Tribes warned to avoid Cordish-style borrowing

David S. Cordish, 64, is known for developing entertainment-oriented projects around the country such as Power Plant Live in Baltimore.
David S. Cordish, 64, is known for developing entertainment-oriented projects around the country such as Power Plant Live in Baltimore. (Sun photo by David Hobby)
TEMECULA, Calif. - Specialists in Native American financing are advising Indian tribes to avoid the type of tax-exempt bond deal that Baltimore developer David S. Cordish engineered for the Seminole Tribe of Florida, saying the controversy and IRS scrutiny that deal sparked make tax-exempt financing too risky and potentially expensive for most Indian development projects.

At a conference yesterday exploring ways Indian tribes can borrow money, several featured speakers said the IRS's preliminary rejection of the Cordish deal - heralded at a similar conference a year ago as a promising innovation - is forcing tribes to drop plans to mimic the project and pursue less troublesome financing instead.

The auditor of the Morongo Band of Mission Indians in Southern California said his tribe scrapped a tax-exempt bond deal three weeks before its completion last year, unwilling to face the same fate as the Cordish deal.

And an official with a municipal agency that completed a tax-exempt Indian bond deal modeled after the Cordish project - also being audited by the IRS - said he won't consider handling another one unless the IRS or Congress makes clear that such financing is legal under federal tax laws.

"I don't think we could even find a lawyer willing to sign off on it at this point," said Michael LaPierre, program manager for the California Statewide Communities Development Authority, whose $145 million bond deal to build an Indian hotel and casino in Indio, Calif., used Cordish's deal as a model. "We stand by what we did, based on the public benefit. But there's too much controversy surrounding it now for us to want to do anything like that again."

The IRS made a preliminary ruling last month that the Seminole Tribe was not entitled to use money from tax-exempt bonds to build its two Hard Rock Hotel and Casino complexes in Florida, both of which opened last year.

Cordish, developer of Baltimore's Power Plant project, developed the complexes and arranged for $410 million in mostly tax-exempt bonds to finance them, in exchange for a share of the casino's profits.

As detailed in a two-part series in The Sun last year, the Seminole deal is expected to pay a subsidiary of the Cordish Co. more than $1.3 billion over the next 10 years. Payments to Cordish began when the second casino opened last May. Copies of his contracts and records released to investors who bought the Hard Rock project's bonds show the developer had been paid $81.6 million through the end of November.

While city and state governments routinely issue tax-exempt bonds to finance buildings or other projects, Indian tribes are prohibited from using them for anything but "essential governmental functions." Because interest that investors earn from the bonds is not subject to income tax, the IRS considers tax-exempt bonds akin to a government subsidy.

The Seminole deal was the first to bypass the tax laws by using a "conduit" structure, under which a municipality on the Florida Panhandle issued the bonds and then lent the money to the tribe.

In its preliminary ruling invalidating the Seminole deal, the IRS suggested it will seek to invalidate any other deal that uses a similar tactic. Financing specialists said yesterday that they have gotten the message.

All of them criticized the IRS' position, questioning its reasoning and arguing that tribes should be entitled to the same benefits as non-Indian governments. But they cautioned Indian leaders to stay away from conduit financing unless and until Congress or the IRS changes the status quo.

"Can the bonds be done in the future? Probably not," John Theberge, a partner in the Washington law firm Holland and Knight, said at the conference. "My personal view is that the IRS is flat-out wrong, but I'd say the chance of them changing their position on this is less then 5 percent."

One speaker said reverberations of the Cordish deal are even being felt on Capitol Hill, where Congress has taken up legislation in recent years to rewrite the tax laws and give Indians the same authority to issue tax-exempt bonds that state and local governments enjoy.

Kathleen Nilles, a partner in the law firm Gardner Carton & Douglas who specializes in Indian affairs in Washington, said politicians have soured on changing the law because of "fallout" from the Cordish deal and news of the developer's considerable fee.

"The perception now is that bonds only benefit wealthy gaming tribes and rich developers," Nilles said. "This is something that definitely needs to be dealt with."

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