In a first for the Midwest, a city in southern Illinois plans to use sales tax and revenue bond proceeds to fund a mall redevelopment.
Next Wednesday, Stifel will price for Marion, Illinois, $115 million of STAR bonds, with the proceeds funding the redevelopment of Illinois Star Centre Mall and the construction of a sports and entertainment complex on surrounding parcels.
"It's just huge for our region," Marion Chief of Staff Cody Moake told The Bond Buyer.
Mayor Mike Absher called Moake the city's STAR bond administrator and "resident expert on STAR bonds."
"Of course, the [Illinois] legislature approved [STAR bond legislation] almost 15 years ago, and we're just delivering on it today, but good things take time," Moake said.
STAR bonds are a decades-old development financing tool. Typically retired in 20 years, they redirect sales tax revenue to major tourism, entertainment, retail and related projects within eligible districts.
"Like any revenue tax-backed bond issuance, there are pros and cons" to STAR bonds, said Toby Rittner, president and CEO of the Council of Development Finance Agencies.
The pros include: incremental sales tax can be a viable financing option, especially for places that already have significant sales tax revenues and can use those to spur more retail or commercial development.
But sales tax is a more volatile source of revenue, Rittner noted, and "with heavy online shopping demand, projects have to be extremely well crafted and must include a diverse set of sales tax streams of revenue."
To succeed, these projects require sales tax revenues that "meet and exceed the necessary debt coverage ratios," he said. "Often you will see a sales tax-backed bond issuance coupled with another tax revenue (income, property, gross, etc.) or backed by a special assessment. The special assessment is a backstop to guarantee debt service payments in the event that sales tax revenues fall short."
In Marion's case, almost all of the sales tax revenue within the STAR bond district is pledged to pay off the bonds, Moake said at a Feb. 10
The county sales tax revenue is not pledged, nor is a 1% tax that school districts collect, he told The Bond Buyer. "That money goes only into a building fund," Moake said of the latter revenue. "That building fund will grow at the rate that the sales taxes grow."
At the City Council meeting, Moake said school districts stand to gain because 15% of any new real estate tax revenue generated within the district will go to the regional office of education, and based on the developer's numbers, the school building "fund is going to exponentially grow at a pace that hasn't been seen before."
According to its presentation to the City Council, developer Oasis Sports wants to build a multi-sport entertainment complex on 10.5 acres around existing retail components, such as Planet Fitness, Olive Garden, Chick-fil-A and Chipotle.
It also wants to build a fieldhouse featuring indoor golf and pickleball; a golf course; a restaurant and bar; a 3.2-acre, 109-room Hampton Inn; a four-acre lot for manufactured and modular homes; a five-acre lot for recreational vehicles and automobiles; a home center selling spa, pool, lawn and garden gear; and a ballfield.
The mall's surviving tenants will become part of Oasis South Shopping Center, with some new retail and warehouse space added around the perimeter of the development.
The developer promised to invest nearly $198.1 million in the project, Moake said at the meeting.
The ordinance that passed unanimously on Feb. 10 authorizes up to $125 million of bonds. Moake said the city is planning at least one additional STAR bond sale after the issue next week.
He told The Bond Buyer the city and the developer are splitting the project costs down the middle. Illinois requires that no more than 50% of development costs come from STAR bonds.
"I am absolutely convinced that if our developer wasn't local, already deeply invested in the success of southern Illinois, and if they weren't plain good people, we wouldn't be here tonight," Mayor Absher said at the meeting. "It is inconceivable to me that some hedge fund on the coast … would have dug in and stayed in for the long haul."
Illinois is one of three states that authorize STAR bonds, which were created in Kansas in 1993. Nevada passed its own authorizing legislation for STAR bonds
Illinois Comptroller Susana Mendoza, who in 2010 was a state representative, played a key role in the legislation authorizing STAR bonds, creating an angel investment tax credit program that was subsequently amended with the STAR bond provisions.
