| LovelandPolitics.com |
| The Centerra Gamble: Loveland's $112 Million Variable Rate Public Debt |
Loveland - November 25, 2009
McWhinney Slogan - Harbinger Of Things To Come?
A self-serving axiom once propagated by Troy McWhinney and his closest staff was that a town “either
grows or dies.” The argument is that without constant growth and change in a community it will enter
into a cycle of economic decline. The McWhinney brothers were defending Loveland's precedent
setting agreement with their company in 2004 allowing for the diversion of a projected $500-$650
million in future sales and property taxes over 25 years to subsidize the Centerra project straddling
the I-25 in Loveland.
This slogan was used prior to the nationwide economic crisis in which we now find the country and prior
to the current focus of bringing “primary jobs” back to Loveland. Loveland's 2006 municipal elections
steered the local political debate away from Don Williams’s (Loveland City Manager and unabashed
McWhinney promoter) competition with surrounding communities to steal potential shoppers for the
sales tax revenue at any cost (even past a point of diminishing returns). Now the often-claimed goal has
become retaining and attracting primary jobs for Loveland.
In 2006 the community, before the nationwide economic slowdown, become weary of Loveland’s
construction-focused City Council and City Manager who were immersed in efforts to bring more retail
to the I-25 corridor (often at the expense of other areas of Loveland) all while Loveland was
hemorrhaging its highly-paid, high-tech manufacturing jobs. After losing two seats on Loveland’s council
in 2006, local developer McWhinney’s apparatchik in city hall got the message and tried to “get in front
of the inevitable” by claiming jobs were the first priority of the now infamous 2004 Master Financing
Agreement (MFA) between the City of Loveland and McWhinney. This strategy culminated in an
editorial last October during Loveland's municipal election by Chad McWhinney that made the false
claim that jobs were documented in the 2004 agreement as its primary objective. This last-minute
attempt to influence Loveland’s mail-in council election didn’t succeed as most candidates defending
McWhinney lost.
Too many tax-paying retailers like car dealers and the movie theater had already been poached by
McWhinney from within Loveland thus demonstrating that Centerra’s heavily subsidized venture is not
necessarily Loveland’s gain; depending from where the tenants are being recruited – i.e. from outside or
inside Loveland.
McWhinney also suffered the humiliating defeat of being allowed to use $80 million of Centerra’s bond
proceeds to build a private parking garage for their Grand Station development; only to see it become a
grand failure that never could get off the ground even before the economic downturn began. Ultimately,
the Grand Station diversion cost McWhinney the loyalty of their managing partner of the Promenade
Shops at Centerra who went to tattle on McWhinney to Loveland’s council as being over their heads.
The partner, Poag & McEwen, also warned in 2007 that the Promenade Shops at Centerra were
overbuilt and the local demographics still 10 years away from supporting any additional retail in the area.
The problem is the quasi-governmental entity McWhinney used to finance Centerra’s infrastructure
through massive public debt is now at risk of imploding if it doesn’t continuously grow. Grow or Die is
not just an empty slogan for those advocating more sprawl east of Loveland anymore as it was in 2004.
Now it is an imperative that resulted from an overly ambitious financing scheme using public
monies to develop what is largely a private undertaking.
Promenade Shops at Centerra Go Into Foreclosure
Many people were shocked to learn that KeyBank recently initiated foreclosure proceedings against
Centerra’s flagship retail center opened in late 2006 called the Promenade Shops at Centerra.
Coincidently, the outstanding unpaid balance on the construction loan is $112 million which is rounded
to the same amount as Centerra’s public debt. The two loans are not connected; though the identical
amounts did cause some initial confusion for many over whether the news stories were addressing the
public or private debt of Centerra’s premier lifestyle center.
The recent attention on the initiation of a foreclosure does provide an opportunity to better examine the
public’s debt also incurred, in part, building the same project. What is important to consider is that
Chad McWhinney’s penchant for exotic financing schemes and use of derivatives or balloon
payments to lower the overall interest rates on loans involves a level of risk most local
government entities would not normally use when financing public projects.
