To: Honorable Mayor and Members of Town Council
From: Michael J. Hyman, Town Attorney
Trish Muller, CPA, Finance Director
Title
Ordinance Authorizing the Execution and Delivery of Certain Certificates of Participation Pursuant to a Lease Transaction; Authorizing the Execution and Delivery by the Town of a Site Lease Agreement, a Lease Purchase Agreement, and Other Documents Related Thereto; and Providing Other Matters Related Thereto (Second Reading - Approved on First Reading on August 18, 2020 by a vote of 6-1) [Certificates of Participation for financing the Town owned parking spaces in the Encore project]
Body
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The Ordinance was approved on first reading on August 18, 2020 by a vote of 6 to 1 with no changes.
Executive Summary
Town Council has specified continued economic development as one of the strategic priorities for the Town. The Encore project is a mixed use development that will bring residential, office and restaurant / retail to the core of downtown Castle Rock. It will also provide public parking spaces. As stated in the Redevelopment Agreement with Confluence developers, upon completion of the parking garage, the Town will pay $9,750,000 for 308 parking spaces for public use.
The Town intends to use lease-purchase financing to fund this investment in downtown public parking. With approval of Ordinance No. 2020-012 (Attachment A),Town Council will cause the issuance of $9.75 million in Certificates of Participation (COPs) in a lease-purchase agreement to pay for its share of the construction costs associated with the parking structure at the Encore project.
Discussion
The Encore project is a mixed-use redevelopment of an old liquor store and two oil change garages, as well as a development of the adjacent Town Hall parking. The project will include 150,762 residential square feet (SF) made up of 124 for-sale condominiums, 28,621 commercial SF made up of 60% retail and restaurant space, and 40% of office space. The project is proposed to be seven stories, at 84’4” tall.
The project will have 601 total parking spaces with parking on all seven stories, with the Town owning 308 of those spaces for public use. The project will have 293 spaces for private development. Town code requires 124 spaces for the private residential SF in this project and 37 spaces for the private commercial SF. Also, the project is providing 132 spaces in addition to what is required for the development and the spaces dedicated for public use.
The project will include an interior, privately owned plaza facing Wilcox street, a privately-owned dog park on the east side of the building facing Perry Street, and a restaurant patio space on the north side of the project adjacent to the Town-owned plaza that will be built by Confluence.
Construction on the project started in the fall of 2019. The parking garage is scheduled to be completed in spring of 2021, with the residential and commercial components scheduled to open in early 2022. As part of the financing package for the project, the Town plans on using lease-purchase financing to reimburse Confluence for the construction of the 308 public parking spaces.
Prior to making the financial commitment for the Encore project, the Town conducted an independent financial analysis of the acquisition of the parking spaces. The analysis determined that the projected Town revenue from the project: the General Improvement District mill levy, the Property Tax and Sales Tax increment from the site, and the add-on Public Improvement Fee (PIF) was estimated to be sufficient revenue to service the COP debt.
The Town will make rental payments under a lease-purchase agreement for Town property with UMB Bank. In turn, UMB Bank will issue COPs in the lease-purchase agreement, using the Town’s rental payments to fund the annual debt service requirements on the COPs. The Town will use revenues from its general fund to make the rental payments until such time as the Festival Commons General Improvement District (GID) is generating sufficient property tax revenues to make such payments. Town staff has been working with the Town’s financial advisor (First Southwest), bond counsel (Butler Snow), and investment banker (Stifel Nicolaus) to structure the financing.
COPs are different from General Obligation Debt or Revenue Bonds in many ways. This method of funding does not require voter authorization and is not considered a general obligation indebtedness or multiple-fiscal year financial obligation of the Town within the meaning of any constitutional, statutory or Charter debt limitation. Rather, the debt service on the COPs is funded by rental payments that are subject to annual appropriation by Town Council.
These COPs are structured as a "lease, lease back" of an essential Town asset - initially, the Town Hall site and the buildings and improvements located thereon and, eventually, if the Town Council so elects, the Town’s interest in the Encore parking garage. In other words, the Town enters into a lease of property which the Town currently owns (the “Site Lease”) with a bank (in this case, UMB Bank). The bank, in turn, leases its interest in the property back to the Town (the “Lease Purchase Agreement”).
The bank then issues COPs in the Lease Purchase Agreement and sells them to investors, who are repaid out of the rental payments made by the Town over the term of the Lease Purchase Agreement (i.e., 30 years). The proceeds of the COP sale (i.e., $9.75 million) are used by the Town to finance the acquisition of its interest in the Encore parking garage. At the end of the Lease Term or upon payment of the purchase option price by the Town, whichever occurs first, the Lease Purchase Agreement is terminated and title to the leased asset reverts back to the Town. Should, in any given year, Town Council decide not to appropriate the rental payments, the Town must vacate the leased premises and the bank will sell or lease its interest in the leased premises to generate revenues to pay back the COP purchasers.
Part of any COP issuance is the identification of an essential Town asset to be used as collateral for the COPs. The term “essential” in this case refers to an asset used for core operations of the government and not easily vacated. Town Hall will be used initially as the collateral asset, with an option to switch out the collateral to the parking units at a later date. This collateral designation will be transparent for the operations of Town Hall.
