GRAND RAPIDS — Kent County commissioners extended the life of the lodging excise tax last week, adding another 30 years to the levy better known as the hotel-motel tax.
Commissioners took that action in order to finance the debt of the 30-year bond package that will partially pay for the construction of DeVos Place, the expanded convention center.
The bonds are expected to be worth between $86 million and $88 million, and should be issued yet this year. A prospectus could be coming as soon as this week.
The package will pay for $86 million of the building’s $219.5 million construction cost. Another $2 million may be earmarked to get the bond package to market. A pre-sale is being planned for local investors.
Late last month, the Treasury Department revealed that it would discontinue issuing the 30-year Treasury bonds, saying that it no longer fit the government’s current financing needs. And that decision will likely have a positive effect on the upcoming sale of the bond package, to be issued by the Grand Rapids/Kent County Building Authority.
“My thought is that long-term Treasury rates have dropped and that other long-term rates will move in the same direction, others being municipal rates. But there is no way that anyone can tell how closely these will track each other. It can only mean positive things for the municipal market,” said Thomas Coomes, first vice president with UBS PaineWebber Inc.
Coomes serves as the investment banker for the local bond issue and he spoke with the Business Journal from his office in Chicago.
“All in all, I think it will have a beneficial impact to the city-county building authority for their upcoming issue, because municipal rates tend to move in the same direction as Treasury rates,” he added, while noting that the yield on municipal bonds is, and has been, higher than the yield from T-bills.
The drop in long-term rates means it will cost the authority less to pay back the debt over the life of the issue. Buyers should get a good deal, too, as municipal bonds, or munies, normally trade “cheap” in comparison to Treasury securities.
“The five-year is trading at 86 percent of Treasuries. The normal is 70 percent. So the yield is 86 percent of the five-year Treasury. The 30-year muni, triple A GO, is trading at 101 percent of Treasuries. So you’re basically getting a tax exemption for free,” said Coomes. “That’s why I say munies are cheap to Treasuries.”
Coomes said he expects that institutional buyers will pick up most of the bonds from the impending sale, but he felt that a significant amount will also be bought by retail investors. He said buyer interest in 30-year municipal offerings remains high because the investor base for long-term municipal bonds is different from that of 30-year T-bills.
A significant portion of the package will be issued as capital appreciation bonds, or zero-coupon bonds, meaning that the buyer payout will come at the end of the maturation date. Coomes said this arrangement allows investors to buy at a discounted price in relation to the bond’s face value.
For example, Coomes said a 25-year CAB with a face value of $5,000 that yields 5.25 percent would cost an investor about $1,370 today. The tradeoff for the lower price is that the buyer won’t receive semi-annual payments and will have to wait until the bonds mature to collect the $5,000.
In the past five years, the lodging excise tax has generated nearly $22 million in revenue. Over that same time period, 20 percent of those tax dollars has gone to the Convention and Visitors Bureau to market the area as a destination for conventions and tourism.
Kent County created the hotel-motel tax in 1975 to finance the acquisition, construction, improvement and maintenance of convention and entertainment facilities, adding a tax of 3 percent to a visitor’s lodging bill. The tax was initially set to run for 25 years, ending in 2000. But in 1989, the county increased the rate to 5 percent, the highest allowed by state law, and extended the tax through July 1, 2014.
The amendment passed last week goes into effect on Feb. 1, 2002, meaning the tax will be collected through early 2032.