by James C. Sherlock

On September 13, 2022, a regular meeting was held of the board of the Virginia Small Business Financing Authority (VSBFA). That board has sweeping responsibilities only one of which is the bond program.

From its 501(c)3 Tax-Exempt Bond Program.

• “There is no maximum limit on the dollar amount of bonds which can be issued on behalf of 501(c)3 organizations.”
• “Financing can provide longer terms than those typically offered through conventional bank loans: average maturity of the bonds can be up to 120% of the economic life of the assets being financed.”
• “Qualifying non-profits may be able to finance many of the ancillary costs of the project, including site preparation, capitalized interest during construction and some issuance costs.”

On the agenda of that meeting was authorization of bonds for North Carolina’s 501(c)(3) P3 Foundation to build a surf park in Virginia Beach.

Minutes show that presentations were made by a VSBFA staff member and by Mssrs. Anderson (McGuire Woods), Coan (Piper Sandler), Culpepper (Venture Realty Group), Fawcett (Secretary, P3 Foundation) and Smith (Piper Sandler).

A Q&A session was held, but the minutes give no indication that the questioners were curious about the ability of the borrower to repay the debt. Their bylaws did not require them to inquire on that subject.

Board members voted unanimously to authorize up to $75 million in bonds with coupons as high as 12%. So they knew of the risk.

On March 31, 2023, VSBFA issued over $63 million in revenue bonds for the surf park. Twelve pages of economic risks, reviewed in a previous part, were published in the 616-page final bond offering memorandum.

The state bond issue for the surf park was not submitted to the rating agencies. That proves not to be particularly unusual. In this case it was wise. Rating agencies would have checked out the borrower.  

Even with the changes, the tax exempt senior bonds did not sell at 8.5%. They were sold at a discount to yield 9%. 

The subordinate series were bought by members of the developer team at yields of 9.25% (tax exempt) and 10.25% (taxable) respectively. That put them in line behind the institutional investors in case of a default.

The average yield-to-maturity of Virginia municipal bonds on the date of the sale was 3.75%.

VSBFA had been called out by the General Assembly’s Joint Legislative Audit and Review Commission (JLARC) in 2020 on problems that made it likely to fund this deal even when no one else would. It was under General Assembly pressure to get money out the door and had been criticized for lack of repayment risk standards.

One JLARC comment on the VSBFA loan program seems prescient in the case of the surf park bonds two years later:

VSBFA … lacks written policies on risk standards for loans and a standardized tool for staff to assess applicants’ repayment risk. Without policies and a tool to govern loan decisions, VSBFA has tended toward caution and generally been too conservative when making loan decisions.

Commentary. By 2022, VSBFA seems to have gotten the “too conservative” part of that message. It was anything but conservative in floating bonds for P3 Foundation.

For repayment risk, the board need only have looked at the yields required to sell the bonds. But neither the VSBFA Tax Exempt Bond Program that puts no limits on bonds for nonprofits nor that organization’s bylaws mention repayment risk.

The author gave the state Treasurer a heads up about this report and asked for comment on surf park bond approval. He responded personally.

The Virginia Department of Treasury has no supervisory or oversight responsibilities with respect to VSBFA; the only connection being that I, as State Treasurer, am an ex-officio member of the VSBFA Board. Since I was not present at the Board meeting in question, I am not in a position to offer any response to this request.

VSBFA should perhaps be assigned to the Division of Bond Finance of the Treasury Department to bring it under better oversight.  

Authorizing Virginia municipal bonds that may require coupons as high as 12% tax exempt appears like what it was, a desperate borrower at high risk of default.

That is not a good look for a state bond authority.