Warren Buffet is fond of saying, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
Chad McWhinney ignored this advice in 2005 when the Promenade Shops at Centerra were financed using a $116 million exploding ARM type loan (term means: Adjustable Rate Mortgage that has a near-term large balloon payment or pay-off requirement). Amortized over many years, the loan balance of more than $100 million was due and payable in just 5 years.
In 2008, McWhinney’s Centerra Metro District paid approximately $6 million to settle a 4 year old bond debt dirivative agreement on $57 million and borrowed another $115 million in new public bond debts. The interest rate is adjustable but instead of becoming due and payable in 5 years, this payment rises continually for 20 years. It started at $4 million in 2009 and ends in 2029 at $14 million if the swap agreement holds with RBC. Otherwise, the floating interest rate could dramatically change in the future far above $14 million.
Senior McWhinney staff member Doug Hill attempted to blame the Promenade foreclosure on the economy despite the fact sales are good and the shopping center is 90% leased. Poag & McEwen, the managing partner of the Promenade shops, have done an excellent job of keeping the stores leased and merchants and customers happy.
Hill once described the foreclosure problem at Promenade Shops to CBS4 news in Denver this way;
“The loan has matured and that’s the issue we have to deal with. It’s like your home mortgage coming due all at once instead of coming over time and that’s a difficult lump sum to deal with.”
Really? Coming due “all at once” implies a surprise or an unexpected change in the terms which is not really what happened. Like a homeowner who thought things would always get better, McWhinney may have placed the city’s Centerra Metro District on a similar collision course with reality as he did for the Promenade Shops at Centerra.
Declining property values alone can sink the Centerra Metro District’s ability to repay their public bond debts if the dip is low enough. The Centerra Metro District has even gone to court seeking a motion to dismiss an attempt by Poag & McEwen from appealing a Larimer County decision not to accept a protest of the Promenade commercial property taxes paid in 2008 and 2007.
The Security and Exchange Commission is investigating the use of swap agreements to create a “synthetic” fixed interest rate for municipal bonds (as Centerra did) which are also refereed to as derivatives.
LovelandPolitics posted an investigative report earlier today on Centerra’s property tax debacles regarding Promenade and how it could affect the ability of the Metro District to repay the bonds.
Please take time to read the entire report.
Thanks
