For the first time in decades, Madison is creating an opportunity for the public to directly invest in a local building project — the expansion of Olbrich Botanical Gardens — and get a tax-free interest return.
If the City Council approves, the city this fall will offer so-called “mini-bonds,” sold in $500 increments, to generate $2.1 million to help pay for $12 million in improvements at the celebrated gardens on the East Side.
The project includes a two-story, 8,500-square-foot Learning Center, to be located off the existing main lobby on the garden side, with flexible space that can be converted from one to three classrooms, demolishing the current 9,600-square-foot greenhouse for a more efficient one roughly the same size, and other improvements.
The $12 million cost would be split between the city and the private Olbrich Botanical Society, which jointly run the gardens at 3330 Atwood Ave., near Lake Monona.
So far, Olbrich has raised nearly $5 million and is continuing fundraising efforts, director Roberta Sladky said.
The City Council has approved $6 million of general obligation borrowing for the improvements in 2017 and 2018. Of the city’s borrowing, $2.1 million now would be issued as online, tradable mini-bonds, which would allow the public a financially accessible chance to directly invest and make tax-free interest income on an endeavor that will directly benefit the community, city finance director David Schmiedicke said.
“It’s not raising more money,” Schmiedicke said. “It’s making (the investment) more accessible to the residents of Madison.”
The Olbrich project was chosen because “it’s clearly a jewel of the community” and “I think the residents of Madison can relate to it and feel an affinity to making an investment in it,” he said.
Sladky applauded the mini-bond offering.
“It provides an opportunity for city of Madison residents to contribute to the project in a different way than the traditional tax-deductible contributions to the Rooted & Growing capital campaign,” she said. “ I hope that this mini-bond campaign will only create more interest in the project and assist OBS in raising awareness about the philanthropic opportunities that fund both the capital campaign and ongoing garden operations.”
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Typically, investment banks facilitate the sale of large pieces of city debt — often tens of millions of dollars at a time — in $5,000 increments with 10- or 20-year maturation. The banks market the debt to institutional and individual investors, mutual funds and others.
Those bonds, however, are out of reach to many smaller investors and the sales don’t build a sense of community ownership by investors to specific projects. Mini-bonds offer much smaller increments, shorter maturation and direct marketing to investors focused on a geographical area for sale such as a city, region or state.
Madison is experimenting with mini-bonds now because there is interest from residents in investing in city projects, and technology is making such a program easier to administer, Schmiedicke said.
There are two main ways to manage mini-bond programs: a third-party broker and an in-house approach, including marketing, sales and operating efforts, which Madison tried at least once in the 1970s.
This time, the city is using third-party broker Neighborly of San Francisco, which would help develop marketing materials, provide the sales platform and offer other services.
Last year, Neighborly helped Cambridge, Massachusetts, generate $2 million in proceeds for part of a larger capital plan to renovate school buildings, update energy efficiency of municipal buildings, and make other improvements. More than 500 Cambridge residents applied for Neighborly brokerage accounts in two weeks and the bond issuance sold out to more than 230 residents in under three business days.
In Lawrence, Kansas, also in 2017, more than 150 residents quickly signed up for Neighborly brokerage accounts for mini-bonds to generate $654,000 for a new fire truck. It oversubscribed in the first day.
On Tuesday, Mayor Paul Soglin introduced a resolution outlining the $2.1 million mini-bond sale and process to set the interest rate for investors.
Meanwhile, the city is developing a marketing plan, which will include a website, advertising and town hall meetings where people can sign up for accounts. That activity will occur in September, with a bond sale, with city residents getting the first chance to make investments, scheduled for Oct. 3-9.
The interest and outcome of the upcoming offering of mini-bonds will determine future use, Schmiedicke said.