Mall of America water park plan a deep dive into creative accounting

The Mall of America's owners have long wanted a supersized water park to complement their shopping behemoth in Bloomington. But customers paying to sunbathe and cascade down giant slides wouldn't generate enough cash for the mall to privately finance the $250 million facility.

Enter the city of Bloomington, which has spent months devising an intricate plan that officials say will both lower borrowing costs and shield property taxpayers from risk. The deal has little precedent in the state, but authorities on public financing say it fits a growing national trend of using tax-free debt in new ways for developments associated with for-profit companies.

The city will also spend public money as part of the water park deal, most notably $50 million to construct a parking ramp and skyway. The financing plan hinges on the option of hiking sales taxes on Mall of America customers if revenue at the water park fall short. The Legislature approved special laws making both arrangements possible.

"We have been questioning this since it was first proposed," said Bloomington Mayor Gene Winstead. "We have really been working to take it apart and see to it that it's appropriate and it's doable."

Winstead thinks it is, and calls the water park "one heck of an amenity." Renderings show people catching rays beneath palm trees in a palatial indoor complex, looking out on an expansive wading pool, a lazy river, a waterfall, a faux ship and even an airplane. For more of a rush, visitors could barrel down an array of looping, multicolored waterslides.

The inner workings of the deal are equally elaborate. Instead of financing and owning it directly, the city will have a nonprofit organization borrow the money from another issuer of tax-exempt debt — possibly out-of-state — and then own the water park. The mall's owner, Triple Five Group, will retain ownership of the land, and a mall-affiliated entity will also operate the water park.

The deal would look different if the mall pursued its own financing. But Mall of America spokesman Dan Jasper said the income from the project would not be enough to cover private borrowing interest rates — though it is more than enough under tax-exempt rates.

"We believe that the proposed financing/ownership structure is the path that makes this project feasible and sustainable," Jasper wrote in an e-mail.

Some wonder why the complex arrangement is necessary.

"Why do we have to go through all these hoops to get this financed if it's going to be a good deal?" asked attorney Kim Lowe, who helped craft Minnesota's nonprofit laws. Lowe said typically a nonprofit is involved because it wants the project for its specific mission, like developing senior housing. The nonprofit's charitable purpose in this arrangement is "lessening the burdens of government," according to the city.

"The red flag gets raised when the mall's involved," Lowe said. "It's not like there's the church of Lutherans thinking, 'Hey it would be really good if we built this thing.' "

Several authorities on municipal finance said the deal stretches the intended purpose of tax-exempt borrowing. Triple Five Group is also relying on tax-exempt bonds to build a massive new mall in New Jersey called American Dream — which includes a comparable water park.

"We've gone far astray from building roads and sewers and that kind of stuff," said Virginia-based attorney Mark Scott, a former head of the IRS' tax-exempt bond office.

Scott said there have been "a lot of transactions that are basically being done for private benefit, as opposed to a good governmental activity."

Though the Mall of America requested the water park, Bloomington must limit the company's stake in the project to comply with tax-exempt financing rules. The only money the mall is putting money into the deal is $2.5 million in design costs that would be reimbursed if the project moves forward, according to the city.

The water park would be built on land just north of the mall, now occupied by a surface parking lot. Under the city's plan, water park revenue would pay the mall annual rent for use of its land. That could amount to more than $2 million a year, based on one feasibility study commissioned by the city.

The city says the mall can't donate its land or discount the rent because of rules restricting private involvement in projects financed by this type of bond. That's also why they must earn a market-rate fee for managing the park.

"The project … can only have a very small percentage of private use," Julie Eddington, the Bloomington port authority's general counsel, said at a public meeting last month. "So we have to balance all of the contracts related to this project so that we ensure that the Mall of America doesn't have any ownership interests."

The use of a nonprofit entity to borrow for and own the water park is similar to a deal to build a sports center in Vadnais Heights several years ago. That ended ruinously after the center failed to meet revenue projections, the city stopped propping up the debt payments, and city's credit rating tanked.

Bloomington's Port Authority Administrator Schane Rudlang said they have studied that deal and structured the water park borrowing differently to avoid similar pitfalls. The debt for the Vadnais project was akin to parents co-signing on a car loan, he said.

"In this case the city is not 'co-signing for the loan' with its property taxes," Rudlang said.

The risk could instead fall on patrons of the mall, who would have to pay more for a new handbag, hamburger or glass of wine if the water park deal sours.

More than a decade ago, the Legislature authorized Bloomington to impose sales taxes to aid the Mall of America's expansion. Those amount to a 1 percent general sales tax, a 3 percent food and beverage tax, and 1 percent admissions and hotel taxes. The city estimates they could generate more than $13 million a year.

City officials stress that this is an avenue of last resort.

"Nobody wants to turn an additional sales tax on at the mall if we don't have to," Rudlang said. "Because that will negatively impact international tourism, frankly."

In 2013, the Legislature approved a separate bill that removed the mall from the region's tax-sharing program. That allowed Bloomington to pay for infrastructure with money that otherwise would have helped reduce property taxes elsewhere in the metro area.

The city used $34 million to build parking for the first phase of the mall's expansion, featuring a J.W. Marriot hotel and new office building. And it will spend between $50 million and $55 million building a parking ramp and skyway associated with the water park.

The city would also spend $5 million to $8 million from lodging and liquor taxes to prepare the water park site. Those taxes will also pay $7.5 million to complete the design, which would be repaid if the park materializes.

Jasper said the water park will be a distinct attraction, where guests of all ages can have a "tropical oasis adventure."

"We are confident that this project will drive additional tourist traffic to the greater Minneapolis/St. Paul metropolitan area — and will bring a much-desired amenity for millions of residents to enjoy," Jasper said in an e-mail.

The Innovation Group, a consultant commissioned by the city, projected last fall that the Bloomington park would attract 1.1 million visitors by 2022. That's twice the attendance of the World Waterpark, the three-decade old facility at Triple Five's West Edmonton Mall — the largest mall in North America.

Rudlang said the difference is justified by the Twin Cities metro area being 2½ times larger than Edmonton, and having more people within driving distance.