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Building
Bonds
Ken
Powell and Nate Betnun pioneered tax-district financing in
the
Stone and Youngberg, a San Francisco public-finance banking firm, wasn’t thinking about a major expansion of its nominal East Coast presence when Richmonder Ken Powell cold-called CEO Kenneth Williams this summer. The idea wasn’t even on the radar screen.
But in mid-August, barely a month later, the company announced that it had hired Powell and his partner Nate Betnun as managing directors, and was committed not only to building its East Coast business but to dominating the market.
The California investment bank, a regional powerhouse in the municipal market, happens to dominate a particularly arcane niche in public finance: packaging and selling tax-exempt bonds secured by real estate and backed by revenue flows from such unconventional sources as special tax districts and tax-increment financing. When Powell came calling, nearly all of the firm’s business originated in the West – California mostly, with contributions from Nevada, Arizona and a bit from other states.
But Powell and Betnun, both former public-finance bankers with Legg Mason, had broken open the market in Virginia and Maryland, and they were making inroads into nearby states. Their deal flow was only a small fraction of Stone & Youngberg’s business, but they brought to the firm ties to local development communities, the skills and know-how to pioneer the new financing tool in new markets, and a passionate conviction that special tax district financing was the wave of the future.
“Ken and Nate had relationships, expertise and knowledge. And local knowledge is critical,” says Steve Heaney, a managing director and head of Stone & Youngberg’s public finance practice. “When we get outside the West Coast, we have to ask what value are we bringing to clients? … When we look at what Ken and Nate do, they do development-related, land-secured financing. That’s a natural fit with us.”
They’d been successful at Legg Mason where the business was essentially a novelty, Powell reasoned, so it was easy to imagine doing even better when backed by Stone & Youngberg, with its decades of experience at closing the complex transactions and a sales force adept at selling the specialized bonds. The opportunity for both parties was too good to pass up.
A self-described “recovering” attorney, Powell is the gregarious front man, cultivating relationships with prospects and working with local governments on legal and political aspects of the bond deals. Betnun, who earned a PhD in finance from MIT, is the meticulous financial wizard who structures the deals.
Powell has set up shop in his home town of Richmond, Va., sharing an office with a small bond sales operation that Stone & Youngberg had established there in 2003, while Betnun is working out of Annapolis, Md. Though operating out of different cities, Powell and Betnun function well as a team. “We’re on the phone together 20 times a day,” Powell says. “As a client, you’d never know we weren’t in the same office.”
Stone & Youngberg got its start in 1931, packaging bond issues to finance irrigation projects bringing water to farmers in the Sacramento area. Over time, the firm grew into the largest regional underwriter of tax-exempt bonds in California.
The land-secured financing business took off in the 1980s after California voters passed Proposition 13, hindering the ability of local governments to raise revenue through property taxes and pay for the infrastructure required by California’s rapid growth. Communities desperately needed a mechanism to outfit new development projects with roads, water, sewer and other amenities. Beginning in 1984 with the passage of the Mello-Roos Act, developers and local governments began to rely upon special tax districts, in which a tax on landowners paid off the bonds that financed the public improvements on their land.
Over the past 20 years, much of California ’s growth has been paid for in this way. Dominating the market, Stone & Youngberg, a firm of 220 employees has become the largest packager of land-secured bonds in the country. Between 1999 and 2003, the firm completed 705 financings totaling more than $12.3 billion, dwarfing UBS Financial Services, No.2 in the market, with 450 deals, and No. 3 Citigroup with 438.
Never hobbled with a Proposition 13, East Coast municipalities have not resorted to tax-district financing until recently. But localities in Virginia and Maryland are increasingly hard-pressed to fund urban redevelopment projects and new, green-field projects located outside existing public service districts.
As an attorney before joining Legg Mason, Powell helped write the Community Development Authority (CDA) law that made special tax districts in Virginia possible. And then, as an investment banker with Legg Mason, he was involved in putting the first deals together.
Two of Powell and Betnun’s biggest deals have been in their respective home towns. In the Richmond Broad Street CDA, they raised $66.7 million to build parking decks and install extensive street-scaping in a blighted area near the Richmond Convention Center. The project, which relied upon a combination of parking lot revenues and a special tax-district levy, catalyzed other private development in the district, including construction of a new hotel and renovations to another, not to mention extensive rehabilitation of historic properties along the Broad Street Corridor.
In another project, the duo raised $25 million to finance the publicly owned portion of a parking garage in Annapolis, a critical piece of a project encompassing a hotel, Class A office building and residential condominium. The project was notable for municipal bond innovations never seen locally, including a back-up tax to be levied in the event the other revenues proved insufficient, and separation of the bonds into two series, one with an accelerated funding stream.
Other Powell-Betnun projects include an $8.7 million deal for residential infrastructure in Gettysburg, Pa.; $18 million street-scape and infrastructure improvements in the Hyattsville, Md., University Town Center project; $15 million to support an Erickson Retirement Community in the Village of Lincolnshire, Ill.; $16 million for infrastructure in a mixed-use project in Hanover County, Va.; and a $19 million as part of a superfund clean-up in St. Paul, Minn.
Powell and Betnun were happy at Legg Mason, which gave them considerable latitude to run their practice. But the picture changed unexpectedly earlier this year when the Baltimore-based brokerage and investment company agreed to an asset swap with Citigroup.
In exchange for its mutual funds, the New York financial giant wanted Legg Mason’s brokerage business, but it had no interest in Legg Mason’s Capital Markets Group, of which Powell and Betnun were a part. Citigroup and Legg Mason decided to solicit proposals from third parties. The uncertainty dragged on for weeks and months. It was paralyzing: Powell and Betnun didn’t know what to tell clients and prospects.
Worse, the situation didn’t look promising for Legg Mason’s specialty bond shop. “We were a niche,” Powell explains. “Nobody really understood what we did. We didn’t think anyone would be interested in the business.”
Rather than passively await his fate, Powell decided to act. He screwed up his courage to contact Stone & Youngberg, a firm he knew by reputation but had never had any dealings with before. But first, he called Betnun, who was mountain climbing in Colorado at the time, to tell him what he was planning to do. He figured he’d get a voice mail box, but Betnun’s cell phone was getting reception. From the rarefied atmosphere of Pike’s Peak, Betnun told his partner to go for it.
Making that call to Stone & Youngberg was one of the smartest decisions he’s made in his life, Powell avers. He’s done a lot of complex deals, but he can’t come close to matching the collective experience of Stone & Youngberg. And he can call upon that experience any time.
“They’ve seen everything happen,” Powell says. “They’ve been through the business cycles. They’ve seen all the problems. We’d been on the job for three days when we had a question. I sent out an e-mail – has anyone seen this problem? In 11 minutes, we had 14 responses. They knew exactly how to structure the deal. We didn’t have to reinvent the wheel.”
The association with Stone and Youngberg solves another problem: finding buyers for the bonds. The firm has a dedicated sales force that sells to a network of high net-worth individuals who understand and have a risk tolerance for non-rated bonds, and to a large network of institutions that rely upon the firm to bring sensible, well-structured financing to the market and then to provide liquidity for the issues.
“The firm has a research department focused on this type of credit,” Betnun explains. “Investors know the bond will be tracked in the secondary market. They’ll get continual, updated reports on the issue. That means they can buy the bonds with greater assurance that there will be a liquid market to sell into if they want.”
Powell also appreciates the fact that Stone & Youngberg is privately owned. In addition to the incredibly high standards of professional and personal behavior the firm expects employees to uphold, management doesn’t have to deal with the expectations of outside shareholders to pump up profits every quarter. “This firm doesn’t grow for the sake of growth,” he says. “It grows only when there are good reasons to.”
That makes it easier to turn down deals where the company wouldn’t add much value. “Our business model isn’t to go out and do every deal we can,” Powell says. “We’ve turned down a bunch of deals that aren’t right for us.”
Stone & Youngberg’s East Coast strategy has a dual thrust. First, it focuses primarily on the Mid-Atlantic markets where Powell and Betnun have extensive contacts and track record of success. Second, the firm follows clients to other states. The CDA financing model has proven so successful for a client that develops retirement communities, for instance, that the client wants to apply it in a number of new projects across the country.
Heaney, the head of the public finance practice, has high hopes for the Richmond and Annapolis offices. “The East Coast is beginning to see the value of using the [special tax-district] tools for development financing,” he says. “By virtue of work we do here in California, we have a real strength in that area. Ken and Nate are two pioneers of that kind of financing on the East Coast. We see tremendous opportunity.”
-- December 7, 2005
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Kenneth Powell
Nate Betnun
Useful Links News Stone & Youngberg Hires Innovators in Special District Bond Finance (Aug. 17, 2005)
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