In 2008 the Centerra Metro District paid its 2004 issued bond debts of $57 million by issuing a new
series of adjustable rate public bonds for $112 million. The 2004 issue early grace period had expired
by 2008 thus McWhinney’s Metro District was required to begin making higher payments to cover not
only the bond’s growing interest costs but also begin repaying the principle of $57 million. Similar to a
consumer who takes out more credit cards to cover existing credit cards already ‘maxed-out,’
McWhinney’s Metro District dodged the bullet in 2008; by simply issuing additional bonds to pay pay-
off the previous bond debts and get additional near-term cash for the McWhinney’s Centerra Metro
District to build even more projects in hopes of increasing the annual revenues of the District. The new
debt follows a similar pattern as the old by beginning with manageable payments while escalating the
annual payments until they exceed current Metro District revenue. (see chart on the right)
Incredibly, the discretionary part of $55 million in public debt taken out in March of 2008 has already
been spent by July 2008 save one indenture account the City of Loveland required for McWhinney’s
Metro District to set aside to cover the improvements promised in their 2004 MFA of the I-25 and
Highway 34 interchange. Despite efforts to persuade the city to let them have that remaining money,
McWhinney failed to convince their supporters in city hall that the safety improvements could be
indefinitely postponed on an intersection they once called Northern Colorado’s main street. A partial
funding was approved by council at only $8.7 million and appropriated to fund interim safety
improvements while distribution of the balance (approx. $2.5 million) was postponed to be decided at a
later date. The struggle to redirect the $12 million became a costly political move for McWhinney that
left some of their supporters asking "what were they thinking?"
McWhinney Acting Desperately - Losing Allies On Loveland's Council
McWhinney tried to divert the some $12 million in the transportation indenture account for Centerra to
fund improvements for a new commercial building project to accommodate a potential tenant, Agrium
Inc. McWhinney's original request to divert the funds claimed an unnamed Fortune 500 company was
coming to Northern Colorado but they and the NCEDC (Northern Colorado Economic Development
Council) couldn't name the company. LovelandPolitics broke the news April 13, 2009 that it was not
an out of state Fortune 500 company but instead a local company - see full story - by reporting,
"The mystery employer McWhinney is claiming they can bring to Loveland only after the I-
25/U.S. 34 safety improvements are de funded was described as a "Fortune 500 agricultural
research firm." In fact, it is a consolidation of two companies already located in Greeley
and Loveland that is the subsidiary of a much larger Canadian firm."
Reactions to the news by the City of Greeley, Larimer County, the competing developer located in
Johnstown (across the street from Centerra) along with general public responses to local newspapers
culminated in McWhinney withdrawing the request. Later, both the head of NCEDC and McWhinney's
former President, Rocky Scott, resigned their positions.
Even those who emphatically defended McWhinney as the best thing that ever happened to Loveland
became concerned over the Agrium scandal as the political causalities began to stack-up. Loveland
Mayor Pro Tem David Clark is said to have phoned McWhinney just before the council meeting to say
he couldn’t support their position anymore and still have a shot at being elected mayor by November
2009. Working off the tip they already lost their support on council before the infamous vote,
McWhinney withdrew their request but on October 7, 2009 came back to the council with a
compromised lesser improvement of $8.7 million that Clark did support despite heavily public
opposition at the meeting. See video clips of angry public comments from the meeting.
McWhinney Slogan - Harbinger Of Things To Come?
A self-serving axiom once propagated by Troy McWhinney and his closest staff was that a town “either
grows or dies.” The argument is that without constant growth and change in a community it will enter
into a cycle of economic decline. The McWhinney brothers were defending Loveland's precedent
setting agreement with their company in 2004 allowing for the diversion of a projected $500-$650
million in future sales and property taxes over 25 years to subsidize the Centerra project straddling
the I-25 in Loveland.
This slogan was used prior to the nationwide economic crisis in which we now find the country and prior
to the current focus of bringing “primary jobs” back to Loveland. Loveland's 2006 municipal elections
steered the local political debate away from Don Williams’s (Loveland City Manager and unabashed
McWhinney promoter) competition with surrounding communities to steal potential shoppers for the
sales tax revenue at any cost (even past a point of diminishing returns). Now the often-claimed goal has
become retaining and attracting primary jobs for Loveland.
