investment. Mr. LoPatin maintained that the Discovery Center would have to stand on its own, and would not be treated as a throw-away, or a break-even facility. The other element that would help bring some of the numbers down was the expectation of sponsorship grants of $5M to $8M. In answer to Co-chair Frank, he said tour or communications companies might be possible sources for grants. Senator Kelly noted that many changes had been made in the Labor and Commerce substitute of SB 338 including requiring a feasibility study to be done by the railroad, paid for by the LoPatin Developers, and a full performance and completion bond by LoPatin payable to the railroad if the Center was not completed. Senator Kelly went on to speak to financing. He said the bill was structured so there would be no faith and credit or moral obligation from the state of Alaska, Alaska Railroad Corporation, or the municipality of Anchorage on this project. That exact language would be placed on the face of the tax-exempt bonds. Senator Kelly called them "junk bonds" and Mr. LoPatin used the words "high-yield." Senator Kelly admitted that there was a demand for tax-exempt bonds. He felt that the state or Anchorage would not be liable, and voiced his support of the downtown project. Co-chair Pearce asked for confirmation that the Alaska Railroad Corporation would have no equity in the project. Mr. LoPatin agreed that it would not. Mr. LoPatin asked Mr. Wohlforth to respond to the railroad or the state's obligation to pay as well as the railroad's ability to borrow additional moneys for railroad purposes. ERIC WOHLFORTH, Wohlforth Argetsinger Johnson & Brecht, attorneys, via teleconference from Anchorage, agreed that the language of SB 338 made it absolutely clear that there was no railroad liability for the Discovery Center's bonds or debt. The offering documents would contain bold-face print to that effect. He confirmed that everything had been done so far to exclude Railroad liability for the debt. As far as the basic railroad statute was drafted, the only ability of the Railroad to borrow for any purpose, recourse or non-recourse, was with legislative permission and that was what was sought with SB 338 for bonds for the Discovery Center. The legislature would have to act to permit any further borrowing for major capital purposes such as a development like this. Mr. LoPatin said that in terms of federal law, the Railroad still had the ability to borrow tax-exempt money. Mr. Wohlforth said that what inhibits the Railroad from borrowing was the lack of legislative permission to do so. Federal law had survived several major revisions of the income tax code. The railroad still continued to have this unique provision to borrow tax-exempt money for private purposes which was essentially wiped out for other borrowers in the 1986 reform bill. Senator Jacko asked how the legislature could approve a $55M authorization and still have no moral or legal obligation to the state. Mr. LoPatin reiterated that federal law gave the Railroad the unique ability to sell tax-exempt bonds for a private purpose. The Alaska legislature had restricted how the Railroad can use that distinct ability. As to this project, the bonds were not general obligation bonds. They would not in any way impinge on the Railroad's ability to act like a railroad. The bonds would only be supported by and backed by the revenues from this facility. If this facility failed, the Railroad, the state, or the Anchorage municipality, would in no way be effected. The bonds would specifically say that the bonds were high-risk, and this facility was sole collateral for repayment of those bonds. Mr. LoPatin reiterated that there was no moral or legal obligation to the Railroad, state, or municipality. Senator Jacko asked at what point the 65 percent penetration of 700,000 visitors would be achieved after the opening date. Mr. LoPatin corrected the projection to 60 percent and proposed those levels of penetration would be achieved in three to four years. In answer to Senator Jacko, Mr. LoPatin explained that the "salmon center" referred to on page 19 of the Economics Research Associates handout dated April 1992 (Attachment B, copy on file) was a Juneau hatchery and was being used as an example of visitor penetration. Mr. LoPatin said that the Discovery Center would act as a marketing tool for all of Alaska and could market salmon. Senator Jacko asked if this was the first time the legislature had authorized "junk bonds." Senator Kelly said that "junk bonds" was his term because he himself would not invest in them because of lack of collateral. He believed other people would be willing to take the