Bailout of Napa wine shrine flawed; Copia was broke and had violated tax rules
A tiny state-owned bank last year approved a $77 million bailout of Copia, a Napa Valley wine and food museum, even though the nonprofit was insolvent and facing penalties for breaching federal tax rules.
Now, a Bee investigation has found, that decision is coming back to haunt the Sacramento-based Infrastructure and Economic Development Bank, or I-Bank for short.
The insurer of the Copia bonds is awash in subprime mortgage debt and facing an Aug. 11 deadline to come up with cash to back its guarantees – a deadline already extended six times since December, most recently last Wednesday.
Though I-Bank claims that as a third party it is not liable for the bonds that bear its name, a Bee investigation found that if the bond insurer fails and Copia ultimately defaults, I-Bank – and California taxpayers – could at a minimum be stuck with some big legal bills as the finances are sorted out.
Named for the Roman goddess of abundance, Copia: The American Center for Wine, Food and the Arts, is an 80,000-square-foot shrine to wine and food on the banks of the Napa River. It was the brainchild of the late Napa wine mogul Robert Mondavi, who donated $20 million and the land on which it was built.
I-Bank authorized the first bond offering for Copia in 1999 for $70 million, allowing construction of buildings and grounds that feature shimmering fountains, indoor and outdoor kitchens, a demonstration vineyard and organic vegetable gardens, cooking and tasting classrooms and a 240-seat auditorium.
Copia also houses two restaurants: a bistro and a formal eatery, Julia's Kitchen, named after the late Julia Child, celebrity chef Mondavi friend and former honorary trustee. A large gift shop sells fine wines, cookbooks, gourmet cooking tools and DVDs.
Despite rich surroundings and fine fare, however, many visitors to Napa have skipped Copia in favor of one of the valley's 400 wineries, many of which have their own tastings, programs and gift shops.
Since it opened in 2001, the center has lost between $4.2 million and $12 million a year and now has a $14 million deficit, according to the 2007 annual report prepared by accountants Pisenti & Brinker, dated April 23, 2008. At the end of 2006, Copia was running out of money and had taken out a $1 million line of credit, according to financial documents.
The Bee's investigation, based on more than 3,000 pages of bond documents and other financial reports obtained from I-Bank under the state Public Records Act, found several reasons for Copia's financial meltdown:
• Copia consultants had forecast paid attendance of between 467,900 and 522,400 a year by 2006, but instead paid attendance topped out at 146,472.
• Special fundraiser dinners held between 2002 and 2006, like the one to mark Julia Child's 90th birthday and Copia's Bacchus Gala, lost a total of $679,000.
• The initial $12.50 admission price was too high, 33 percent higher than its consultants had recommended. In addition, local residents were upset about being charged admission just to eat in one of the restaurants.
(Copia has since eliminated its admission fee and is trying to build bridges by offering locals special evenings and activities.)
I-Bank knew the hazards
With full knowledge of Copia's troubles, I-Bank approved Copia's financial rescue in April 2007 and authorized the bond refinancing deal three months later through New York-based securities firm JPMorgan. As issuer of the bonds, I-Bank was responsible for evaluating Copia's ability to make its payments.
Created in 1994 to promote economic development and job creation among private businesses, municipalities and nonprofits, I-Bank is part of the state's Business, Transportation and Housing Agency, and its board is headed by that agency's top official, Secretary Dale Bonner.
Over the years, I-Bank has helped California nonprofits borrow $4.5 billion in tax-exempt bond funds. Among the beneficiaries was the San Francisco Ballet, which borrowed $44 million to renovate and equip offices and rehearsal space and develop new productions. Another was the Walt Disney Family Museum, which in February was approved for $75 million to help build a museum at the Presidio "devoted to preserving the vision and legacy of Walt Disney."
The agency has attracted little outside scrutiny. But the state's legislative analyst, Elizabeth Hill, said in a report earlier this year that I-Bank's annual reports to the Legislature offered too little financial information, hampering legislative oversight.
In Copia's case, I-Bank approved the 2007 bond deal even though the nonprofit was one payment shy of defaulting on $67 million in previous I-Bank bond debts, "raising substantial doubt about its ability to continue as a going concern," according to I-Bank board minutes and Copia's 2006 and 2007 annual financial reports.
Stanley Hazelroth, I-Bank's executive director, defended the state agency's decision to approve the deal not only to refinance Copia's debts but to add $10 million to them. Hazelroth said the goal was to give the center time to improve its finances.
