NCDOT Extends Financial Close A Third Time
NCDOT and I-77 Mobility Partners have amended the contract a third time to extend the financial close. The original financial close date was January 22, 2014. It had been extended through two previous amendments to May 17, 2015. The latest agreement extends the financial close another ten days, to May 27.
That NCDOT is willing to extend the deadline as many times as it takes comes as no surprise. In this amendment, though, there is a very interesting additional term. A little background first.
In March we reported about a revenue sharing arrangement between NCDOT and I-77 Mobility Partners. NCDOT would collect a percentage of toll revenues exceeding a certain threshold, with the threshold increasing annually. The percentage can go as high as 75%. When the toll lanes open the threshold is $17,000 so NCDOT would collect 75% of toll revenues above that amount. In five years the threshold number increases to $321,000. In twenty years the threshold is $2.8 million.
With the threshold set so low most of the toll revenues would go to NCDOT, leaving only a quarter of revenues available for debt service. This makes it impossible to pay off any loans. We brought this to the Fed’s attention in March. We’re pretty certain this delayed the financial close because of this term in the latest amendment:
Amendment of Attachment 1 to Exhibit 5: The following sentence is added to the bottom of the table on page 2 of Attachment 1 to Exhibit 5 of the Comprehensive Agreement:
“Note: the amounts expressed in the above table are in thousands of dollars ($000)”
That seemingly innocuous sentence is actually a huge change. The table they reference is the one that lists the threshold revenues. So now when the toll lanes open, instead of collecting 75% of revenues above seventeen thousand, NCDOT will not be taking a cut until seventeen million.
You might be tempted to say this was the intent all along- that the table was really listed in thousand dollars and they just forgot to include that. We jumped the gun.
We disagree. If the table is now in thousands then in five years toll revenues will have to exceed $321 million before NCDOT takes a cut. In twenty years that number will be $2.8 billion! That’s absurd. If that really is the case, then why bother with this provision at all? It doesn’t make sense.
So what is really going on? The negotiations have all been in secret, and we are left to piece together the artifacts, but here is a plausible explanation:
The contract requires the table to be amended ten days after financial close, not before. As we’ve said earlier, the threshold was set so low that debt repayment was impossible. What to do?
NCDOT initially said the numbers in the table are merely “placeholders.” Of course, you can’t (or shouldn’t) underwrite a loan based on placeholders, so the feds probably didn’t buy that argument. NCDOT can’t amend the table until after financial close, at least not without looking like this is a complete charade. Instead what they did was raise the threshold so high that the revenue sharing becomes a non-issue. Then after financial close they’ll amend the table, per the contract.
Here is the third amendment: