Westcor; Would You Put Up $100 mil for a 7% Return That May or May Not Begin 8 Years in the Future and Possibly Never?


What follows is what I have been able to discern about the Westcor Regional Mall deal. I’ll admit that it is difficult to slog through all of this information with no help. While this summary is directionally correct, I can’t vouch for 100% accuracy but I have done my best reading and understanding the agreements and annual reports.  I’ve also attached at the bottom of this blog all the documents I used to get this far in case anyone wants to confirm any of this.

I’d understand more but since Lord Mayor Georgia took over, Goodyear employees have apparently been instructed to either drag their feet in replying to me or direct me to complete a Freedom of Information Act Request if I want any information from them.

Here is what I have learned so far about the Westcor deal with Goodyear;

  1. The city borrowed $47 million at 5.25% and handed the money over to Westcor to refund Westcor for their infrastructure investments. According to the development agreement this could grow to be as much as $70 million. Streets, parking lots, curbs, water drainage, basically a pile of dirt with curbs.  The city has limited leverage in this agreement to force Westcor to ever complete the project.
  2. Present and future owners of the property are then “assessed” by the city under an Improvement District created by the city to pay the interest on the 5.25% loans which stretch out until 2032.  Looking at Goodyear bond CUSIP # 38251UAY5, which I believe to be the correct bonds, they appear to be interest paying bonds only, which means that the principal is not being paid down.  So when does Westcor pay Goodyear back for the $47 million the city gave them?  I don’t know. It looks like assessments after 2032 if the Improvement District continues to assess at that time could be applied to principal.
  3. Westcor gets 50% of all City of Goodyear sales tax revenue collected from the tenants of their mall and shopping centers within the Improvement District until Westcor is “paid back” its additional costs of “public improvement” development.
  4. A ‘base’ $10 million is defined as the Base Reimbursement Amount from Goodyear to Westcor..
  5. In addition to the $47 million to $70 million in long term bonds that the city put up for Westcor, the city’s minimum additional obligation to Westor is $25 million for additional public improvements which are being paid now from sales tax revenues from the current shopping center.  I asked weeks ago for records from the city on how much has been paid in sales taxes to Westcor so far and have yet to receive anything back from the city.
  6. After Westcor gets their money back for the public improvements, then the city will also pay Westcor for “the fair market value” of any property that Westcor doesn’t want or need and would like to dedicate back to the city. There does not appear to be any limit on this amount.
  7.  Westcor’s agreement with the City of Goodyear is so one sided that it states that public improvements (by Westcor) are, “not a covenant of (Westcor)…but…(only) a condition precedent to city obligations to reimburse the developer“.
  8. The annual report of Westcor’s parent lists their debt service costs for this project as only about $20,000 per month or $250,000 per year. They also list total debt on the property as only $13.5 million which can be defeased (annulled) at “any time”. Later in the report they mention that another $8.5 million in debt liability could come to them if joint investors in the project also defaulted.  In total, Westcor, part of a $7 billion REIT, has less than $22 mil in debt liabilities in this deal. Only a small portion of Goodyear’s potential total debt exposure. Westcor can walk away from this agreement with less than $22 mil in debt to serve and leave the City of Goodyear holding the bag on $47 to $70 mil of development bonds any time they like plus whatever sales tax reimbursements have been paid until that time.

Discussion

How likely is it that Westcor would default?

City officials will tell you that the Westcor bonds are ‘backed’ by the assessments levied by the city on the property owners. But the bonds are issued by the city of Goodyear. At 5.25% on $47 million of bonds, the assessments to Westcor would appear to be about $2.5 mil in assessments per year.  Peanuts to a large company? Perhaps.  Depends upon how many of their other projects are in distress.  But you can be sure that they will only keep on paying up on a pile of dirt with curbs for so long.  Then Goodyear would end up owning a $47 – $70 million pile of dirt with curbs.

Is this a good deal for Goodyear? 

Obviously, if Westcor defaulted and left Goodyear holding the bag, then this is a far worse deal than even the ball park.  But what if they complete construction by 2014 and the sales tax revenues begin?

I estimate back of the envelope sales tax revenues on a million square feet of retail space at build out using $300 per sq ft of revenue for a typical retail store. At 1.25% sales tax to Goodyear (Westcor gets half of the 2.5% Goodyear sales tax for some time)  that would mean $3.75 mil per year in sales tax revenue. In their Feb 15, 2011 presentation to council, city management estimates 2014 mall sales tax revenue at $6 mil to $8 mil.  I don’t know how they got there with half going to Westcor unless they think Westcor will be paid off by then but I’d have to doubt that without more information. Either way, would a private investor put up $72 ($47 + $25) to perhaps $100 mil (@ max $70 mil of bonds) for a $4 mil to $8 mil annual return that is 8 years away (agreement started in 2006, new claims are Westcor will do this by 2014) and might be 10 years away (the amended agreement the city just signed with Westcor allows them to 2016 without penalty) and no guarantee that it will ever happen? I don’t think so.

City officials will point out that there are ‘other benefits’ to what the mall will attract that will add to these revenues.  That is true if the city doesn’t continue giving away sweet development deals to continue to attract them.  However, how many more cops, firemen, fire stations, cop radio improvements, water treatment, road repair, admin staff etc etc are required as an investment like this proceeds?  I didn’t subtract any of those additional costs from the 7% return that I estimated either.

Documentation

2011 2 15 Work Session Presentation

0689-06 Westcor Regional Mall Dev Agrmnt

Macerich REIT 2010 Ann Report

Agreement financial summary

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5 Responses

  1. Great article, Can you do the same research into the CTCA deal? Mike, you told me you were going to do the research on the CTCA deal and forward it to me as a guest post. I’m still waiting.

  2. Mr. Brodbeck:
    Is there a reason why you have chosen not to investigate the Cancer Treatment Center of America’s tax break? They received an $85 million dollar subsidy (property tax break) that really has no benefit to the City of Goodyear other than bragging rights.

    Can you please look into this? No reason in particular. I just do not know anything about it. I do not remember it coming up in the CBC like the ball park and mall did. Mike Williams (not his real name) said he was going to post a guest blog about it.
    I’m still waiting for him. My understanding of this is vague. What I have been told is that the $85 mil is a property tax break? I do not know if that is typical or not for companies who employ large numbers of people like hospitals do. I will look into it if I do not hear back from Mike W soon.

  3. Another good article. I appreciate all the hard work you put in to covering the city of Goodyear’s financial situation. The City officials need to be held accountable.

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