In 2006 the community, before the nationwide economic slowdown, become weary of Loveland’s
construction-focused City Council and City Manager who were immersed in efforts to bring more retail
to the I-25 corridor (often at the expense of other areas of Loveland) all while Loveland was
hemorrhaging its highly-paid, high-tech manufacturing jobs. After losing two seats on Loveland’s council
in 2006, local developer McWhinney’s apparatchik in city hall got the message and tried to “get in front
of the inevitable” by claiming jobs were the first priority of the now infamous 2004 Master Financing
Agreement (MFA) between the City of Loveland and McWhinney. This strategy culminated in an
editorial last October during Loveland's municipal election by Chad McWhinney that made the false
claim that jobs were documented in the 2004 agreement as its primary objective. This last-minute
attempt to influence Loveland’s mail-in council election didn’t succeed as most candidates defending
McWhinney lost.
Too many tax-paying retailers like car dealers and the movie theater had already been poached by
McWhinney from within Loveland thus demonstrating that Centerra’s heavily subsidized venture is not
necessarily Loveland’s gain; depending from where the tenants are being recruited – i.e. from outside or
inside Loveland.
McWhinney also suffered the humiliating defeat of being allowed to use $80 million of Centerra’s bond
proceeds to build a private parking garage for their Grand Station development; only to see it become a
grand failure that never could get off the ground even before the economic downturn began. Ultimately,
the Grand Station diversion cost McWhinney the loyalty of their managing partner of the Promenade
Shops at Centerra who went to tattle on McWhinney to Loveland’s council as being over their heads.
The partner, Poag & McEwen, also warned in 2007 that the Promenade Shops at Centerra were
overbuilt and the local demographics still 10 years away from supporting any additional retail in the area.
The problem is the quasi-governmental entity McWhinney used to finance Centerra’s infrastructure
through massive public debt is now at risk of imploding if it doesn’t continuously grow. Grow or Die is
not just an empty slogan for those advocating more sprawl east of Loveland anymore as it was in 2004.
Now it is an imperative that resulted from an overly ambitious financing scheme using public
monies to develop what is largely a private undertaking.
Promenade Shops at Centerra Go Into Foreclosure
Many people were shocked to learn that KeyBank recently initiated foreclosure proceedings against
Centerra’s flagship retail center opened in late 2006 called the Promenade Shops at Centerra.
Coincidently, the outstanding unpaid balance on the construction loan is $112 million which is rounded
to the same amount as Centerra’s public debt. The two loans are not connected; though the identical
amounts did cause some initial confusion for many over whether the news stories were addressing the
public or private debt of Centerra’s premier lifestyle center.
The recent attention on the initiation of a foreclosure does provide an opportunity to better examine the
public’s debt also incurred, in part, building the same project. What is important to consider is that
Chad McWhinney’s penchant for exotic financing schemes and use of derivatives or balloon
payments to lower the overall interest rates on loans involves a level of risk most local
government entities would not normally use when financing public projects.
In 2008 the Centerra Metro District paid its 2004 issued bond debts of $57 million by issuing a new
series of adjustable rate public bonds for $112 million. The 2004 issue early grace period had expired
by 2008 thus McWhinney’s Metro District was required to begin making higher payments to cover not
only the bond’s growing interest costs but also begin repaying the principle of $57 million. Similar to a
consumer who takes out more credit cards to cover existing credit cards already ‘maxed-out,’
McWhinney’s Metro District dodged the bullet in 2008; by simply issuing additional bonds to pay pay-
off the previous bond debts and get additional near-term cash for the McWhinney’s Centerra Metro
District to build even more projects in hopes of increasing the annual revenues of the District. The new
debt follows a similar pattern as the old by beginning with manageable payments while escalating the
annual payments until they exceed current Metro District revenue. (see chart on the right)
Incredibly, the discretionary part of $55 million in public debt taken out in March of 2008 has already
been spent by July 2008 save one indenture account the City of Loveland required for McWhinney’s
Metro District to set aside to cover the improvements promised in their 2004 MFA of the I-25 and
Highway 34 interchange. Despite efforts to persuade the city to let them have that remaining money,
McWhinney failed to convince their supporters in city hall that the safety improvements could be
indefinitely postponed on an intersection they once called Northern Colorado’s main street. A partial
funding was approved by council at only $8.7 million and appropriated to fund interim safety
improvements while distribution of the balance (approx. $2.5 million) was postponed to be decided at a
later date. The struggle to redirect the $12 million became a costly political move for McWhinney that
left some of their supporters asking "what were they thinking?"