chance and invest in this facility. Senator Kelly said he was not aware of the legislature ever before authorizing these kind of bonds through the railroad. End SFC-94 #43, Begin SFC-94 #43, Side 2 Mr. LeResche noted that this was unique today but prior to the 1986 Tax Reform Act, AIDEA sold billions of dollars of high-yield bonds secured only by project revenues. People around the country also sold billions of dollars worth of these kinds of bonds. There were still some in people's ownership and a demand probably existed for these high-yield municipal bonds. It was not a new concept, but this type of bond had survived the 1986 Tax Reform Act. Co-chair Frank asked if there was any dollar limit to the number of bonds that could be issued by the Alaska Railroad Corporation. Mr. Wohlforth said the only limit was legislative approval. Co-chair Frank asked what pay-back terms would be on the bonds. Mr. LeResche said that the term for the bonds would be as long as possible, perhaps 20 years. Co-chair Frank asked for other examples of projects financed prior to 1986 through stand-alone AIDEA financing where there would be no moral obligation to the state. Mr. Wohlford listed Alaska Airlines, Alaska Pipeline (M-Star), Louisiana Pacific, American President Line's dock at Unalaska, as examples of companies that had issued bonds. In answer to Co-chair Frank, Mr. Wohlford said that typically, general obligation bonds were issued by private companies. Co-chair Frank, referring to one of his examples, asked if it would have been termed "Alaska Airlines full faith and credit." Mr. Wohlford agreed. Co-chair Frank asked what was envisioned for this project. Mr. Wohlford said that he did not know what the ultimate financing would be. It would be project financing and that would be where the parties would look for ultimate repayment. Mr. LeResche said other bonds had been issued that did not remotely include anyone's full faith and credit. For example, several native corporations in southeast built a dock at Klawock with $12M-$14M worth of AIDEA project bonds. At the Energy Authority, $30-35M worth of conduit bonds were sold for the Solana Energy Project. Co-chair Frank asked if LoPatin & Co.'s full faith and credit would be put up for the bonds. Mr. Wohlford said that if the bonds were enhanced by an outside letter of credit bank, or bond insurance, those entities would tie up every full faith and credit of LoPatin & Co.'s assets that they could to provide a letter of credit. In answer to Co- chair Frank, Mr. Wohlford said it was not appropriate to discuss this with LoPatin & Co. until the feasibility study for the bond market was complete. Co-chair Frank asked Mr. Wohlford if he thought it was proper for the legislature to authorize this before the feasibility study was complete and terms and conditions were still unknown. Mr. Wohlford said that this bill included a requirement for a feasibility study, and the bond market would absolutely require it. He felt Mr. LoPatin would not want to complete a feasibility study without assurance that if the study came out positively, the Railroad would have the authority to sell the bonds. Senator Kelly noted that a feasibility study had been done but the problem was Mr. LoPatin's company contracted it making it unacceptable to the bond market (some parts of it are found in Attachment B). He pointed out that this feasibility study had said that the Discovery Center would be feasible and that was why LoPatin & Co. was in support of the Discovery Center project. The feasibility study needed for the bond market would have to be done and the cost would be paid for by LoPatin & Co. Mr. LoPatin explained the process that was to follow. Before the sale of bonds, a detailed feasibility study must be completed with performas including capital construction contracts and budgets. Once that happens, the bond market would know what the facility would cost, and its revenues, as best projected, so that an amount could be set for the sale of bonds. For all this to happen, legislative authority had to be in place first. Moving this bill would not guarantee that this facility would be built. Other steps would have to happen, but this was the first step. It could not proceed without it. Senator Kelly remarked that the Anchorage municipality's approval had been the first step and $5.5M had been put into the Ship Creek landing project a few years ago. Co-chair Pearce announced that SB 338 would be HELD until March 16, 1994, 9:00 a.m. At that time SB 316, SB 321, and SB 148 would also be heard. She hoped SB 190 would be heard March 17, 1994. SCHEDULED BUT NOT HEARD:
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