When the Rensselaer City School District in upstate New York couldn't afford a new school using general obligation debt, they got someone else to pony up the money and build it using an innovative $71 million certificates of participation deal.
"What this financial arrangement allowed us to do was to build a completely new building and to have money financed on its behalf that the debt-service limits of the school district would not allow us to do on its own," said William Lyons, the district's school business executive.
The kind of facility the district wanted to replace its existing two school buildings serving 1,082 students was just too expensive: In a city of just 7,761, the statutory debt cap was low. Using COPs was a way around that, but it required a lease.
Enter the U.W. Marx Construction Co. The developer purchased the 25-acre site on which it's building the new K-12 school with private financing, thus taking on the construction risk itself. When construction is complete at the end of 2007, the RCSD Corp., a nonprofit corporation created specifically for the project, will take title of the property and U.W. Marx takes title of the existing high school and middle school for redevelopment in a turnkey property swap.
The proceeds of the COPs will be used to pay for the finished buildings. The RCSD Corp. will then lease the property to the Rensselaer school district until the certificates are paid off, in 2036, at which time the property will be transferred to the district.
"There are so many school districts in the Northeast in old economy towns like Rensselaer whose borrowing capacity is at X and their need for facilities is at some multiple of X, and they're all going to have to be looking to do something like this model," said Jeffrey Hyman, managing director for UBS Securities LLC, which underwrote the deal.
Back in 2001, the city began to identify its costs and needs for school infrastructure. Voters approved a $23 million general obligation measure for renovations for the existing schools in 2002, but the bonds were never sold. The following year the district decided to use existing school property as an asset to fund something more ambitious.
District officials modeled the COP deal on one the Niagara Falls City School District used in the 1990s to build a new school, Lyons said. After issuing a request for proposals, Rensselaer chose U.W. Marx - an upstate New York developer that has served as general contractor or construction manager on more than 30 school campuses in New York - for the project. The financing required special state legislation that was passed in 2005. The project broke ground in 2006.
Squire, Sanders & Dempsey LLP was bond counsel and New York Municipal Advisors Corp. was financial adviser on the deal.
Part of the redevelopment plan includes putting city property onto the tax roll, which will be a direct result of the property swap. U.W. Marx will redevelop the old school - which boasts views of the Albany skyline from its location on the Hudson riverfront - into a mixed commercial residential development.
The lease payments that pay off the COPs over 30 years are backed by a number of sources: a state education aid intercept estimated at $30.2 million, a 3.5% school district tax hike, a guarantee of $9.8 million of additional property taxes over 10 years from the riverfront property redeveloped by U.W. Marx, payments in lieu of taxes from another redevelopment project in Rensselaer by the recycling company Besicorp Development LLC, and money from the sale of the existing elementary school.
But before the financing was finally in place, the insurer, XL Capital Assurance, had to be convinced that Rensselaer was worthy.
"We had to tell the insurance companies the story of public agencies in a city which was making great strides to reinvent itself and taking itself from that sort of old-economy type of tax base," Hyman said. "Even though it looks like an ambitious project that is three or four times the borrowing capacity they would have in a more mainstream sense, they going to have plenty of repayment wherewithal over a long period of time."
