Rivian floats $15 billion bogus bond plan to obstruct tax relief
(Bloomberg) — Electric car maker Rivian Automotive Inc. What would normally be a stunning announcement for the municipal finance market: a potential $15 billion bond for a Georgia campus, which would theoretically be the largest sale ever to a municipality for nearly $15 billion. The size of the company’s market value.
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Except the bonds aren’t real.
The debt was structured based on what are known as “phantom bonds” that companies use to obtain a Georgia estate tax break, and entails no real financial or accounting impact on the company in question, according to a report by the law firm Smith, Gambrell & Co. Russell LLP. In Rivian’s case, this is a workaround because the state does not have legislation allowing companies to take rebates that would provide such relief.
The massive — but essentially fictional — sale is necessary as part of one of the largest economic development projects in Georgia’s history. It is also an indicator of the fierce arms race that countries are embarking on to secure huge manufacturing deals that promise high-paying jobs and an economic boon. The company says it will create 7,500 jobs, and once operational, the facility will eventually produce up to 400,000 vehicles annually.
RELATED: Rivian wins $1.5 billion incentive package for Georgia plant
Rivian, based in Irvine, California, makes electric trucks and sport utility vehicles and is seen as the leader in the chase of Tesla Inc. After a massive IPO in 2021, the company has struggled to address supply chain challenges and ramp up production. It has since been able to accelerate production from a single operational plant in Illinois over the course of this year.
The details of the Rivian deal are complex. The bonds are issued primarily through a four-county agency, known as JDA, located within 40 miles of Atlanta, which works to bring economic development to the region.
Under the agreement, the Real Estate Development Authority will issue bonds to obtain a legal title for the project, which it will lease back to Rivian. Then, over the next 25 years, the company will make payments to local governments rather than the full property tax amount, although the payments take into account local tax rates.
“The whole concept is set up to eliminate ad valorem taxes,” John Shakarjian, associate general counsel for real estate and construction at Rivian, said in an interview. “There is no cash in circulation, no cash is generated, and there is no movement of money.”
Shakarjian said that Georgia’s system of economic development projects is unusual among American states and even among countries abroad. He noted that it is common for companies in Georgia to use a phantom bond structure.
The bonds simply serve as a “vehicle” to provide tax relief to Rivian, said Andrew Capizzuto, chief administrative officer and general counsel of the Georgia Department of Economic Development. He said countless bogus bond deals were struck to provide incentives.
“A lot of other states have the legal authority to issue abatements, and that doesn’t exist in Georgia,” he said. “So some smart lawyers came up with this way they could do it — by transferring ownership of the asset to a tax-exempt entity.”
EV snap
Rivian has agreed to make payments in lieu of taxes — known as PILOT — of $1.5 million that will gradually increase to $20.4 million by 2047. The company has guaranteed it will pay at least $300 million, though that amount could increase if it spends More than its initial commitment.
Currently, the area that will be home to Rivian’s new factory generates only about $80,000 in tax revenue, according to the state.
The reason these deals are called phantom bonds is because no actual debt service payments are made, unlike traditional transactions. As part of this structure, Rivian’s rent will always equal its debt service costs and because Rivian is the sole bondholder, money does not pass from hand to hand.
“Because the company is both the lessee and holder of the notes, principal and interest payments may be made constructively and may be deemed to have been made when due,” the securities filing said.
So far, $5 billion worth of fictitious bonds have been issued as part of the agreement with Rivian launching the project, according to Chakarjian, the company’s lawyer. If costs rise, Rivian could ask the JDA to increase the amount of bonds to protect those costs from rising property taxes, he said. The JDA has the authority to reduce up to $15 billion in Rivian project costs.
The Georgia Economic Development Agency said the deal is similar to agreements with other companies such as Kia and SK Innovation.
The deal has faced controversy and a legal challenge in the state. But in August, a judge ratified the bond agreement. One local resident said in a 2022 column in the Morgan County Citizen that the electric car company got a “free ride” from Georgia.
Capizzuto, a consultant for the state’s economic development arm, said Rivian is not being taxed at the full value but is more like sacrificing a few slices of the pie.
“But Rivian may have chosen to go elsewhere,” he said. “If Rivian chose to go elsewhere, we would have no pie at all.”
–With assistance from Martin Z. Brown and Ed Ludlow.
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