What appears to have been a foregone conclusion that Des Moines would have a convention center hotel, and the search for cheap money to build it, led supporters down two lightly traveled paths.

One led to the creation of a special nonprofit organization that will own the hotel and finance it by attracting bond investors who will be lured by the guarantee of tax-free interest income.

The second led to a federal immigration program that generates investments from foreign nationals in exchange for permanent work visas and green cards. The nonprofit’s structure is unique to the area, as is the immigration program.

Some leaders of the effort to build the convention center hotel acknowledge that because the nonprofit and immigration program are novel, they have led to behind-the-scenes head-scratching about the wisdom of the convention center hotel project.

But prominent Greater Des Moines attorney Steve Zumbach, a man who has observed and been a part of the internal machinations of a number of projects that were doubted at first but praised in hindsight, said that when it became obvious that the hotel would not be a private-sector project, both the nonprofit group, called the Iowa Events Center Hotel Corp., and the immigration program, called EB-5, were crucial to advancing the project.

And from a financing standpoint, they make perfect sense. Zumbach and fellow Belin McCormick P.C. attorney Wayne Reames did the legal legwork that resulted in the IEC Hotel Corp., and they believe it was the logical path to take in an effort to keep financing costs under control for the $101 million hotel, which will rely heavily on a range of public funds for its construction.

The return on those funds, and the risk, will accrue to the community, they say.

“The idea of having for-profit investors who came in, even with county guarantees and tax credits, the idea of giving them those benefits and then driving out of town wasn’t the best way to do it,” Reames said.
The ‘63-20’ advantage

Here’s the setup. Reames and Zumbach established what is called a 63-20 nonprofit. The numbers stand for the 20th rule approved by the Internal Revenue Service in 1963.

Under the structure, government’s can create operating entities that they control through the appointment of board members. In the case of the IEC Hotel Corp., Polk County has control of the corporation and veto power over its actions by the appointment of five of its seven members. The city of Des Moines will appoint the other two members.

IEC Hotel Corp.’s profits will be tax-exempt, but just as important, the group can issue bonds for construction of the hotel that are sold at interest rates that are well below private-market interest rates. The bonds are attractive to investors because the income derived from the interest also is tax-exempt.

A saving grace for taxpayers is that IEC Hotel Corp. will pay property taxes that will backstop bonds issued as the city of Des Moines contribution to the project.

And there is another important element to this financing. In legal terms, the bonds issued by IEC Hotel Corp. actually are certificates of participation, a form of lease that will be used as collateral against a nearly $33 million first mortage on the property. 

If loan payments cannot be met, the property could revert to the lender, said Tim Oswald, a managing director with Piper Jaffray and the bond counsel on the project.

“There is no lookback to taxpayers,” he said.

Reames pointed out that the typical purchasers of the bonds are institutional investors and high-net-worth individuals who fall in the top 30 percent tax bracket. 

Those buyers should be willing to buy the bonds as compared with market-rate investments on which they would pay taxes.

“We’re taking advantage of tax law that is available to everyone and trying to structure it in the most tax-efficient way possible that will enhance the probability that the project works well, and you have a hotel that supports the convention center,” Zumbach said.

In addition, Reames has met with representatives from the Iowa Department of Revenue and the state attorney general’s office to make the case that the IEC Hotel Corp. also should be exempt from paying sales tax on the hotel construction because the nonprofit is is an extension of county govvernment.

In announcing the details of the project in February, officials said private investors wanted a high rate of return, something in the range of 25 percent, to participate in the project.

A Greater Des Moines investment banker observed that in the pool of institutional investors he turns to for financing private deals, only one will invest in hotels, and then only in hotels that have been operating for several years and that are generating high cash flows. Even in those instances, that investor is seeking a return on investment in the 20 to 25 percent range.

Regardless of whether the Iowa Events Center Hotel was going to be backed by private or public dollars, Zumbach observed that its construction seemed inevitable once a decision was made to build Wells Fargo Arena and develop the Iowa Events Center.

“The feeling was that in order to be a successful city with a vibrant economy and to be a growth center, we needed a convention center and a convention center hotel,” he said. “When the decision was made to build (the convention center), the bookend needed to be a convention center hotel.”

Proof of that point came in 2012, when Des Moines Redevelopment Co. was formed with pledges from 18 Greater Des Moines businesses and business leaders to guarantee funds for the purchase of properties. Zumbach filed the articles of incorporation for the organization.

The first two purchases were the former Allied Insurance Co. building at Fifth Avenue and Park Street, in the shadow of the Iowa Events Center, and a nearby parking lot.

