County Backing Brings High Rating to Utah 'Dirt Bond'

DALLAS – It’s not often that you find a “dirt bond” with a double-A rating.

Debt backed by undeveloped land generally represents the riskiest segment of the municipal bond market, attractive to investors seeking high yields.

But $17.6 million of special assessment bonds pricing Thursday from Weber County, Utah, are a bit of an exception.

Standard & Poor’s conferred its AA-minus rating and a stable outlook on the bonds, citing a pledge from Weber County that adds a layer of security to the deal for the Summit Eden development.

“For a special assessment bond that had nothing on it but dirt, they would not be getting a AA-minus rating,” said S&P analyst David Hitchcock, who co-authored the ratings report with lead analyst Jennifer Hansen. “That’s a pretty high rating.”

Alan Westenskow, vice president at the county’s financial advisor, Zions Bank, called the bond “a kind of hybrid.”

“It’s a special assessment bond that’s really like a back-door general obligation bond,” he said.

“We did emphasize to Citi that we don’t want these marketed like every other dirt bond,” said Dan Olsen, comptroller for Weber County, which has about 234,000 residents. “We did an RFP (request for proposals) and got about 80 responses. We liked Citi’s marketing plan.”

Cameron Parks, director for Citi who is leading the deal, declined comment.

Rising high in the Wasatch mountains 50 miles north of Salt Lake City, the 1,650 acres earmarked for development as Summit Eden provide breathtaking views, access to the Powder Mountain ski resort and the amenities of the Ogden Valley.

Developers Summit Mountain Holding Group have acquired an equally high profile as organizers of the Summit Series, events that since 2008 have attracted former president Bill Clinton and big-name entrepreneurs such as Richard Branson and Ted Turner to discuss social, technical and policy innovations on behalf of charitable causes.

Forbes magazine dubbed the series, launched about 80 miles south of the Ogden Valley in Park City, Utah, “the Davos of Generation Y,” referring to the World Economic Forum in that Swiss mountain town.

Elliott Bisnow, founder and chief executive of the Summit Series, said that the Powder Mountain development will be the permanent home of the series, making Summit Eden “the epicenter of innovation.”

“We couldn’t think of a better home for the Summit organization and community than Powder Mountain,” Bisnow, 27, said in the May news release announcing Summit’s purchase of Powder Mountain.

Bisnowwho also co-founded Bisnow Media Corp., a digital media company specializing in real estate in the Washington, D.C., area.

Bisnow and company represent a second chance for the Powder Mountain development after previous owners ran into opposition from county residents fearing traffic and congestion from plans to develop up to 10,000 homes, multiple golf courses and more than a dozen new chairlifts.

Summit bought the property and the Powder Mountain resort earlier this year for $40 million and produced a dramatically scaled-back vision of the future.

The Summit plan calls for 500 home sites and a small residential village featuring environmentally friendly design. Small cabins will be available as rotating residences for artists, musicians, nonprofit leaders and start-up entrepreneurs.

The new residents of the ski-in home sites will include Summit investors and others who can reach the high economic threshold.

Summit Revolution, a partnership between the Summit Series LLC and Revolution Capital LLC, has $33 million in investment from its “founding member” program and anticipates receiving $45 million, according to Greg Mauro, managing partner for Summit Mountain Holding Group.

Members in the program are entitled to an ownership interest in the Powder Mountain operating resort and receive credit for a home site in the development, Mauro said.

While some investors might dismiss the social aspirations of Summit as pie-in-the-sky, officials from Weber County said the project survived sharp scrutiny as a business proposition.

“We made sure that there was an appraisal and made sure it met the test of three times coverage (of debt service),” said Weber County’s treasurer, John Bond.  Utah law requires a minimum of three-times coverage of debt service for special assessment bonds.

In its current state, the Powder Mountain site is valued at $5.1 million, according to Weber County auditor Ricky Hatch. If developed as proposed, the property’s taxable assessed value rises to $69 million, he said.

The county’s bonds, pricing through negotiation with Citi, will finance $14.8 million of roads, sewers and water infrastructure serving the development.

“No additional bonds will be issued and no bond anticipation notes will be issued,” Hatch said. “The developer is responsible for paying any additional costs for the project that are not covered by bond proceeds.”

The county’s bonds are backed by a special assessment within a 1,685-acre area and by a back-up pledge of Weber County to restore draws on the debt service reserve. The total reserve fund of $3.69 million will represent about 2.5 years of debt service payment, Bond said.

In the event of a draw on the debt service reserve, Weber County must fully replenish the debt service reserve. The county agreed to cover any draws from sale of delinquent property, or if necessary, appropriations from the general fund. The county could also call for a general obligation bond election.

The cost of issuance of the debt is estimated at $474,616, according to Westenskow.

With maturities of 2015 through 2033, the bonds will feature 10-year call provisions.

“This particular structure is kind of unique,” Hitchcock said. “There are only a couple of comparisons in Utah. There are some states that provide enhancement to special assessment bonds, but they’re all structured differently.”

A somewhat similar $18.8 million deal in Herriman, Utah, drew ratings of A with a stable outlook from S&P in 2010. In that case, the city, a growing suburb of about 21,000 21 miles southwest of Salt Lake City, pledged to replenish the reserve fund, raising taxes or issuing general obligation bonds if necessary.

The Herriman bonds were backed by special assessments on 269 acres in a planned 344-acre mixed use development on land previously owned by the Church of Jesus Christ of Latter-day Saints.

Land-backed debt, which typically lacks backstops such as those provided by Herriman or Weber County, accounted for almost half of default filings in the muni bond market where investors didn’t get paid, according to Municipal Market Advisors.

Ballard Spahr LLP is bond counsel.

After peaking at $12.3 billion in 2009, Weber County’s taxable value dropped by nearly 8% during the past three years to $11.2 billion in 2012, according to S&P.

“Despite these recent decreases, estimated full market value of $19 billion translates to $81,015 per capita, which we consider very strong,” S&P noted.

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