City, firm at impasse over 'very bad' parking deal

Officials of Pennsylvania's capital city insist that a 2008 offer made by LambdaStar Infrastructure is not valid, while the firm continues to pursue sources of equity after an unsuccessful fundraising effort.

A private equity firm with no committed capital is scrambling to find investors for a $215 million parking deal in Harrisburg, Pennsylvania – a deal that city officials insist is invalid, Infrastructure Investor has learned.

New York-based LambdaStar Infrastructure Partners has hired investment bank Greenhill & Company to help find equity investors for a 75-year lease of the city’s parking garages.

Officially, Greenhill was engaged as LambdaStar’s co-advisor on the deal alongside Chicago-based investment bank William Blair in an effort to help LambdaStar reach financial close on the deal. People familiar with the engagement say Greenhill is helping the firm find other sources of equity for the lease because LambdaStar has failed to raise any money for a fund that would have backed the deal.

I don't know what a future deal might be but if it's anything like the prior one we want to run in the other direction

Dan Miller

As recently as last year, the firm was looking to raise $1.5 billion from investors for its debut infrastructure fund. The Harrisburg deal, proposed two years ago by LambdaStar co-managing partner Jacob Frydman, was marketed to investors as the fund's cornerstone investment, priced at $215 million.

Regardless of whether LambdaStar is ultimately able to find the money to close on the deal, Harrisburg officials insist there is currently no deal to be had. “There’s no LambdaStar [transaction]. They do not have an executed contract,” Harrisburg City Controller Dan Miller, told Infrastructure Investor.

“There’s no transaction on the table at the moment,” said Chuck Ardo, spokesperson for Harrisburg Mayor Linda Thompson.

Troubled transaction

LambdaStar does technically have an executed contract for the lease, according people familiar with the transaction. In 2008, former Harrisburg Mayor Stephen Reed signed a contract binding the city to lease the garages to LambdaStar in exchange for the $215 million upfront payment.

But there was a problem.

“The mayor in our city cannot unilaterally . . . lease or sell assets. Only city council can do that,” explained Miller.

And on 25 November 2008, the city council unanimously voted against the deal, according to council proceedings provided by Harrisburg. Miller, then a member of city council, recalls voting against it because “the deal that was presented to us was a very bad deal for our city”.

“There were things in [the contract] such as compensating agreements, so if finances didn`t perform or the revenue didn’t perform up to what they thought was expected, the city would have to make up the difference. So the risk was still on the backs of the citizens of Harrisburg,” Miller said.

Despite the rejection, LambdaStar is holding out hope that city officials will honour their side of the agreement. The city is in dire financial shape and is looking into a lease of the garages as one way to help shore up its balance sheet.

Central to Harrisburg's troubles is its guarantee of about $288 million in debt issued by The Harrisburg Authority, owner of several of the city’s public works, to improve a trash incinerator. In December 2009, Management Partners, a consulting firm hired by the city, concluded that Harrisburg was in a state of financial crisis, caused largely by the debt guarantee.

The crisis could soon become much worse. In December, $34 million of the incinerator debt will come due. Unless Harrisburg is able to re-negotiate the debt or find a new source of money to make the payment, it may have to file for bankruptcy.

Leasing the parking garages could provide the city with the money to at least temporarily avoid bankruptcy. In June, Pennsylvania Governor Ed Rendell paid a visit to the legislators of the state's capital city to urge them to pursue such a deal.

If the city council members decide to do so, approving the LambdaStar contract could be a quicker way to get a deal done than by starting an auction from scratch. Such a process could take months, holds no promise of completion and is already behind the provisional bidding schedule laid out by Management Partners.

Troubled investor

Just as the city is running short on cash, LambdaStar itself has little money to spare.

The firm was co-founded in 2008 by Frydman, a real estate investor, and Leonard Shaykin, a former private equity investor who used to sit on the board of the Chicago Sun-Times newspaper. They obtained about $6 million from an investment bank to help bankroll their fundraising for the fund.

To help with the fundraising effort, in late 2008 Frydman and Shaykin brought in three other partners: former Alinda executive Andrew Sutton, to serve as LambdaStar's chief financial officer, and two ex-Macquarie executives, Stephane Azulay and Aaron Klein.

The timing proved inopportune: in September 2008, the collapse of Lehman Brothers set off a financial meltdown in public equity markets that sucked a lot of liquidity out of pensions’ alternative asset allocations. As a result, raising funds from institutional investors became a lot more difficult, especially for first-time funds such as LambdaStar.

In the end, the firm gained soft-circle commitments from several investors but never held a first close on any capital, according to market sources familiar with the firm’s fundraising.

Worse, the $6 million of funding provided to the firm has run out, according to several sources, and the firm is now at a crossroads with regard to how to bankroll its continued fundraising.

An indication of the firm’s financial troubles came last month, when Sutton resigned as chief financial officer, according to an email obtained by Infrastructure Investor. Sutton did not indicate in the email a reason for leaving the firm but Infrastructure Investor has learned from a market source that the firm was experiencing payroll decreases.

Previously, all five members of the firm were listed as contacts on its homepage. Now, only Shaykin and Frydman, the co-founders, are listed as contacts.

The co-founders still hope to close the Harrisburg deal as well as another parking deal in Pittsburgh, and use that as a catalyst for getting investors in the fund.

Not a done deal

A lease of the city’s parking garages could still happen. Ardo said “every option is on the table” to help the city deal with its financial crisis, including a parking garage lease. Mayor Thompson “is certainly willing to consider it”, Ardo said, but “she will review all her options before making any decision”.

Earlier this week, the city hired Scott Balice Strategies, a Chicago-based financial advisory firm, to serve as its restructuring and fiscal recovery advisor, according to a press release.

Scott Balice will assist the city in implementing the recovery initiatives in its emergency financial plan. The plan includes the garage lease as one potential option though, again, Ardo cautions that it is too early to say what course of action the city will take.

But Miller, the Harrisburg controller, has ruled out at least one potential option.

“I don’t know what a future deal might be but if its anything like the prior one we want to run in the other direction,” he said.