Both properties later were sold to Polk County, and they will be turned over to the IEC Hotel Corp. 

“The DMRC acquired the site adjacent to the Iowa Events Center to facilitate a full-service conference hotel development with at least a Four Star rating,” according to a request for proposals for a developer who would construct the center and put together a financing plan.

The private piece

It is worth noting here that private money is not producing convention centers or convention center hotels in midsize metropolitan areas. It didn’t build the Iowa Events Center, and by at least midsummer of 2014, it was obvious that it would not build the hotel.

As suggested in an early report from M. A. Mortenson Co., which was tabbed as the original developer, a private company could be found if it was lured by a large initial contribution of public dollars, say in the $50 million to $60 million range.

That figure was a deal breaker and would have led to a wood-framed, three-story structure that would have fallen far short of meeting the definition of a convention center hotel.

There was an exception though that filled a funding gap, and that was the federal EB-5 program, which encourages foreign investment in development projects that generate at least 10 direct or ancillary businesses and in exchange offers permanent work visas and green cards for investors, their spouses and children under age 21.

Lori Chesser, an immigration specialist with the Davis Brown Law Firm, said the program struggled to gain a footing as a development incentive until the funds were directed toward business-savvy organizations called CMB Regional Centers.

Those centers pooled the investment dollars so they could finance larger projects that generated more jobs.

The Iowa Economic Development Authority partnered in 2013 with the CMB Regional Center in Rock Island, Ill., and began looking for eligible projects. IEDA receives a finder’s fee of 0.75 percent of the investment in the project.

It encouraged hotel backers to consider using EB-5 as a way to close a financing gap.

“It was the final piece. It gives us some comfort; it put us over the top,” Reames said.

A minimum of $500,000 from 40 investors will provide $20 million for the project at 5 percent interest. It is the largest chunk of private money going into the project.

At some point, Des Moines Redevelopment will announce that its members, or at least a few of them, will provide $4 million to purchase urban renewal bonds.

The EB-5 loan means the hotel corporation will have access to funds that are not backed, ultimately, by taxpayers.

“The reality of it is that it’s passive debt investment that will get a passive debt return, the same as all of the other tax-exempt investors will get,” Reames said. “We get a hook because it is relatively speaking readily available money that we can get cheap and access to fill the gap so that we don’t need to go into the broader capital market to get it and that doesn’t have to be guaranteed or somehow backstopped by the local community.”

Iowa Reinvestment District

The IEDA board is expected to decide this month whether to give final approval to a special tax revenue generating district established under what is called the Iowa Reinvestment District Program. Last year, IEDA gave preliminary approval to the 23.5-acre district that runs along Fifth Avenue from Center Street to Court Avenue.

Legislators passed the plan with Des Moines in mind, and last year IEDA gave preliminary approval to the city’s request to use $36.4 million in sales tax and hotel-motel tax revenues to help finance the convention center hotel.

When the city submitted its request for final approval, it asked for $39.4 million in revenues, based on revised projections for sales at the Hy-Vee Inc. food store that will fall inside the district. Much of that money would be used as security against loans to build the convention center hotel.

That request, of course, is based on projections, as are potential revenues for the convention center hotel. 

The risk to taxpayers in the hotel center is that revenue projections could be off, and in that case the public debt would fall on their shoulders.

Zumbach is skeptical of projections, but he is a full-blown believer in the ability of community leaders to pick a winner. He makes a case for support of the convention center hotel.

“The wisdom of this project is that you not look at the first year or the second year or the third year, but the wisdom of this project, just as the wisdom of the people who built the (Des Moines) Marriott (Downtown) hotel, was that it was the right thing to do,” he said. 

“We make long-term decisions. We don’t make short-term decisions. And long term, this community has made a decision that it is going to have an events center, and a convention center for the betterment of its economy. There will be ups and downs in that convention business and events business during that period of time, but that is the long-term investment this community has decided to make.”

Where the money comes from:

Private:
• $20 million from foreign investors
• $4 million from members of Des Moines Redevelopment Corp.
• $1.75 million from naming rights for the hotel
• $7.9 million from new facility fee on guests

Public:
• $39.4 million (requested) in rebate of sales tax and hotel/motel tax revenues (used as security on loans)
• $14 million from city of Des Moines through tax increment financing, (potential for another $5 million in TIF financing)
• $6 million from Polk County reserve fund created by Prairie Meadows Racetrack and Casino gaming profits
• $1 million from state brownfield redevelopment grant
• $20 million loan guarantee, if needed,  from Polk County via Prairie Meadows gaming profits

Source: Compiled from city of Des Moines document