Bad News From Illinois for Rededevelopment TIF Bondholders

The Illinois Supreme Court has decided the Prologis case (City of Chicago v. Prologis, Docket No. 106805, opinion filed January 22, 2010). It affirmed the lower courts’ holdings that Prologis, a holder of revenue TIF bonds issued by the Village of Bensenville to finance a redevelopment project, was not entitled to compensation when the redeveloped property that generated the tax revenue used to service those bonds, was condemned for the expansion of the Chicago O’Hare Airport. The condemnation transfered title to the property to the city of Chicago, so it became tax-exempt, and the tax revenue stream dried up, making the TIF bonds worthless.

“The bondholders argued that when plaintiff acquires the subject property, it will become tax exempt. Since the TIF bonds are secured only by the real estate tax income derived from the subject property, they will lose all value once the property becomes exempt from taxes.”

The court relied on Omnia Commercial Co. v. United States, 261 U.S. 502 (1923), and John K. & Catherine S. Mullen Benevolent Corp. v. United States, 290 U.S. 89 (1933). Omnia held that when a contract is frustrated when the government takes the subject of the contract, but not the contract itself, no compensation is due. The Mullen case held that when the taken property does not formally secure the bonds, but is only used as a source of tax revenues used to service them, the bondholders’ property interest in the subject property (which they then do not have) is not taken, and so they are not entitled to compensation.

The court noted that the bond indenture spoke of tax revenues “if any” and emphasized that the claimants were sophisticated investors who understood the risk inherent in purchasing revenue bonds (the bond indenture contained explicit language to that effect) so the court was of the view that the bond holders assumed the risk.

So the moral here would appear to be that he who lives by the redevelopment sword, dies by it.

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