Bringing to the fore a seldom-used and unique alternative to the municipal financing approach for the construction of arenas and convention centers, Texas-based holding company Citizens Capital Corp. said last week that it will be issuing commercial mortgage-backed securities next year to fund the development of a mixed-use hotel/ golf resort and arena convention complex in San Antonio.

By utilizing a corporate and real estate financing approach for the endeavor, as opposed to the typical municipal route, the company hopes to benefit in several ways, including the ability to bypass the need to have the proposition voted on by members of the local, state or city taxing jurisdiction.

"Though our approach is a traditional corporate financing method - it is often used to fund the development of large downtown office buildings - we are utilizing it in a slightly different way," said Bill Hawkins, president of Citizens Capital. "One of the benefits of the municipal route, from an investor's standpoint, is that the income is generally tax-free. However, by utilizing our approach, while the income earned is not tax-free, you compensate for that by having a higher yield, which offsets the tax-free components of a municipal approach."

A Novel Method

Typically, convention and entertainment complexes are financed by municipal-bond obligations issued by state, county or local taxing authorities. Hence, any bond issuance that would impose taxes must be approved or voted on by the appropriate council, electoral board or voters residing in the taxing jurisdiction.

However, by accessing the capital markets, Citizens Capital is able to get around the municipal aspect of having to take the whole transaction before a vote by the residents of such a jurisdiction. In this way, the issuance of mortgage-backed debt to finance the construction of the mixed-use complex presents many advantages to both the company and the investors.

"We're talking about the same dollars here, whether it is done with the municipal approach or our approach," Hawkins said. "It is still going to be a multi-million dollar project, either way. But by utilizing MBS, we get the transaction done, and the structuring of the financial instrument provides investors with liquidity to get into an investment and then get out of the investment at some point in time."

The CMBS issuance, which will be in the "multi-hundred million dollar" range, Hawkins said, is expected to take place sometime next spring, and will be launched by the company's Landrush Realty Corp. subsidiary.

The construction of each building would initially be funded with short-term construction financing, which is then to be taken out by long-term, permanent commercial mortgages, Hawkins noted. These individual mortgages would subsequently be pooled together, packaged as MBS and sold in the secondary mortgage market.

A significant advantage of the corporate financing plan is that it uses the various income streams - income generated from the arena convention complex, restaurants, office facilities, cinema and entertainment facilities, and lease rental income, to a name a few - which investors can rely on.

"Investors can count on a lot of traffic to that facility," Hawkins said. "There is an ongoing stream of income, and especially with advances today in the digital media, there will be both internal and external corporate signage opportunities for income."

MBS Approach Will Become Popular

Hawkins attributes the infrequency of utilizing MBS for arena financing to a general lack of knowledge on the part of sports and entertainment business people about the overall techniques of corporate financing and of how to properly tap the capital markets.

"Investors in the 144A market on the municipal side are generally the same people who you see on the corporate private debt side," Hawkins said. "In terms of getting the project done and funded, there is little difference in what instruments you use because the end investor will be some institutional investor. The instruments are still secure and collateralized, so we think they can be interchangeable.

"This method hasn't been done much, if at all, which surprises me, since it provides investors with a high level of ease of getting in and out of an investment."

Hawkins said that this method of arena financing is bound to become more popular, and his company intends to utilize the MBS approach in other mid-size and large cities around the country that are looking for these types of venues.

The method will particularly appeal to cities that have not been able to pass funding with a municipal approach, he added. For instance, last week the city of Houston conducted a vote before its residents on the development of a tax-based arena, and it was voted down.

"They're going to want to find a way to get that done," Hawkins said. "You just can't rely on municipal finance."

Citizens Capital Corp. is a development-stage holding company for Landrush Realty, Media Force Sports & Entertainment, Inc., and SCOR Brands, Inc. It operates in residential mortgage loan marketing, real estate investment and development, news print publishing and the design and marketing of branded athletic shoes and apparel.

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