McWhinney Acting Desperately - Losing Allies On Loveland's Council
McWhinney tried to divert the some $12 million in the transportation indenture account for Centerra to
fund improvements for a new commercial building project to accommodate a potential tenant, Agrium
Inc. McWhinney's original request to divert the funds claimed an unnamed Fortune 500 company was
coming to Northern Colorado but they and the NCEDC (Northern Colorado Economic Development
Council) couldn't name the company. LovelandPolitics broke the news April 13, 2009 that it was not
an out of state Fortune 500 company but instead a local company - see full story - by reporting,
"The mystery employer McWhinney is claiming they can bring to Loveland only after the I-
25/U.S. 34 safety improvements are de funded was described as a "Fortune 500 agricultural
research firm." In fact, it is a consolidation of two companies already located in Greeley
and Loveland that is the subsidiary of a much larger Canadian firm."
Reactions to the news by the City of Greeley, Larimer County, the competing developer located in
Johnstown (across the street from Centerra) along with general public responses to local newspapers
culminated in McWhinney withdrawing the request. Later, both the head of NCEDC and McWhinney's
former President, Rocky Scott, resigned their positions.
Even those who emphatically defended McWhinney as the best thing that ever happened to Loveland
became concerned over the Agrium scandal as the political causalities began to stack-up. Loveland
Mayor Pro Tem David Clark is said to have phoned McWhinney just before the council meeting to say
he couldn’t support their position anymore and still have a shot at being elected mayor by November
2009. Working off the tip they already lost their support on council before the infamous vote,
McWhinney withdrew their request but on October 7, 2009 came back to the council with a
compromised lesser improvement of $8.7 million that Clark did support despite heavily public
opposition at the meeting. See video clips of angry public comments from the meeting.
| The far right column titled "Annual Debt Service Fees" shows the escalating payments due on the debt that exceed Centerra Metro District revenue |
| Debt Service - $195,811,869 In Escalating Payments Due (2009 - 2029) |
| Chad McWhinney (left) and Troy McWhinney (right) are brothers whose company (McWhinney) has been the beneficiary of the $112 million bond proceeds used to operate and develop Centerra in Loveland. The only money now remaining from the 2008 bond proceeds is a required reserve account for debt repayment and some money already committed to a few transportation projects. |
In the end, Clark’s original judgment was correct and he lost his bid to be Loveland’s mayor anyway in November of 2009. According to a fellow councilman the community’s
perception that Clark's unwavering support for everything McWhinney instead of the community cost him the election.
Throughout 2008 and the beginning of 2009 valiant efforts were also being made by McWhinney lobbyists (at least one drawing his salary directly from the publicly funded Centerra
Metro District) to divert any federal or state funds coming to Loveland or the region into a bailout package for McWhinney. By finding alternative methods to fund the Centerra Metro
District’s obligations to pay for promised regional transportation improvements from the $112 million bond proceeds, McWhinney was staying one step ahead of the game . These efforts
paid-off and the I-25 / Crossroads Interchange with I-25 improvement project is now being funded mostly with federal stimulus money. McWhinney hasn’t been shy, however, to claim
credit for the project as if it were provided by the Metro District as the result of their 2004 “partnership” MFA.
Is Centerra Metro District In Financial Trouble Like Promenade Shops?
Centerra’s $112 million public bond debt must be paid to the bond holders with adjustable interest rates by 2029. The planned payments are not constant but begin low at only $6 million
in 2008 and grow to $14 million by the last year of the agreement in 2029. Here is the problem. McWhinney’s Centerra Metro District only reported total revenues in 2008 of barely
over $8 million. The revenue comes from various sources but mostly diverted property taxes that are rebated by Larimer County to the Centerra Metro District’s urban renewal authority
($5 million) and the improvement district “fees” that are collected like sales taxes from shoppers in Centerra ($2 million).
A little known consequence of the Centerra Metro District’s deteriorating financial condition was the lay-off of McWhinney employees earlier this year. Former McWhinney employees
have told LovelandPolitics that Chad McWhinney used the Centerra Metro District monies as a kind of slush fund to cover overhead expenses. This appears to be the process of
accumulating expenses “for the Metro District” and later collecting what the entity owes McWhinney. Metro District Manager and McWhinney lobbyist Rich Shannon informed Loveland’
s council earlier this year that any money left over from the indenture account to improve the I-25 and Highway 34 interchange would automatically revert to the Metro District and would
likely got to pay the outstanding “debt” the District has with McWhinney. Some on council were surprised to learn that McWhinney records many “in-kind” contributions to the Centerra
Metro District as debt to be drawn out later when the Metro District has cash available. This may explain why McWhinney’s ability to support a large staff ended at nearly the same time
the last of the funds left from the $112 million bond proceeds from the Metro District were spent.
Centerra Metro District Projected Income and Expenses
Even at a constant growth rate in sales of 2% per annum between now and 2029, the Centerra Metro District’s public bond debt payments will out pace revenue collections by 2011
leaving the district with a negative cash flow and insufficient funds to maintain landscaping and provide other basic services. This is because the growth in debt payment obligations will
increase to over $8 million annually by 2011 and $9 million annually by 2014. The only way Centerra can continue to pay back the public debt it is obligated to pay while covering
expenses will be to grow at a pace faster then normal economic growth even during a time of economic downturn. The only realistic way to grow the District revenue beyond future
financial obligations will be to develop more properties inside Centerra to increase the service fee (sales tax) revenue and property tax revenues of the Centerra Metro District. It is
comparable to a household with a growing mortgage debt payment. If the mortgage grows faster than the primary income earner can receive in future raises the only next option is to get
every member of the household working.
Similarly, Loveland’s best hope to avoid an economic catastrophe for the Centerra Metro Districts is to increase the number of properties within the Districts that are developed and
generating revenue for the districts through sales and property taxes. The dilemma is that cannibalizing businesses from within Loveland means diverting the tax revenue businesses
generate over to paying the Centerra Metro District’s bond debt until 2029 instead of supporting local government services.
In addition, even growth coming from outside Loveland to the Centerra Metro District is of dubious benefit as the diversion of taxes doesn’t mean the new Centerra residents or
businesses will not demand a full level of city services like police and fire protection while they are contributing less than other businesses and residents to support. Beside diverting taxes
back into Centerra to pay the bond debt the 2004 MFA also allowed McWhinney a generous waiver in the developer fees (up to $7 million) that other developers must pay to offset the
capital expansion costs of emergency services as the city grows in population. These diversions take on added significance given Loveland’s current and anticipated budget crunches. The
2010 budget, for instance, required a cutback to 2007 levels, despite continued growth in the City’s population and demand for services.
As the ratio of participants in the local economy paying a lesser amount towards regular city services increases the greater the economic burden grows on those Lovelanders who don’t
get any tax subsidies. According to the amortization methods being used to value the assets of the Centerra Metro District in its annual audit, all its assets (monument signs, promenade
infrastructure and Centerra landscaping) will be worthless in 20 years – about the same time the debt is finally paid.
It is Centerra’s Metro District that must “grow or die” given the current obligations it has to repay an enormous public debt. In all, the properties and businesses located in Loveland’s
Centerra Metro Districts will need to generate over $195 million between now and 2029 to successfully pay-off the public bond debt with interest. Current revenue is unlikely to grow
faster than 3% unless additional construction occurs thus McWhinney’s desperation in chasing any possible projects that can increase revenue for the Centerra Metro Districts. It is like
sending everyone to work to pay an escalating mortgage payment in a household. The more that is paid toward the bond debt (mortgage) the less monies available for other
improvements and normal maintenance in Centerra.
Centerra Bond Debt Interest Dependent on Unusual Derivative Agreement
All of the above assumptions regarding the repayment schedule of the bond proceeds and total interest charged assume an incredibly low interest rate on the $112 million Centerra Metro
District bond debt of 3.5%. While the interest rate is, in fact, adjustable McWhinney has represented to local officials it is a fixed rate. Given the vary cursory understanding the previous
Loveland City Council had of the bond debt it is not surprising they were unable to fully understand McWhinney representatives carefully parsed words when describing the Centerra
Metro District debt.
The Centerra Metro District uses a separate “swap agreement” to level the payments through what is sometimes called a “synthetic fixed rate” of interest. Simply explained, the interest
rate on the bonds is clearly adjustable but through a separate agreement with RBC Centerra “fixes” the rate for a financing charge. If the adjustable bond rate increases and the payments
increase, RBC is supposed to pay through its agreement the difference in cost to the Metro District for the higher interest rate on the public debt payments. However, if the adjustable
interest rate on the bonds goes down than RBC profits by receiving the difference between the synthetically fixed rate and lesser amount the Metro District would then have to pay. It is
explained in the 2008 Centerra Metro District audit in the following way.
