$71 million in nonrated bonds slated for FC mall

FORT COLLINS – A special metro district created to finance improvements for the redevelopment of the aging Foothills Mall is expected to issue $71 million in nonrated bonds early next year, if the project passes its final round of reviews in December.

In addition to $53 million in public improvement costs, the bond issue will cover $8 million in capitalized interest, a $7 million reserve fund and $3 million in issuance costs, for a total cost of $71 million, according to the city.

The city opted to use the metro district model, rather than issuing the bonds itself, in order to protect itself from risk should the redevelopment fail, according to Mike Beckstead, the city’s chief finance officer.

The bonds are expected to be issued at an interest rate of 7 percent, significantly higher than the 3 percent to 4 percent that standard municipal bonds command at current market conditions.

Interest rates have risen dramatically since the mall agreement first was approved by the city May 8 and if, as the project goes through another round of reviews, interest rates on the nonrated bonds reach 8.5 percent, the agreement must be re-evaluated, Beckstead said. The bonding also must be approved by City Manager Darin Atteberry.

Mall developer Alberta Partners did not respond to requests for comment. The metro district will be governed by a board of mall property owners, most of whom will be represented by Alberta Partners, Beckstead said.


The bonds will be repaid using three revenue streams. First, 50 mills of property tax will be assessed on the mall, resulting in an estimated $43 million in revenue over 25 years, according an Oct. 16 city presentation obtained by the Business Report.


A public improvement fee also will be charged to retailers at the mall, resulting in an estimated $65.5 million over 25 years in revenue for the metro district. The final source of funding is property tax increment from the Fort Collins Urban Renewal Authority that will account for $42.7 million in revenue over the next 25 years.

In total, this will mean $151.4 million in revenue for the metro district over the next 25 years, according to the presentation.


The bonds could have been issued for a much lower interest rate had they been issued by the city rather than the metro district, because the city has an AAA credit rating from Moody’s Investors Services, Beckstead said.

However, in order to protect the city’s books and credit rating, from risk, the city decided to issue the bonds through the metro district, which as a newly created entity will have no credit rating.


Municipal bonds issued to AAA-rated organizations now carry interest rates below 4 percent, but 25-year nonrated bonds come with an interest rate of 6 percent to 7 percent, said Dan Heckman, senior fixed-income strategist for US Bank Wealth Management.


If the bonds are backed by sales tax revenue and established retailers, as the mall is expected to be, an interest rate as low as 5 percent could be obtained, Heckman said.


It’s not unusual for small cities to use special metro districts to issue bonds in order to protect their own credit ratings and finances, Heckman said. Once the issuer has a positive track record stretching over several years, he said, the bonds can be refinanced at a lower rate.


This lines up with the city’s plan for the bonds on the mall.


If a revenue stream can be proved over the first 10 years of the life of the bonds, the city will try to refinance them at a lower rate, said Josh Birks, economic health director for the city.


Redevelopment financing always is challenging because it needs money to get started, but typically doesn’t have a revenue stream, Birks said.


In order to get the project financed, investors must be found who are willing to take on a certain amount of risk.


Market uncertainty in the coming months could prove to be a challenge, Heckman said. Issues such as Detroit’s bankruptcy and continued brinksmanship over fiscal problems at the federal level have hurt nonrated issuers because of the risk associated with their bonds, he said.

Still, improvements in real estate, job creation and consumer confidence nationwide, however slight, have buoyed investors, Heckman said.

“In general,” he said, “things have improved enough for nonrated bonds to attract investors, given the right type of project and environment.”


Even though the mall’s redevelopment has fallen behind schedule – it was originally scheduled to break ground this summer and be completed in time for the 2014 shopping season – the public finance portion of the Redevelopment and Reimbursement Agreement has remained mostly unchanged from the version that was approved by the Fort Collins City Council in the early morning hours of May 8, including the issuance of $71 million in nonrated bonds.


The city and Alberta now are aiming for a phased opening of the mall, beginning in spring 2015, with the main portion opening in time for the 2015 holiday season.

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Molly Armbrister covers real estate, banking and health care for the Northern Colorado Business Report. She can be reached at 970-232-3139, marmbrister@ncbr.com or twitter.com/MArmbristerNCBR
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