It's a Bad Deal Anyway....

I’ve questioned the City’s risk management practices before, but the MSB deal is bigger than a few bad decisions. The problem is that I don’t think Marc Maxwell or this Council are competent enough to negotiate a deal like this in the first place. Whether you like data centers or not, it's a bad deal when those in charge pick the wrong developer, take on too much risk, and fail to protect taxpayers from the downside risks. The MSB agreements are a pretty good example of exactly that.

I've spent more time than I care to admit looking at the City's agreements with MSB Global/SSDC1, and I think there is a more fundamental problem with them than any individual provision. The City seems to have approached risk management primarily as a question of what remedies it would have if MSB failed, rather than asking which risks the City should have been taking or avoiding in the first place.

But before getting into the agreements themselves, there is an even more obvious problem: the first step in managing the risk of a project like this is choosing a developer that knows how to build one.

That shouldn't be controversial. If you're going to bet public land, infrastructure, borrowing capacity, and millions of taxpayer dollars on a massive data-center development, you start by finding a seasoned data-center developer with a demonstrated ability to finance and complete projects of comparable scale.

Instead, the City chose MSB.

MSB had never developed a hyperscale data center before this project, and their corporate bios and company website were complete fabrications end-to-end. Yet the City was willing to rely on them for what was being promoted as an enormous, potentially record-setting data-center campus.

And before MSB, the City had apparently pursued a similar project with Delphi, another company for which I have been unable to find a comparable track record of actually developing major data centers.

That is not a minor due-diligence issue.

You don't start with an inexperienced developer proposing one of the largest projects of its kind in the country and then congratulate yourself for putting a reverter clause in the contract. The obvious way to reduce the risk was to choose someone who had actually done this before.

As far as the Chapter 380 agreements themselves, they do contain at least some protections. There are development deadlines, phased land conveyances, reverter provisions, a deed of trust, restrictions on use, compliance requirements, and other mechanisms designed to give the City options if the project doesn't proceed as promised.

Those provisions matter, but most of them deal with the consequences of failure after the City has already committed itself. That's a very different thing from allocating risk properly at the beginning.

I'm a recovering banker, so the easiest way I know to explain it is this way:

If someone walks into a bank wanting to borrow $50 million to build a project, one of the first questions is whether this person has ever successfully built anything like it before. Experience isn't a substitute for underwriting, but it certainly matters when you're deciding whether this is someone you should entrust with $50 million.

And if the answer is no, the bank doesn't shrug and proceed as though that additional risk doesn't exist. Either you don't do the deal, or every other part of the transaction gets more conservative.

The borrower puts more money in. Financing is verified more rigorously. Equity is documented. Collateral and guarantees become more important. Conditions have to be satisfied before money is advanced. Construction is inspected, liens are monitored, and the bank's exposure increases only as the borrower actually performs.

Foreclosure isn't the risk-management strategy. Foreclosure is what you do after the risk-management strategy has failed.

The basic principle is simple: the less confidence you can reasonably have in the party on the other side of the table, the less risk you should be willing to assume on their behalf.

The City appears to have done the exact opposite.

The City had real, existing assets at risk: land, infrastructure, borrowing capacity, utility revenue, taxpayer money, and eventually substantial legal expenses tied to the project. The land alone represented millions of dollars in public value, and millions more have been committed to infrastructure and other costs associated with the Thermo site.

Those are not projections. They are actual public assets and actual public obligations.

MSB, by contrast, was really only bringing the promise of future performance. It was supposed to obtain financing, attract customers, begin construction, create billions of dollars in taxable value, and ultimately develop a project approaching $18.7 billion in taxable improvements.

There is nothing inherently wrong with a public entity relying on future private investment. But when one side is contributing valuable existing assets and the other side's contribution depends heavily on other people's money and stated intentions, the agreement needs to be structured so that the public investment largely follows developer performance.

And that is where the second failure occurred.

The best risk-management decision would have been to select a proven developer in the first place. But if Maxwell and the Council were determined to proceed with MSB anyway, then MSB's lack of experience should have caused the City to shift substantially more risk back onto MSB.

