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

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
See video clips of angry public comments from the meeting.
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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
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

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

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.
Centerra 2008 Audit
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)
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