"This is exactly the kind of project I had in mind to bring jobs and development to Illinois," Mendoza said of the Marion bonds. "I am hopeful this project will have ripple effects, bring welcome economic investment, jobs, new businesses, entertainment, fun and great opportunities to all of southern Illinois."
Former state Rep. John Bradley, who shepherded the STAR bond legislation to passage, said during the 2010 debate that he looked to Kansas City's example in shaping the law, according to
More recently, Mendoza said, David Harris, the director of the Illinois Department of Revenue, "worked very hard with [Marion]" to make the project, the first of its kind for Illinois, a reality.
While only three states use STAR bonds, Rittner noted, about 15 allow sales tax to be used as a revenue source for bonds, according to CDFA research. The other states typically use a tax increment financing revenue bond.
Kansas issuers have been the leader in STAR bonds. In April, Bonner Springs, Kansas, announced plans to issue STAR bonds to fund the development of a
A 2021 audit by the Kansas Legislative Post Audit Committee found that only three of 16 Kansas STAR bond districts reviewed met the state Commerce Department's tourism-related goals. The legislature and Commerce made some changes to the law following the audit.
Nevada's early STAR bond districts fell short of projections after the Great Recession hit. According to The Reno Gazette Journal, in some cases the projects helped developers profit off cities seeking growth, creating minimum-wage jobs in exchange for multimillion-dollar subsidies.
The tool eventually drew so many detractors that in 2021 a Nevada assemblywoman successfully
A growing number of cities are using municipal bonds, but not STAR bonds, to finance the redevelopment of mall properties, including
Marion would be among a handful of U.S. cities to attempt mall projects using STAR bonds.
Sparks, Nevada, developed
In 2018, there were plans to redevelop the Great Mall of the Great Plains in Olathe, Kansas — once the biggest mall in the state — with STAR bonds. The project was to include a hockey stadium and restaurant, retail and office space alongside multifamily housing, the
"There have been some successes and some failures, but generally speaking, we've talked to some attorneys that have been involved in projects out there [in Kansas]," Moake said. "And if they're set up conservatively, they've been successful."
The revenue study and the par amount of the bonds for Marion's project are based on an assumption of 70% of pledged revenue, he said. "We took a 30% cut to make sure we can stress the project," Moake said. "And when we did the revenue study, we asked that they not include the impact that the sports complex would have on the district."
The boundaries of the STAR bond district were drawn to include only a sliver of the sports complex — just the ticket booth is part of the district — because the law limits districts to 500 acres, and "we don't want to waste land on things that aren't going to generate sales," Moake said.
The whole STAR district is 461 acres. The projects relevant to the first bond sale are 86.6 acres.
According to a copy of the ordinance shared with The Bond Buyer, the series 2025 bonds will finance project costs; refund outstanding series 2024 notes, $7 million of which were issued to finance certain initial project costs; fund the debt service reserve account and capitalized interest; and pay costs of issuance.
The final maturity of the bonds can be up to 35 years after the first distribution date of sales tax revenues, and the coupon rates are not to exceed 7.5%.
Moake said the first bond sale only impacts work on 10 tracts of land selected for development. The remaining five or six tracts of land will be developed later. If additional bonds are issued to finance their development, he said, the revenues generated in those remaining tracts of land "will be the basis for the new set of bonds."
The CDFA's Rittner said best practices around STAR bonds and other bonds backed by sales taxes include having a strong commercial or retail need and a proven analysis of expected sales tax revenues.
"Large retail centers, outlet malls, destination spots, town centers and development that is heavily focused on sales tax is ideal," he said. "In a perfect scenario, the project would be backed by multiple sources of revenue to ensure that the development is solely reliant on the sales tax receipts."
Marion intends to begin construction the week of March 10. The plan is for the mall to be partly operational by the end of this year, according to Moake. The sports complex and hotel should be operational by the middle of next year.
"I'm sure there'll be some growing pains, but collaboratively I think we'll be able to work those out," he said.
