Tuesday is a big day in the safety center financing process.  The Council will vote on a resolution to approve the lease-revenue financing transaction – we will vote to close the deal, in other words.

The package of documents is 551 pages, but the collection of documents is quite straightforward, so don’t let the size (or the legalese) overwhelm you (nor the handwaving on Locally Grown).  The documents itemize the parts of the deal and allocate risks.  To repeat – the documents describe the deal and are intended to allocate the risks among the parties.  Much of the length is from the repetition of relevant definitions and terms in each document, as well as the requirements of securities law which are extensive.

300 of the pages are the 2011 Comprehensive Annual Financial Report (CAFR) which the Council reviewed and accepted in July (the auditor’s presentation gives a quick summary)

Of the remaining 200 pages:

1-5: Finance director Kathleen McBride’s memo which itemizes everything else in the packet – it’s a good summary of who is involved and the documents in the packet.

6-12: The resolution by which the Council authorizes the transaction and approves the financing documents.  The three provisions (repeated throughout the documents) to highlight are (1) these are not general obligations of the City (the full faith and credit of the City are not pledged to pay these obligations), (2) the City must appropriate payment annually (Failure to appropriate funds annually is at the sole discretion of the Council), and (3) the certificates of participation (COPs) are tax-exempt.

13-25: Ground lease

• Deal: Northfield has already purchased the property for the project – the Cowles property – on Riverview Drive off Highway 3.  Now the City will lease the land for $1 to US Bank for the duration of the lease-purchase deal below.

• Risks: Since this is about land, the site lease puts the burden for ensuring good title, proper zoning, etc., and no environmental hazards on the City as owner/lessor.  But the meat of it is the termination section: 3 ways the site lease can terminate, all dependent on the lease purchase agreement: (1) full payment of the lease below (that’s the $6.28 million) at the end of the term, (2) prepayment of the lease, or (3) non-payment either by failing to appropriate the rental payments each year or by default (money appropriated but not paid for some reason).  These termination events are repeated throughout the documents.

26-68: Lease-purchase agreement

• Deal: The City agrees to pay rent to lease the property resulting in the purchase when the obligation is paid (either at the end of the term or sooner if prepaid); the Trustee agrees to lease the “lease property” which includes “the Project” (design, construction, installation, and equipping of an approximately 26,653 sq.ft. public safety center on the site), site improvements, etc.

• Lease term: date of issuance to April 2, 2033 and expires at earliest of: full payment, prepayment, or non-payment as above.
• City makes Base Rental payments and Additional Rentals (utilities, insurance, etc.)
• City operates and maintains the property in an appropriate manner and other typical language about who owns improvements
• City constructs the project according to Agreement to Construct (below) which stipulates that
  
• Trustee holds title to the property until City completes payment

• Risks:

• If lease expires for non-payment, the city has 45 days to vacate the site, deliver equipment (personal property or equipment financed with the proceeds from the sale of the certificates of participation) and any monies already appropriated must be paid.
• If construction exceeds the $6.28 million, the City must pay any excess costs
• Nonappropriation may be cured by the City within a reasonable time – so, let’s say a Council fails to appropriate funds in the (statutorily mandated) December 15 budget.  New Council takes its seats on January 1 and could pass a budget amendment to appropriate the rent payments and save the deal.
• The City is not obligated (because it’s not a general obligation) to make payments or purchase the facility.  The risk here is to the trustee, but in practice, the likelihood of the city walking away is extremely low.
• City has the burden of maintaining the property and using it only in ways that maintain the tax-exempt status of the investment

69-132: Indenture of trust (having nothing to do with indentured servitude which is about the only use of “indenture” outside the legal world)

• Deal: an agreement between the City (the bond issuer) and US Bank (the trustee which administers the lease for purchasers) which details the rules and responsibilities of each party.  The trustee receives payments from the City, pays the owners, and manages the legal requirements of the securities (which are substantial).  This document is technical securities market stuff.

133-154: Agreement to construct: just what it sounds like

• Deal: City agrees to construct the safety center; Trustee agrees to pay for it from the proceeds of the sale of the COPs

• Risks:

• Fixed Price if the construction costs exceed the proceeds of the sale of COPs, the city pays.  The city may execute change orders in the project, but the maximum price is fixed.  If the project comes in under budget, the city gets that benefit.
• Scheduled completion date is October 31, 2014 (actual completion date is when appropriate documentation of completion is delivered).  City uses best efforts to meet this schedule, but it is not a default if the scheduled completion is exceeded.
• Typical construction contract language defining default in the construction (rather than the payments to the trustee) such as the city failing to use best efforts to meet the date, not constructing the building to the appropriate standards, etc.

155-161: Continuing disclosure undertaking: More securities regulation stuff.  The City agrees to provide annual financial information, reports of “material events” and other documentation intended to give securities holders information about risks involved with their investment (I believe this is required for any bond issue).

162-177: Certificate purchase agreement

• Deal: Agreement for the City (issuer) to sell the entire issue of COPs – the $6.28 million package – to Dougherty & Co (underwriters) to market to investors by means of the Official Statement; the Official Statement (included as the Preliminary Official Statement below and finalized when the deal closes) is the prospectus or marketing material from Dougherty to investors describing the COPs.  Again, securities regulation stuff describing the actual issuance details.  Also sets the COP amount, rate and yield at closing which will take place tomorrow morning.

178 (Preliminary) official statement describes the terms of the COPs and provides extensive information about the City, the agreements which make up the project for which the COPs are sold described above, the rating from Standard & Poors (AA-) and other information intended to help investors make an informed choice about the risks of the investment and its appropriateness for their portfolio.  The risks include the repetition that these securities are not general obligations and the City is not required to appropriate funds which knowledgeable investors would measure against the AA- rating and their review of the City’s financial outlook as revealed in the 300 page CAFR.

The rest of the packet is copies of earlier materials including the authorizing statute, RFP for the underwriter for the COPS and the scoring of the proposals received, timeline, and the statement issued by the Council to inform the public about our choice of financing.