City counting on ‘lease-purchase’ financing

To build a new City Hall, Las Vegas city officials have turned to what is known as "lease-purchase" financing, which is similar to a general obligation bond with two key distinctions: There is no dedicated source of funds to pay back the note, and the city can walk away from the obligation.

But doing so would mean the city would be evicted from its own City Hall.

The financing method itself is well-known to investors, said Guy Hobbs, a financial consultant and former finance director for Clark County.

Investors buy what's known as "certificates of participation," or COPs, and are paid back in annual lease payments appropriated by the City Council as part of the budgeting process. Since the city technically has the option, however unrealistic, of ditching municipal headquarters (which would revert to the investors), the interest rate is usually a little higher than general obligation bonds.

"A lot of the time the market looks at government leases as less solid than other forms of security, because government entities have the ability to not appropriate the lease payment," Hobbs said.

As currently proposed, the developer, Forest City, would build the new City Hall once the funds from the COPs are available.

The city wouldn't have to make any payments in the first three years after construction is complete, followed by four years of small payments of $1 million or $2 million a year.

It's not until the eighth year after construction that full lease payments of $14 million to $15.6 million, as projected, would be due.

The city has the option to buy the building outright or refinance using general obligation debt.

The bond rating agencies Fitch and Standard and Poor gave the City Hall COPs an AA- rating, and Moody's rated it Aa3, which is equivalent to AA-. Those are one step below the city's AA bond rating but still considered "high quality."

A previous attempt to sell the COPs was unsuccessful, though, because the city couldn't get a low enough interest rate to make the project affordable.

This time, the city is using Build America Bonds, in which the federal government pays part of the borrowing costs, thus lowering the cost of the financing. The program is part of the stimulus bill and expires at the end of 2010, which is why the city feels pressure to secure the funding as soon as possible.

The council will find out the proposed interest rate on the bonds before they vote Wednesday.

Contact reporter Alan Choate at achoate@reviewjournal.com or 702-229-6435.