The Bentonville City Council formally approved a $239 million financing arrangement with the Alice L. Walton Foundation on Monday night.
The line of credit will be used to upgrade sewer infrastructure throughout the city to catch up to and stay ahead of growth. (For more on the current state of the sewer system, see previous coverage here.)
Relatedly, new fees for residential and commercial developments were also approved.
The approval of both came just 18 days after the general public was first told about the plans, and it was passed over the objections of developers who, through the new development fees, are on the hook for paying back the loaned funds.
Cindy Acree was the only city council member to vote against the financing and new fees, saying she believed more time was needed to fully understand the arrangement.
Unique Benefits
City staff have pointed to several benefits of pursuing the financing option with the foundation instead of more traditional approaches.
Project-by-project financing
In approving the arrangement, the city did not agree to take out $239 million in loans all at once. Instead, financing can be accessed on a project-by-project basis as needed.
This structure means “the city avoids borrowing money before it is needed,” according to a Q&A published by the city. Interest at 5% will be assessed on funds that are loaned.
Foundation assumes substantial risk
Repayment of the loaned funds is based solely on revenue from new fees being levied on future developments, which hinges on continued growth in the city.
The foundation will be entitled to the proceeds of the new fees but will receive no other collateral to secure the loan.
If the city is unable to repay the loans based on development fees, the foundation cannot access other city revenue streams or force the city to raise ratepayers’ bills.
Lack of other options
The city government presented no alternatives to the financing arrangement with the foundation, saying it would not have been possible to use traditional municipal financing options without shifting the costs to ratepayers.
In past meetings, city leaders have also stated that other funding sources do not currently appear to be viable options. The terms of the deal with the foundation allow for early payoffs if grants or more favorable financing are secured in the future.
“Nobody else is offering us $239 million at 5%,” city council member Gayatri Agnew said during Monday’s meeting. “This is the option. If we have a better option on January 1, we can convert all of that.”
Developer Concerns
While the city is building out the infrastructure, developers of future residential and commercial projects are on the hook for paying back 100% of the loans through new fees.
The fees will start at $7,867 per “equivalent residential unit.” An apartment or single-family home is considered one ERU, based on estimated usage.
Commercial developments will also pay the fees, scaled up based on usage. One hypothetical example provided by the city was a newly constructed restaurant with 120 seats. Based on usage estimates, the fee for the restaurant would be $156,474.63.
Local developer Jake Newell said his initial reaction to the new fees was to “push way back.” However, upon further review, he concluded that he supported the plan. With “a little creativity,” he said he could make the fees work.
Other developers and real estate industry professionals who spoke were either not in favor of moving forward with the proposal or wanted the approval to be delayed to allow for further discussion.
Among the concerns expressed by developers:
More time and information requested
City leaders first publicly shared details of the financing arrangement at a meeting on Dec. 4.
Multiple developers expressed concern Monday night about the speed at which the proposal was moving forward.
“We talked to a lot of our members, and there’s just a lot of questions and a lot of people still trying to understand what these fees entail, what they cover and what they don’t cover … A lot of our builders couldn’t be here tonight due to the holidays the next couple weeks.”
Mayor Stephanie Orman asked if Marquess had specific questions he would like answered. “We just found out about it Friday night, so we really didn’t have a ton of time to jot those down,” he responded.
“I’ve got a few different points, the first being the rushed and exclusionary nature of this decision. The combined approval of a $239 million loan bond structure and new development fee in one meeting during Christmas, outside of regular city meeting schedules, kind of sets the wrong tone for the builders. A lot of us found out about this a couple of weeks ago, if not a week ago.”
“I just ask that you guys consider tabling this. As you heard from all of the developers, there's so much confusion. Every developer comes up here has different questions, and so I don't even know you guys fully understand this in great detail.”
New fees do not cover all sewer upgrades
The new fees have been framed as a way to bring predictability to the cost of building in Bentonville. However, some developers expressed concern that they will still have to pay other sewer-related costs on top of the new fees.
The plan the city approved does not cover the upsizing of every sewer pipe in the city. The arrangement only includes primary sewer lines that are 12 inches and larger. It does not cover smaller collection lines that branch off to individual properties.
If a development causes a smaller pipe to exceed its capacity, the cost of upgrading that line will also fall to the developer.
Buffington Homes is in the early stages of building Osage Mills, a new development in southwest Bentonville. As part of the project’s approval process, the company has already voluntarily agreed to upgrade some sewer pipes.
“These new impact fees would add over $1,000,000 to a single phase of that community … We can’t absorb that cost, plus interest, and build and upgrade additional sewer pipe for the city, which is also usually in the millions.”
Fee payment required before construction starts
The new sewer fees will be collected before a project’s construction is started.
Developers expressed concern that they would be required to pay the fee up front, potentially years before construction is finished and units are ready to be sold or rented.
“Let’s say you have 100 units, that’s an $800,000 check that would have to be written even before you have a guarantee of a permit. We are not gamblers, we are stewards of capital, and oftentimes that capital comes after the permit. I need to have a permit in hand to get financing from a bank and to get investors.”
Preston Newbill, deputy director of the water utility, said moving the fee payments later in the process would increase the city’s financial burden.
“We're accruing interest in the city, and so as city staff, we didn't feel it is appropriate to continue to accrue interest waiting for developments to be done in order to collect fees,” he said.
