Detroit's plan for exiting the largest municipal bankruptcy in U.S. history broke new ground by using land as a bargaining chip with creditors and could serve as a model for other distressed municipalities.
Few cities contain as much vacant realty as Detroit. The city leveraged that liability into settlements with two major creditors by giving them land and leases - and making it in their financial interest to help revitalize the city.
"The city does not have to come out of pocket with money and they get a piece of property back on their tax rolls," said Pat O'Keefe, chief executive officer of O'Keefe and Associates, a turnaround firm. "It's a tremendous blueprint to settle claims."
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Any city under enough financial duress to declare bankruptcy likely has taken possession of "interesting real estate" that could be used in settlements, he added.
On Friday, Federal Bankruptcy Judge Steven Rhodes is expected to rule that Detroit's plan for restructuring $18 billion in debt and obligations is fair to creditors and feasible for the city to follow.
The plan includes an agreement with Financial Guaranty Insurance Co, a bond insurer with a $1.1 billion exposure from guaranteeing pension debt. FGIC gained control of the site of the Joe Louis Arena and plans to turn it into a housing and retail development anchored by a hotel.
Another settlement, with bond insurer Syncora Guarantee, includes a lease on part of a tunnel connecting to Canada, control of a parking garage, and options to acquire property near the riverfront.
Both deals incorporate cash and city-issued notes, as well.
The use of real estate is not new, said Matt Fabian, managing director of Municipal Market Advisors, an independent research firm, but amalgamating different sources of recovery that include property is.
"For larger and more intractable situations like Detroit and Puerto Rico, this is going to be the way to do it," he added. "This is setting the model for difficult-to-refinance issuers."
After Detroit filed for bankruptcy in July 2013, creditors pressed to monetize the Detroit Institute of Arts collection. In mediation the city and foundations came up with a "Grand Bargain" to pay pension claims without selling the collection.
Still, the idea of using city assets remained. During closing statements at the hearing on the plan, Bruce Bennett, an attorney from law firm Jones Day representing Detroit, said the city evaluated many properties "to see what could be monetized."
"There was a drive to create arrangements that, No. 1, deployed assets for the benefit of creditors but, No. 2, did so in a way that if the creditors go forward...they’re going to have to make investments in the city of Detroit," he said.
The deals also take properties' maintenance costs off city ledgers, he added.
Sandy Baruah, chief executive officer of the Detroit Regional Chamber, lauded the approach. "The ability to use some physical assets to help resolve objections got us to the point where the bankruptcy process could be executed sooner and with less hysterics and a higher level of agreement than we expected a year ago," Baruah said.
Detroit's vacant properties are nothing new. The movie "8 Mile" captured the images of a once-thriving industrial hub in ruin 12 years ago. Still, Detroit fell victim to the housing market's collapse and saw staggering population declines. The Motor City became, in many ways, the empty city. Fellow Midwestern metropolis Chicago had 11,841.8 persons per square mile in 2010, according to the U.S. Census. Detroit only had 5,144.3 persons per square mile.
Detroit is developing its riverfront area, building up its downtown, and hoping to attract residents, and redevelopment of sites like the Joe Louis Arena builds on long-established relationships with the bond insurers.
"Let's remember there was a close tie before," said Baruah. "They invested in Detroit many years ago."
Councilmember Gabe Leland, who chairs the committee on planning, said the deals make the insurers partners in the city's future.
"The benefit here is that the land transactions will allow the creditors to be a part of the growth of the city. As they succeed, we succeed, and vice versa," Leland said.