“Using rates as of December 31, 2008, debt service requirements of the variable rate debt and net swap payments, assuming current interest rates remain the same for
their term, were as follows. As rates vary, variable rate bond interest payments and net swap payments will vary.”
The trouble with calling this simply a fixed interest rate is that it clearly is not. While RBC has received good credit ratings from various financial rating indexes, Standard & Poor’s placed
RBC on a “credit watch negative” in early 2009. If RBC fails to honor its credit swap agreement with McWhinney’s Centerra Metro District the debt payments could easily outstrip
available revenue sooner than currently projected during an environment of rising interest rates.
The same way McWhinney has said they never anticipated being unable to refinance the Promenade Shops at Centerra loan, a failure in RBC or untimely cancellation of the interest swap
agreement could also catch them by surprise and put the Centerra Metro District in an untenable financial situation. The private Promenade Shops loan and the public Centerra Metro
District loans are gambles that provide an initially lower cost of funds in exchange for taking greater risk later. In this way the two are very much related.
perception that Clark's unwavering support for everything McWhinney instead of the community cost him the election.
Throughout 2008 and the beginning of 2009 valiant efforts were also being made by McWhinney lobbyists (at least one drawing his salary directly from the publicly funded Centerra
Metro District) to divert any federal or state funds coming to Loveland or the region into a bailout package for McWhinney. By finding alternative methods to fund the Centerra Metro
District’s obligations to pay for promised regional transportation improvements from the $112 million bond proceeds, McWhinney was staying one step ahead of the game . These efforts
paid-off and the I-25 / Crossroads Interchange with I-25 improvement project is now being funded mostly with federal stimulus money. McWhinney hasn’t been shy, however, to claim
credit for the project as if it were provided by the Metro District as the result of their 2004 “partnership” MFA.
Is Centerra Metro District In Financial Trouble Like Promenade Shops?
Centerra’s $112 million public bond debt must be paid to the bond holders with adjustable interest rates by 2029. The planned payments are not constant but begin low at only $6 million
in 2008 and grow to $14 million by the last year of the agreement in 2029. Here is the problem. McWhinney’s Centerra Metro District only reported total revenues in 2008 of barely
over $8 million. The revenue comes from various sources but mostly diverted property taxes that are rebated by Larimer County to the Centerra Metro District’s urban renewal authority
($5 million) and the improvement district “fees” that are collected like sales taxes from shoppers in Centerra ($2 million).
A little known consequence of the Centerra Metro District’s deteriorating financial condition was the lay-off of McWhinney employees earlier this year. Former McWhinney employees
have told LovelandPolitics that Chad McWhinney used the Centerra Metro District monies as a kind of slush fund to cover overhead expenses. This appears to be the process of
accumulating expenses “for the Metro District” and later collecting what the entity owes McWhinney. Metro District Manager and McWhinney lobbyist Rich Shannon informed Loveland’
s council earlier this year that any money left over from the indenture account to improve the I-25 and Highway 34 interchange would automatically revert to the Metro District and would
likely got to pay the outstanding “debt” the District has with McWhinney. Some on council were surprised to learn that McWhinney records many “in-kind” contributions to the Centerra
Metro District as debt to be drawn out later when the Metro District has cash available. This may explain why McWhinney’s ability to support a large staff ended at nearly the same time
the last of the funds left from the $112 million bond proceeds from the Metro District were spent.
Centerra Metro District Projected Income and Expenses
Even at a constant growth rate in sales of 2% per annum between now and 2029, the Centerra Metro District’s public bond debt payments will out pace revenue collections by 2011
leaving the district with a negative cash flow and insufficient funds to maintain landscaping and provide other basic services. This is because the growth in debt payment obligations will
increase to over $8 million annually by 2011 and $9 million annually by 2014. The only way Centerra can continue to pay back the public debt it is obligated to pay while covering
expenses will be to grow at a pace faster then normal economic growth even during a time of economic downturn. The only realistic way to grow the District revenue beyond future
financial obligations will be to develop more properties inside Centerra to increase the service fee (sales tax) revenue and property tax revenues of the Centerra Metro District. It is
comparable to a household with a growing mortgage debt payment. If the mortgage grows faster than the primary income earner can receive in future raises the only next option is to get
every member of the household working.