The Town expects to have a rating on the COPs of “AA.” All-in True Interest Costs will be at or near 2.8% and will generate approximately $9,750,000 in project funds. More information on interest rates will be provided at the Council meeting. The estimated costs of Issuance are expected to be approximately $250,000.
The Ordinance grants authority to the Mayor, Town Manager, and Finance Director to finalize the transaction, setting maximum parameters for the transaction that cannot be exceeded without further approval by the Town Council. The Ordinance includes the following parameters:
• 4.5% as the maximum net effective interest rate on the COPs
• A Lease Term not to exceed 30 years, a Site Lease Term not to exceed 40 years
• An aggregate principal amount of Base Rentals not to exceed $12,125,000
• A maximum annual repayment of Base Rentals not to exceed $1,300,000
• And a maximum total repayment amount of Base Rentals not to exceed $21,000,000
• The Lease shall be subject to prepayment at the option of the Town, without penalty, no later than December 1, 2030.
Document Overview
The following documents are discussed briefly to give Council an understanding of each of the documents which are required to issue these bonds.
Ordinance No. 2020-012 An Ordinance Authorizing the Execution and Delivery of Certain Certificates of Participation Pursuant to a Lease Transaction; Authorizing the Execution and Delivery by the Town of a Site Lease Agreement, a Lease Purchase Agreement, and Other Documents Related Thereto; and Providing Other Matters Related Thereto
The Ordinance authorizes Town staff to approve and enter into the various financing documents for the issuance of the Bonds.
Preliminary Official Statement -The Official Statement is the offering document used to solicit orders from potential investors to purchase the COPs. In addition, it contains brief economic and demographic information about the Town.
Site Lease Agreement -The Site Lease is an agreement between the Town, as Lessor, and UMB Bank, as Lessee, whereby UMB Bank will lease the Town Hall site and the buildings and improvements located thereon from the Town for a period not to exceed 40 years.
Lease Purchase Agreement - The Lease Purchase Agreement is an agreement between UMB Bank, as Lessor, and the Town, as Lessee, whereby the Town will lease the Town Hall site and the buildings and improvements located thereon from UMB Bank, with an option to purchase the Bank’s interest therein, for a period not to exceed 30 years.
Indenture of Trust - The Indenture of Trust is a document issued by UMB Bank as Trustee for the benefit of the owners of the COPs. The Indenture provides for the execution, delivery and payment of and the security for the COPs, the proceeds of which will be used to finance the Town’s interst in the Encore parking garage. The Trustee will hold the Revenues and the Leased Property and will exercise the Trustee’s rights under the Site Lease and the Lease Purchase Agreement for the benefit of the COP owners, and will disburse monies received by the Trustee in accordance with the Indenture.
Continuing Disclosure Certificate - The Continuing Disclosure Certificate is a certificate of the Town entered into, pursuant to Rule 15c2-12 of the Securities and Exchange Act, for the benefit of the purchasers of the Certificates. This Certificate requires that the Town provide certain information annually, typically the Town’s audit and certain sales and use tax information, so that investors can make informed investment decisions on the secondary market when looking at the Certificates. It also requires the Town to file notice of certain events when they occur, which would be considered material to investors, like rating changes, events of default, or events of non-appropriation for the COPs.
Certificate Purchase Agreement - The Certificate Purchase Agreement is a contract with Stifel, who is acting as the underwriter for the COP issue. It provides that the Town agrees to sell the bonds/certificates to Stifel, and Stifel agrees to buy them. Stifel can terminate the agreement under certain circumstances listed, and the Town agrees to provide information to Stifel and makes certain representations with respect to the bonds and the COPs. This agreement will terminate at the bond/COP closing.
Budget Impact
The approval of the documents above generates overall revenue available for acquisition of public parking of approximately $9.75 million.
Unlike revenue bonds previously issued by the Town, the rental payments that are due under the Lease and used to pay debt service on the COPs are subject to annual appropriation by the Town during the budget process and, thus, do not constitute a pledge of a particular Town revenue source. Instead, the rental payments are payable from general Town revenues. However, it is expected that the Town will utilize legally available funds in its Parking Fund, a sub-fund of the General Fund.
Staff Recommendation
Staff is recommending Council approve Ordinance No. 2020-012 and direct staff to proceed with the negotiations and preparations for the issuance of the Certificates of Participation in an amount not to exceed $9.75 million.
Proposed Motion
I move to approve on second reading Ordinance No. 2020-012 An Ordinance Authorizing the Execution and Delivery of Certain Certificates of Participation Pursuant to a Lease Transaction; Authorizing the Execution and Delivery by the Town of a Site Lease Agreement, a Lease Purchase Agreement, and Other Documents Related Thereto; and Providing Other Matters Related Thereto.
Attachments
Attachment A: Ordinance
Attachment B: Preliminary Official Statement
Attachment C: Site Lease Agreement
Attachment D: Lease Purchase Agreement
Attachment E: Indenture of Trust
Attachment F: Continuing Disclosure Certificate
Attachment G: Certificate Purchase Agreement