Mortgaging city hall: Local governments find certificates of participation an easier path to fund projects

The city of Loveland closed out the month of June with plans for a new parking garage firmly underway. Finalizing a deal with BBVA Compass Bank, June 23, the city will use a certificate of participation to fasttrack the new development.

COPs are nothing new, said Loveland mayor Cecil Gutierrez. It’s a practical financing tool that is used frequently by municipalities around the state. Loveland previously used a COP to finance the Police and Courts building. COPs are tax-exempt lease-financing agreements that promise investors a share of whatever revenue is derived from the lease (or lease-purchase) of the property or equipment to which the COP is tied.

In March, the Loveland City Council approved putting up for collateral two existing city buildings (City Hall and the fire administration building) to secure more than $17 million to fund a 460-space parking garage at Lincoln and Second streets. In the finalized terms, the lease-financing agreement is for 30 years. Once the garage is completed, it will replace City Hall and the fire department buildings as collateral.

“The reason COPs were very viable for us was because the interest rates were really low at the moment,” Gutierrez said. “The bank made a terrific offer, including more flexible terms — we can pay them off early if we decide.”

Or, because COPs are renewed each year, the city can back out of the deal at any point as well, and turn the parking garage over to the bank — which it’s not planning to at all.

“The goal is never to forfeit to anything,” Gutierrez said.

While COPs have many advantages, city taxpayers sometimes have issues with them. COPs do not require a multi-year fiscal obligation, therefore can be can be issued without voter approval.

“Anytime you do anything in a community, you will always have people that are concerned, which is normal,” Gutierrez said. “We look at the long-term benefit of what we’re borrowing money for to see if it makes financial sense for the community as a whole. The parking garage is something that the community has been asking about for years, so the support was there.

Gutierrez said he is “pretty fiscally conservative” and doesn’t like to borrow, but it makes financial sense to him to run with the parking garage development at this time.

“Construction rates and interests rates are increasing. Sometimes it comes down to timing,” he said.

It’s important to listen to the community, Gutierrez said.

“You will always have people that disagree with you, that’s just how it is,” he said. “Those are voices you have to listen to. Sometimes they have good points you haven’t considered. If you don’t hear them and consider them, you’re not doing your due diligence.”

The Loveland parking garage is slated to be completed near the end of 2018.

Other municipalities in the region are currently using COPs to fund development projects.

Greeley

The city of Greeley is financing its new city center building at the northwest corner of 11th Avenue and 11th Street with a COP through Zions Bank for a $29 million, 20-year term. The contract also includes funds for a new downtown fire station. Lease payments will range from $1.6 million to $2.1 million per year.

Victoria Runkle, assistant city manager, said this current project isn’t necessarily taking a bite out of the city’s budget because for the past 20 years, it has been paying down a COP for a fire station and city building currently in use. The contract ends next year, and the city plans to roll that already budgeted payment over to this new project.

“We don’t have to find any new money,” Runkle said.

As with the Loveland project, timing played a key role in moving the project along — a different kind of timing, though.

“Immediacy was our issue,” Runkle said. “We need additional office space and fire station now. A voter process might take 18 months, for example. I can’t wait 18 months for office space.”

Some citizens expressed feedback, Runkle said. The city facilitated opportunities for a community discussion. Some people saw the COP option as a clandestine way to avoid going to the voters for approval.

“It’s a valid discussion to have,” she said, though adding, “Immediate needs are hard to address if you have to go to a vote every time. That’s the reason the city council approved COPs for these projects.”

Longmont

The city of Longmont chose to use a COP to develop the Village at the Peaks retail area. As collateral for the loan, the Longmont Safety and Justice Center, the civic center complex, the library and the Development Services Center are being held as collateral on the financing. The city will repay the financing over a period of 23 years, at which time the city will regain the titles to the buildings.

According to city finance director Jim Golden, the public improvements  for Village at the Peaks were always planned to be funded through an urban renewal authority, which allows the city to use tax-increment financing. The Twin Peaks URA was established in 2012 for this purpose. The developer also formed a Metropolitan District to allow for a property tax to be levied on Village at the Peaks property.

From there, the forms of financing the city of Longmont considered were bonds issued by the URA, bonds issued by the Metro District or certificates of participation. Neither URA or COP require a vote to issue the debt. Metro District bonds do, but it is the vote of the few property owners in the Metro District, essentially the developer itself. The city did not want to do the Metro District option, as it wanted to retain total control over the tax-increment revenue from the URA versus pledging it to the Metro District, Golden said.

The city chose the COP because of its marketability — it’s backed by the pledge of city properties as collateral as opposed to the tax-increment revenue from the mall redevelopment. Additionally, the COP can be sold at a lower cost of financing than a URA bond or sold without a reserve-fund requirement. The city also noted that a COP is more common nationwide than a URA bond and has a higher degree of certainty that the COP deal could get done versus an URA bond.

Golden said there were some concerns expressed about the public buildings being pledged as collateral on the mall redevelopment, but there was greater support for the concept of the redevelopment.

“The city explained that using public buildings as a collateral for a COP is very common, and it is reliant on the concept that those buildings are essential assets of the city and thus it would be highly unlikely for the city to not fulfill its commitment to the COPs,” he said.

According to the city’s analysis as to the total project revenues, including required Metro District tax toward repaying the COPs, they should more than cover the debt service on the COPs. Thus, the collateral was at very little risk, Gordon said.

“Our experience has been successful so far,” he said. “Village at the Peaks is generating sufficient revenue in 2017 to make its annual COP payment as well as providing earmarked tax revenues for use for public safety, open space and streets. We expect it will also generate some of the same for the City’s General Fund as well.”

Boulder
The city of Boulder in 2015 used certificates of participation to fund its $40 million purchase of the former Boulder Community Health campus at 1100 Balsam Ave. Essentially, the city put up its public safety building, Park Central building and East Boulder Community Center and leased them back for the specified 21-year period, at the end of which the city will regain ownership in them.

Fort Collins
The Fort Collins Senior Center was put up as COP collateral in a downtown parking structure deal — $8.4 million to cover the city’s share of a parking structure attached to the new Elizabeth Hotel.

Statewide
On the state level, Senate Bill 267, which went into effect last month, authorizes issuing 20-year certificates of participation amounting to $2 billion over the next four years to fund transportation and other construction projects across the state.

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