Lombard Public Facilities Corporation Update on Lombard Hotel and Convention Center
What is the Lombard Public Facilities Corporation?
The LPFC was formed in 2003 as a result of a change in State law. Lombard Village officials lobbied in Springfield for a change in State law that would allow the Village to develop, and eventually own, a hotel and convention center. In this regard, an amendment to the Illinois Municipal Code, concerning convention halls, was passed, changing references from "city" to "municipality," and that became effective March 1, 2001.
The LPFC was established by the Village to finance the construction of the hotel and convention center, and is the owner of the hotel and convention center for as long as any bonds remain outstanding. At such time as the bonds are paid off, ownership of the hotel and convention center is transferred to the Village. The hotel and convention center, which opened in 2007, includes 500 guest rooms and 39,000 square feet of flexible meeting space with two full-service restaurants.
How does the LPFC and the Village fit together in terms of the financing of the project?
The Village did not have the ability by itself to issue the tax-exempt bonds for the project and fund the reserves. Therefore, the LPFC was established as the authority
through which the debt was issued as provided under the Internal Revenue Code. As stated above, the LPFC is the owner of the hotel and convention center until the bonds are paid off, at which time the Village will become the owner. Any taxes generated by the hotel and convention center are rebated back to the LPFC to be put toward bond payments.
Why did the Village get involved?
The reason the Village got involved was that, but for the Village's participation, the project would not have been built. Through the LPFC being able to issue tax-exempt bonds to finance the project, there is a lower debt service expense. If the bonds issued were taxable bonds, the project would not have been financially viable, since the debt service would have absorbed all of the net revenues of the project.
In addition, the Village Board identified, as early as 2000, the desire to build a convention center in Lombard, based on the positive economic impact such a project would have on local businesses. It is estimated that the hotel and convention center brings an additional 225,000 visitors to the Village on an annual basis, resulting in additional discretionary spending estimated between $50 and $100 million on an annual basis in the Village of Lombard.
What type of bonds were issued?
There were three series of bonds issued: "A, "B" and "C," each particular one with
its own unique provisions.
The reserve fund was used to cover the July 1, 2011 "A" and "B" series bond
payments, while the payment to "C" bond holders was not made; however, when the LPFC was established, the structure of the debt took into account that the "C" bond
holders may not get paid if there were shortfalls. In such a case, the "C" bonds would continue to accrue interest, rather than the non-payment being considered a default on the "C" bonds. In general, the "A" bondholders are paid first, and the "B" bondholders second. The "C" bondholders are third to be paid, provided that the minimum reserve levels are being maintained relative to both the "A" and "B" bonds. Regardless, the Village is not responsible for any shortfalls on the "C" bonds.
Due to the struggling economy, and in particular, the lack of performance within the hospitality industry, the hotel and convention center has not met its revenue projections, thus resulting in the need to rely upon the reserve funds to assist in repaying the debt. This, however, does not mean that the LPFC has defaulted on a payment. In fact, all "A" and "B" bond debt service payments have been made to date.
Earlier this year, the LPFC issued a "tender offer," which means that the bondholders had an opportunity to sell their bonds back at a lower price, akin to someone refinancing a mortgage. A certain percentage of the bondholders was required to make the tender successful, however, that percentage was not attained. Therefore, the tender did not move forward.
The Village and the LPFC are continuing in their efforts to work on the financing, relative to the debt service payments. When there is no longer sufficient cash reserves to
cover any shortfalls on debt payments, the LPFC will request that the Village appropriate
money to cover the shortfall. At that time, the Village Board will make the decision whether or not to make this appropriation. This structure offers the Village Board the opportunity, but does not require the Village to make the payment for a shortfall.
What are the options?
If the Board of Trustees is requested to appropriate the funding, the following options are available:
1) The Village Board can opt to make the payment relative to the debt payment shortfall; or
2) The Village Board can opt not to pay the debt until the back-up reserves are utilized.
Once the back-up reserves are utilized, the debt may be restructured. The LPFC will continue to monitor and pursue the feasibility of this option, as it is in the best interests of the project and the community to do so. If the debt cannot be restructured, a default would occur. In this case, the hotel and convention center would be subject to a foreclosure, with the possibility of the debt being restructured as a result of the foreclosure. In either of the foregoing scenarios, the Village's taxing authority cannot be involuntarily tapped to provide the required funding.