"There was clearly hope that it would recover," he said. "The alternative was imminent and worse."
Hazelroth said he believes Copia has the revenue to make its bond payments, and he added that the bonds are backed with the center's real estate and furnishings as collateral.
But a California Debt and Investment Advisory Commission researcher warned in 2002 that nothing prevents so-called "conduit issuers" like I-Bank from getting drawn into expensive legal battles and settlement talks when a bond deal fails. Such failures also can damage their credibility in endorsing future bond sales.
"Their reputation and standing with respect to future debt financing may be negatively affected," commission researcher Mark Campbell said.
Before the board approved the bonds, former I-Bank chairman Edward Heidig "expressed concern" at a board meeting about Copia's refinancing request. The board approved it only after assurances that Copia had purchased bond insurance from ACA Financial Guarantee Corp.
But, about 10 weeks after the bond deal closed, ACA declared a quarterly loss of $1 billion on its subprime mortgage loan guarantees, and analysts immediately questioned its ability to honor any of its guarantees.
Last December, ACA Financial collapsed in a $7 billion sea of subprime mortgage loan guarantees. Maryland insurance regulators now are supervising its daily operations. ACA president Allan Roseman didn't respond to requests for comment.
Busted by the IRS
As ACA's woes began to mount, Copia was tangling with Sacramento IRS agent Jeffrey Brown over how it was using the space and facilities built with its first round of tax-exempt bond money.
After an introductory visit in October 2006, Brown made an unannounced visit during which he snapped photos of tables in the lobby displaying toaster ovens for sale and of wine with price tags resting in a cart parked on the second floor. Brown noted that Copia's patio was being used by the restaurant and that small tables in the atrium were an extension of the center's restaurant, wine bar and café, the documents show.
Brown did not return phone calls from The Bee. IRS spokesman Jesse Weller in San Francisco declined to comment.
But Brown's conclusion, documents show, was that Copia was using far more than the allowable 5 percent of its space for business activities, such as sales of wine and food, and private events, such as receptions and parties. That finding put the center's tax-exempt status in jeopardy.
The IRS' concern about using tax-exempt bonds to finance such facilities was echoed by a recent federal Government Accountability Office report to the Senate Finance Committee.
The GAO pointed out that, while attractive to investors, tax-exempt bonds are costing the public billions in lost tax revenue each year. The GAO concluded that their tax-exempt status should be reconsidered because "it's unclear whether the facilities generate public benefits that would be un-provided by the private market."
Copia initially disputed Brown's accusations, but after the agent presented his photographic evidence, attorney Carol Lew – a specialist in nonprofits and tax-exempt bonds – quickly proposed a compromise.
Lew negotiated a $224,737 settlement and sale of some land, the agreement and a copy of a Copia check, dated April 19, 2007, show. Copia's tax-exempt status was preserved.
Turmoil at the top
Meanwhile, Copia was going through administrative turmoil. As Lew negotiated with the IRS, Copia president Arthur Jacobus cut 28 of his 85 staff members, paring costs by $3 million a year.
Then, between I-Bank's approval of Copia's bailout in April 2007 and the deal being finalized in August, Copia chief operating officer Kurt Nystrom was dismissed , his six-figure salary redirected into the center's programs, according to Nystrom and Copia officials.
Jacobus, who signed the final bond papers, was fired eight months later, this past March, as were six people in marketing, including Vice President Larry Tsai.
Now, says Joseph Peatman, a Napa attorney who became Copia's board chairman this spring, the center is trying to put its problems behind it.
In a March news release announcing that former board chairman Garry K. McGuire Jr. was the new president, Copia's public relations firm trumpeted the center's plan for growth and a renewed focus on wine.
After his appointment, McGuire told the Napa Valley Register that Copia had broken even for the first time in 2007. Yet a review of its financial statements indicates large losses and negative cash flows for that year.
Asked to reconcile the two, McGuire told The Bee that he had meant to say that Copia "almost" broke even if you match operating revenues against expenses, numbers that exclude its debt service costs and its bond payments.
McGuire also said Copia is in discussions with a major real estate developer to build a retail center and four-star boutique hotel nearby. McGuire wants to increase online sales from Copia's gift shop and said he is exploring a deal with the Food Channel to syndicate the center's DVD productions on wine and food.
But, board chairman Peatman acknowledged, the struggle to break even continues.
"The whole concept to have Copia as a museum for wine, food and art was flawed," he said. "The focus now is: Can it survive? It's been pretty much insolvent since the beginning."