LOS ANGELES — The market stars aligned for Berkeley, Calif., to land what participants call exceptional pricing for a parking revenue bond deal.
The deal found a market even as a pure parking revenue play, without any general fund backing. Such a structure, which received an investment grade rating, doesn't appear very often in the market, say participants in the deal.
City officials said they spent more than 20 years trying to come up with a way to pay for parking garage bonds that would not need general fund backing.
City Manager Dee Williams-Ridley said the garage needed to be self-sustaining by not being a drag on the general fund budget.
"This garage was designed, engineered and bid around the economics of what kind of revenues could be generated off the garage," said Henry Oyekanmi, the city's finance director.
The city's finance team attributed investor interest to the attractive nature of the revenue structure, a well-thought out energy-efficient parking garage project, and healthy reserve levels in the city's parking revenue funds.
The bonds received an A underlying rating from S&P Global Ratings, and carried Build America Mutual insurance to bring the rating to AA.
Fund managers said that a very supply-constrained municipal bond market played a large role. The strength of the California economy is also lifting all boats when it comes to pricing on non-state government credits, they said.
"We actually thought the bonds priced pretty well for Berkeley," said Tom Schuette, partner/co-head investment research and strategy at Gurtin Municipal Bond Management. "If you are a California issuer and selling in size in this market, you will find demand. They priced on the cheaper end for California revenue bonds, which is appropriate given the security and the risks relative to essential service bonds."
When the Berkeley finance team first began discussing the bond sale a year ago they were expecting to achieve interest rates that would result in annual payments of $2.5 million on the 30-year bonds, but pricing instead resulted in $1.9 million in annual payments, said Craig Hill, principal at NHA Advisors, financial advisor on the deal.
The Berkeley Joint Powers Authority priced the $33.9 million deal Aug. 9 with yields ranging from 0.94% for the 2020 maturity to 3.08% for the 2046, which has a 3% coupon. The $7.5 million 2041 and $8.7 million 2046 maturities are term bonds.
The true-interest cost for the 30-year financing was 2.94%.
Raymond James and Stifel Nicolaus & Co. were co-senior underwriters. Jones Hall is bond and disclosure counsel.
The sale attracted 117 orders from 2,100 different accounts for a total book of $44 million with bids from banks, insurance companies, money managers, bond funds and retail investors, said Rob Larkins, managing director and western region manager for Raymond James.
The bonds performed "spectacularly when compared to similarly-related transactions," said Wing-See Fox, a vice president in public finance for Raymond James.
The bonds pay for $31.9 million of the $43.2 million cost of the parking garage, said Mike Meyer, a vice president at NHA Advisors. The city set aside $11.3 million in cash from parking revenues to limit the amount of debt needed, Meyer said.
Cash will pay for soft costs, such as contingency, equipment and a temporary parking mitigation plan, while the bonds finance construction.
The city also will leave a few million dollars in each parking revenue fund on top of what is needed for the new parking garage to maintain operational flexibility, Meyer said.
Where a 1950s five-story, 440-space garage is being demolished, an eight-story, 720-space garage will rise.
The new garage designed to meet today's environmental standards will have plug-in spaces for 17 electric cars, 300 self-storage spaces for bicycles and rooftop solar panels to generate electricity for lighting.
The Go Berkeley demand-based rate structure was created in partnership with the University of California, according to the bond finance team.
The rate system uses license plate recognition to set rates on a quarterly basis. The staff runs a census on where people are parking and how many spaces are available on a block-by-block basis. Then the data is gathered, analyzed, and rate adjustment recommendations are made to the City Council.
The City Council authorized raising rates using the Go Berkeley system for the next 30 years to make the bond payments, Meyer said.
Paying for the new parking garage was not the only impetus for the Go Berkeley rate structure. The analysis is also used to counteract problems with traffic congestion resulting from drivers circling to look for spots, city officials said.
The rates have been adjusted based on information from the rate structure four times in the last two-and-a-half years, Fox said. Rates did not increase each time. City staffers use the system to evaluate and adjust parking rates either up or down in the garage, in metered parking spaces and adjacent neighborhoods to try to insure that there are parking spaces available during heavy traffic periods, she said.
The rate structure is optimized to maintain occupancy rates in the city's desired range of 65% to 85% per block, Meyer said. When occupancy rises above 85%, rates rise and when it drops below 65%, rates fall, he said.
"This may mean that meter rates will decrease while garage rates increase, or vice versa, and it may include increases to certain garage parkers, such as monthly parkers, and no increase for hourly," Meyer said.
The current garage rates are lower than nearby competitor garages, Meyer said.
Revenues from the garage alone are anticipated to be $4.1mm, and the first full year is 2018/19. In 2017/18 partial year, projections shown in pro-forma, $2.8 million of revenue is expected just from new garage.
The bonds are backed by revenue from all the city's downtown parking operations, including street meters. The meter fund brings in $10 million in gross revenue annually.
Both fund managers interviewed were not among the bond's purchasers, but for slightly different reasons.
"We looked at the Berkeley deal in the primary a few weeks ago, but did not participate given credit concerns and also the structure did not work for us, especially the long 3% coupons where the bulk of the deal was," Schuette said. "We typically avoid parking revenue bonds with a few rare exceptions – those cases where large, urban obligors have broad pledges of street and off-street parking, multiple assets with strong historical demand statistics, and robust debt service coverage."
Gurtin thought the Berkeley pledge fell short of this, and bondholders are taking on construction risk given that the Center Street garage project will need to be completed and operational on time for the city to be able to comfortably meet debt service costs, Schuette said.
The deal has some unique characteristics that made it attractive to buyers such as the use of parking revenues to back the bonds, Schuette said, rather than sales tax or the general fund.
Investors seeking high-quality bonds do view the fundamental quality of parking bonds differently than other revenue bonds, which makes sense given that it is clearly a non-essential service when compared to water, sewer or electric revenue bonds, he said.
For Michael Ginestro, head of municipal credit research at Bel Air Investment Advisors, the bonds didn't provide enough upside. But Bel Air doesn't typically buy bonds rated A-minus or higher.
Bel Air targets bonds aimed at more sophisticated investors that have greater upside, but require more risk analysis.
It does have parking bonds in its portfolio, but evaluates each one on a deal-by-deal basis, Ginestro said.
Among the considerations for Bel Air is essentiality. The likelihood of the bond payments being made is greater if the parking garage serves city hall, for instance.
The three parking bonds that priced this year that Bel Air looked hard at were general-fund backed which means that essentiality comes into play, he said.
Those were general obligation bonds issued for the St. Louis, Missouri Parking Division, Disney Hall parking backed by Los Angeles County and Stockton, Calif. parking bonds.
Like Schuette, Ginestro said current market conditions favor sellers.
"Everyone is getting cheap financing. It is just insane how low rates are," Ginestro said.
"Net supply is negative and there is a ton of cash sitting on the sidelines looking to reinvest," Ginestro said.
Demand remains high, because municipal bonds are still better than other options.
"Munis seem to be – as Bill Gross would say of U.S. government bonds — the least dirty shirt," Ginestro said.
U.S. interest rates are low, but they are higher than anyone else, Ginestro said.
"It is ridiculous," he said. "Below investment grade charter schools are getting low 3s and high 2s. It is a very expensive market."