If MSB needed billions of dollars in financing to execute the project, major City commitments should have followed proof that the financing existed. If the City was going to spend public money on infrastructure, substantial developer capital should have been committed first. If the City was going to contribute land worth millions of dollars, MSB should have had something comparably meaningful at risk beyond the possibility that it might lose rights to undeveloped property later.

Instead, much of the City's protection appears to amount to this: if MSB doesn't perform, the City can eventually stop the deal, recover certain property later on, or exercise other contractual remedies.

That's useful to some degree, but it doesn't transfer the underlying risk. A reverter may return undeveloped land to the City, but it doesn't return the years the property was tied up. It doesn't erase debt service, reimburse legal expenses, restore every dollar spent on infrastructure, or compensate taxpayers for opportunities the City may have passed up while pursuing this project.

Most importantly, it doesn't create the tax base that was supposed to justify those expenditures in the first place.

This is the difference between loss mitigation and risk allocation. Recovering an asset after a deal fails can reduce the damage. Structuring the deal so the private developer bears more of the financial consequences before the public takes substantial risk can prevent much of that damage from occurring.

A better structure, assuming for some reason you had already decided to proceed with MSB, would have been incremental. MSB proves financing, and the City takes the next step. MSB puts meaningful equity into the project, and another City obligation becomes available. Actual construction begins, and additional public commitments are triggered. Verified taxable value appears, and incentives increase accordingly.

The City should have committed more only as the developer proved it could deliver. Instead, the City's exposure got out ahead of it.

The result is predictable. If the developer has substantial capital at risk, delays and failures hurt the developer directly. If the developer has comparatively little capital exposed while the City has committed land, infrastructure, debt, and other resources, much of the early development risk has effectively shifted to the public.

And there is another category of risk that I don't think the City managed competently at all: legal risk.

The City didn't enter this transaction with a clean piece of dirt and an uncomplicated path forward. The Thermo property carried a commercial-generation deed restriction that ultimately resulted in litigation with Vistra/Luminant. For a project requiring an extraordinary amount of power, that wasn't some peripheral title issue. It went directly to whether the site could be used for the proposed purpose.

That obstacle should have been part of the risk analysis before the City took on substantial exposure. What happens if the restriction can't be removed? What happens if removing it costs an enormous amount of money? What happens if litigation delays the project for years? Who bears the City's carrying costs while that dispute works its way through court?

Those aren't fancy legal questions. They're basic transaction-risk questions.

Then there is the legal risk the City created for itself. I have spent months documenting problems with how these agreements were noticed, discussed, approved, and later "ratified." Whatever the courts ultimately decide, complying with your own Charter, the Open Meetings Act, and your own economic-development procedures should be the easy part of protecting a transaction this large.

Instead, the City managed to take an already speculative development, involving an inexperienced developer and a site with a serious unresolved legal obstacle, and layer additional legal uncertainty on top of it through its own illegal conduct.

That isn't bad luck, it's gross incompetence.

Look at the sequence if you need further proof. They apparently entertained Delphi without any demonstrated history of developing a comparable data center. Then they chose MSB, which likewise had no demonstrated history of completing anything approaching the project it was promising. They committed valuable public assets against future performance, failed to push enough financing and development risk back onto the developer, proceeded despite a major unresolved legal obstacle involving the site, and then created additional legal exposure through their own approval process.

At some point, calling all of that a series of mistakes or bad luck is incredibly disingenuous.

I don't have evidence that it was criminal, and I'm not suggesting that it was. Gross incompetence explains plenty.

This is also why I don't buy the argument that MSB simply turned out to be a bad developer and everyone should move on. The first responsibility of the City was to determine whether MSB was the kind of developer taxpayers should have been betting on at all.

If the answer was no, the deal should have stopped there.

And if City officials insisted on proceeding anyway, then every subsequent decision should have been structured around the obvious fact that they were dealing with an unproven counterparty attempting an extraordinarily ambitious project.

They didn't do that either.

Knowing how to get some of the land back after the project collapses is only part of the consideration. A competent City would have started by choosing a developer with a demonstrated ability to build the project. A competent negotiator dealing with anyone less qualified would then have made damn sure the developer—not the taxpayers—carried most of the risk created by that decision.

That's why I don't trust Maxwell or this Council to negotiate the next version of this deal with CyrusOne or whomever.

They've already shown they're incredibly bad at it, which is a problem for all of us.