Under the Copper Ridge retail development deal, the Colorado Springs Urban Renewal Authority would have to issue up to $105 million in “special district” revenue bonds to finance the Powers Boulevard extension.
Special district bonds became popular during the recessionary 1980s, as cities and counties were increasingly unable to fund infrastructure projects.
These bonds are repaid by what’s known as tax-increment financing, meaning the sales or property taxes generated by business activity within the district.
In the case of the Copper Ridge Metropolitan District, the city is considering giving up 75 percent of the 2 percent in sales taxes it gets.
In exchange, the city expects $141 million in tax revenue over the 25-year bond amortization period, said Bob Cope, the city’s economic development senior analyst.
Because the special-district bond will be tax-exempt, that makes it more attractive to individual investors who won’t have to pay federal or state income taxes on their gains.
Typically, revenue bonds are bought by “sophisticated investors,” said Carrie Bartow, senior manager of accounting firm Clifton Gunderson in Colorado Springs.
Mutual fund companies or life-insurance companies often purchase such bonds as part of their portfolios.
Revenue bonds may or may not be insured.
They can be backed by insurance guarantees in case the issuer defaults, though insured bonds usually have a lower yield than bonds that are uninsured.
The rating of the bonds — whether AAA or below — will be determined by the strength of the underwriting, which will depend on which anchor retailers the project lures and sales projections.
Yields on bonds nowadays range from 3 to 5 percent. Typically, the higher the interest rate, the greater the risk.
“It all depends on how risky the market perceives this when it’s sold,” said Tom Zwirlein, a professor of finance at UCCS.
In any case, by the time the bonds are issued, the debt market will have changed, because a sale date is some time away.
That date will depend on when the project is able to attract a “critical mass” of retailers, Cope said.
Although the city doesn’t have any risk in the deal, local government, including the county and School District 20, could share in the distribution of surplus funds.
Typically, the underwriter and bondholders demand that revenue in excess of the bond payment be held in reserves each year, so that if there’s a dip in revenue they will still make their payment.
If the debt-service coverage ratio is 1.5, for instance, they’ll need to collect 1.5 times the debt payment each year as a safety net.
At the end of 25 years, the entire surplus would be released to the three entities.
But, again, none of this can happen until the first retailers sign on Copper Ridge’s dotted line.