Similarly, Loveland’s best hope to avoid an economic catastrophe for the Centerra Metro Districts is to increase the number of properties within the Districts that are developed and
generating revenue for the districts through sales and property taxes. The dilemma is that cannibalizing businesses from within Loveland means diverting the tax revenue businesses
generate over to paying the Centerra Metro District’s bond debt until 2029 instead of supporting local government services.
In addition, even growth coming from outside Loveland to the Centerra Metro District is of dubious benefit as the diversion of taxes doesn’t mean the new Centerra residents or
businesses will not demand a full level of city services like police and fire protection while they are contributing less than other businesses and residents to support. Beside diverting taxes
back into Centerra to pay the bond debt the 2004 MFA also allowed McWhinney a generous waiver in the developer fees (up to $7 million) that other developers must pay to offset the
capital expansion costs of emergency services as the city grows in population. These diversions take on added significance given Loveland’s current and anticipated budget crunches. The
2010 budget, for instance, required a cutback to 2007 levels, despite continued growth in the City’s population and demand for services.
As the ratio of participants in the local economy paying a lesser amount towards regular city services increases the greater the economic burden grows on those Lovelanders who don’t
get any tax subsidies. According to the amortization methods being used to value the assets of the Centerra Metro District in its annual audit, all its assets (monument signs, promenade
infrastructure and Centerra landscaping) will be worthless in 20 years – about the same time the debt is finally paid.
It is Centerra’s Metro District that must “grow or die” given the current obligations it has to repay an enormous public debt. In all, the properties and businesses located in Loveland’s
Centerra Metro Districts will need to generate over $195 million between now and 2029 to successfully pay-off the public bond debt with interest. Current revenue is unlikely to grow
faster than 3% unless additional construction occurs thus McWhinney’s desperation in chasing any possible projects that can increase revenue for the Centerra Metro Districts. It is like
sending everyone to work to pay an escalating mortgage payment in a household. The more that is paid toward the bond debt (mortgage) the less monies available for other
improvements and normal maintenance in Centerra.
Centerra Bond Debt Interest Dependent on Unusual Derivative Agreement
All of the above assumptions regarding the repayment schedule of the bond proceeds and total interest charged assume an incredibly low interest rate on the $112 million Centerra Metro
District bond debt of 3.5%. While the interest rate is, in fact, adjustable McWhinney has represented to local officials it is a fixed rate. Given the vary cursory understanding the previous
Loveland City Council had of the bond debt it is not surprising they were unable to fully understand McWhinney representatives carefully parsed words when describing the Centerra
Metro District debt.
The Centerra Metro District uses a separate “swap agreement” to level the payments through what is sometimes called a “synthetic fixed rate” of interest. Simply explained, the interest
rate on the bonds is clearly adjustable but through a separate agreement with RBC Centerra “fixes” the rate for a financing charge. If the adjustable bond rate increases and the payments
increase, RBC is supposed to pay through its agreement the difference in cost to the Metro District for the higher interest rate on the public debt payments. However, if the adjustable
interest rate on the bonds goes down than RBC profits by receiving the difference between the synthetically fixed rate and lesser amount the Metro District would then have to pay. It is
explained in the 2008 Centerra Metro District audit in the following way.
“Using rates as of December 31, 2008, debt service requirements of the variable rate debt and net swap payments, assuming current interest rates remain the same for
their term, were as follows. As rates vary, variable rate bond interest payments and net swap payments will vary.”
The trouble with calling this simply a fixed interest rate is that it clearly is not. While RBC has received good credit ratings from various financial rating indexes, Standard & Poor’s placed
RBC on a “credit watch negative” in early 2009. If RBC fails to honor its credit swap agreement with McWhinney’s Centerra Metro District the debt payments could easily outstrip
available revenue sooner than currently projected during an environment of rising interest rates.
The same way McWhinney has said they never anticipated being unable to refinance the Promenade Shops at Centerra loan, a failure in RBC or untimely cancellation of the interest swap
agreement could also catch them by surprise and put the Centerra Metro District in an untenable financial situation. The private Promenade Shops loan and the public Centerra Metro
District loans are gambles that provide an initially lower cost of funds in exchange for taking greater risk later. In this way the two are very much related.
| Reference Documents 1. Centerra Metro Districts Audits Centerra 2008 Audit Centerra 2007 Audit 2. Agreement Signed Between McWhinney & City of Loveland Master Financing Agreement (MFA) 2004 3. December 5, 2006 Amendment to the Master Financing Agreement (MFA) |