(Bloomberg) — Taxpayers are paying dearly to bring a pro-sports team back to the faded industrial city of Pawtucket, Rhode Island.

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A few short years after losing the PawSox — the minor league affiliate of the Boston Red Sox — to Massachusetts, Pawtucket is betting it will be able to draw fans to a more than 10,000-seat stadium to see an untested, US pro soccer team playing in the sports’ second tier.

Last week, a redevelopment agency in the New England city sold $54 million in tax-exempt bonds to build the minor league soccer arena, Tidewater Stadium, at a yield of 8.24%, equivalent to almost 14% on taxable securities.

Rosemawr Management, an investment firm that focuses on riskier US state and local government debt, bought the bonds to help finance the future home of Rhode Island FC.

The debt is backed by annual appropriations from Rhode Island state taxes — including sales and personal income levies — collected within a downtown Pawtucket redevelopment district. Appropriations are conditioned on the stadium opening, currently projected for March 2025. Starting in 2027, the state is scheduled to appropriate about $132 million in principal and interest payments through 2053.

There will be little benefit for the surrounding community, according to J.C. Bradbury, an economics professor at Kennesaw State University. “These are people who are already spending their money in the community, and when they’re going to a minor league soccer match, they’re not going to local restaurants, going to movies and engaging in other types of local purchases,” he said.

Unusual financing structures and the near unanimity of research among economists that stadiums don’t generate big economic benefits has drawn criticism, but not derailed the mixed-use project which kicked off construction in 2021.

“We drew comfort from the commitment to the project exhibited by elected officials, including the Mayor of Pawtucket and the Governor,” Jamie Lister, a managing director at Rosemawr, said in an email. “Unlike many stadium financings, this is not a project financing, and is not reliant on stadium fees or revenues to service the bonds.”

Crowded Out

The city and lenders are betting that a minor-league soccer team in a small market can outdraw nearby clubs in much larger markets. Rhode Island FC’s stadium will be located just 20 miles from Gillette Stadium, home of the National Football League’s New England Patriots and Major League Soccer’s New England Revolution.

Phoenix Rising FC, an Arizona team in the same league as Rhode Island FC and in a metropolitan area of about 5 million, averaged about 7,400 fans per game, according to a market study accompanying the municipal bonds. Pawtucket by contrast has less than 100,000 residents and the Providence metropolitan area includes about 1.7 million people.

The Louisville Courier-Journal reported in 2020 that since 2015 at least 22 USL Championship teams have either folded, rebranded, relocated, gone on hiatus, left the USL entirely or dropped to a lower level.

The unusual funding has raised red flags for some.

The developer of the project, Fortuitous Partners, was co-founded by Brett M. Johnson and invests in professional sports and real estate in economically distressed areas that qualify for tax deferments.

To raise funds, Fortuitous bypassed conventional construction financing from a consortium of banks, instead opting for clean-energy loans and funding under the federal EB-5 visa program, which provides a pathway to citizenship for immigrants and families who invest at least $800,000 in qualified US projects.

Johnson, who previously founded the Phoenix Rising FC franchise, and outside investors own both the stadium as well as the team. They contributed $43 million in equity to the project and agreed not to relocate the team while the bonds are outstanding.

Johnson declined to comment through a spokesman. Johnson and an unnamed individual, have guaranteed completion of the stadium’s construction. The guarantee is backed only by a promise and is unsecured.

As guarantors the two will have to maintain a net-worth of $100 million through completion of the project, according to the bond offering documents.

Last August, the city’s financial adviser, Hilltop Securities, resigned from the project citing concerns about the $128 million arena’s mounting costs as well as the developer’s reliance on clean energy loans known as C-PACE funds and the EB-5 program. At the time, Johnson hadn’t secured the EB-5 loan.

“It has been our experience that EB-5 funding is not a typical source of funds to finance construction of a stadium,” Hilltop’s Maureen Gurghigian wrote in a June letter to the Pawtucket Redevelopment Agency, adding that the C-PACE funds are limited to projects related to energy efficiency and renewable energy.

Ben Brooks, a Hilltop spokesman, declined to comment. Hilltop was replaced by MuniCap, a public finance consulting firm based in Columbia Maryland.

Stifel Financial Corp, the underwriter of the bonds, said it addressed and fixed aspects of the deal that may have caused initial concern. Initially, Johnson had requested that the bond deal move forward before securing the EB-5 loan, Laura Radcliff, the banker on the deal, said in an email.

“The bonds sold by Stifel had all private dollars fully funded and in escrow the day prior to bond closing,” said Radcliff.

Rhode Island FC will play its inaugural home opener on March 16 at a nearby stadium on the Bryant University campus.

“We have complete faith in the Fortuitous team and Rhode Island Football Club,” said Grace Voll, a spokeswoman for Pawtucket Mayor Donald Grebien. “The stadium will provide Rhode Islanders with a world-class experience and amenities.”

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