HomeMy WebLinkAbout4.0 Financial PlanGeorge K Baum & Company
INVESTMENT BANKERS SEQCE 1928
May 18, 2001
Garfield County Commissioners
109 80' Street, Suite 200
Glenwood Springs, Colorado 81601
Dear Commissioners:
At your request, George K. Baum & Company has been asked to review the Service Plan for the
proposed Spring Valley Metropolitan Districts #1 and #2. Specifically, we have focused our review
on the financial plan of the Service Plan and the financial feasibility of the District. As required in
Section 32-1-203, C.R.S., in reviewing a service plan the County Commissioners must determine
that "The proposed special district is capable of providing economical and sufficient service to the
area within its boundaries" and that "The area to be included in the proposed special district has, or
will have, the financial ability to discharge the proposed indebtedness on a reasonable basis,"
A Summary of the Financial Plan
The plan is to form two metropolitan districts to serve 5,948 acres. District #1 will be the financing
district and will include all but a small portion of the total area. This district will issue the proposed
general obligation bonds. District #2 will be the service district. It will issue the revenue bonds and
receive by contract various revenues including the transfers of property taxes levied by District #1
for operating purposes.
The total number of homes in the development is projected to be 577 of which 75 would be
affordable units and not included within the Districts. The average price of a home is estimated at
$2.04 million. There will be two golf courses, a community center and an equestrian center. This
development is proposed to be a very upscale project and therefore requires a significant amount of
public improvements. The Plan proposes the issuance of $57,850,000 of general obligation bonds
by District #1 and $30,535,000 of revenue bonds by District #2. The estimated total mill levy that
is necessary to service the debt is 20.25 mills. The operating mill levy is estimated to be 24.74 mills
for a total levy of 45 mills.
Proposed Public Improvements
A metropolitan district, like other independent local governments in Colorado, has the ability to
finance public improvements through the issuance of bonds, notes, or other methods. These
improvements must be "public" in order for the financing to comply with State statutes as well as
Federal law. The proposed improvements are as follows:
717 Sevenleenlh Sheat Suite 2600 • Denver, Colorado 80202-3354
Phona(303)202-1800
Roads
25,723,702
Drainage
1,394,030
Domestic water system
5,076,264
Wastewater system
2,279,014
Trail systems
1,525,776
Common trench utility
6,351,046
Engineering
2,786,170
District organization costs
200,000
Total
45,336,002
The total of the capital improvements are then inflated by 3% annually to the year in which they are
planned to be constructed for a grand total of $51,123,768. All of these improvements are planned
to be made by 2006.
There has been some question as to whether all these improvements are indeed public. In Chapter
III of the Service Plan, there is discussion of turning over improvements to a homeowners
association. If that were to occur, the improvements would no longer be public. In addition, private
roads or trails which could not be accessed by the public could not be financed by the Districts.
Furthermore, there is quite a bit of money raised for operation of the Districts. If the golf courses,
equestrian center and community center are private facilities, they cannot be financed through
Districts nor can they be operated with public money.
The costs ofthe MMrovements may need some fur 1 er an&sis. The amount anticipated to be spent
on road improvements seems high for 502 homes despite the large size of the Districts. Likewise,
more information should be obtained about the $6.5 million common utility trench.
Debt Issuance
The Service Planproposes the issuance of general obligation bonds by District #1 andrevenuebonds
by District #2. The schedule of bond issuance is as follows:
District # 1 - General Obligation Bonds
December 1, 2004
$14,000,000
December 1, 2006
$21,000,000
December 1, 2020
$10,000,000
December 1, 2024
$12,850,000
2
District # 2 - Revenue Bonds
December 1, 2002 1 $30,535,000 —�
The general plan is to issue the revenue bonds first which would be secured by various development
fees and a letter -of -credit obtained by the developer. The first set of improvements would be
constructed and as development occurs and the option of issuing general obligation bonds becomes
a reality, the revenue bonds would be repaid from the proceeds ofthe new general obligation bonds.
The schedule ofissuing general obligation bonds is dependent upon the rate of development and the
subsequent rate of growth in assessed valuation. The fact that the initial development risk is being
borne by the developer is a good idea. This way, if development does not occur as rapidly as
planned, the few new property owners will not be stuck with ahuge tax bill. However, the financing
plan does not make sense.
Why issue bonds by District #2 only to have them paid off by bonds from District #1? General
obligation bonds of District 01 could be issuedwith credit support from the developer and that credit
support could be released through some mechanism as development occurs. Using the two district
financing structure is cumbersome and does notprovide any economic advantage. Amore important
potential problem is the "public purpose" of issuing general obligation bonds to pay off revenue
bonds. The new bonds do not construct any new facilities and they are shown at a higher interest
rate. There are many legal questions that need to be answered before we could be satisfied that this
financing structure could be used.
The schedule of general obligation bond issuance raises some serious concerns as well. Voted
authorization for debt issuance in 2001 would become stale by 2020 or 2024. There would have to
be another vote to approve those bonds. The proceeds from the revenue bonds alone are not
sufficient to install all the necessary improvements. The Districts are dependent on development
fees. Therefore, if development is slow, all of the improvements will not be in place for the residents
until some unknown future date. Avery specific schedule ofimprovements and a description ofhow
these improvements, or lack thereof, will affect the quality of the development should be prepared.
The first bond issue would be revenue bonds to fund the first $29 million of improvements.
Schedule 1 which lists the improvements shows that these would be completed by 2006. It is unclear
from the financial plan how these are being funded but it is probably through a combination of the
proceeds from the revenues bonds, development fees, and small portion of the proceeds from the
general obligation bonds. It appears that the majority of the proceeds from the general obligation
bonds will be used to pay offthe revenue bonds. The Plan needs a specific breakdown of each bond
issue and what that bond issue is paying for.
If all the improvements are being constructed by 2006, and the revenue bonds are being paid off by
the general obligation bonds issued in 2004 and 2006, then what is the purpose of the bond issues
planned for 2020 and 2024? Are these proceeds being used to repay the developer? Overall, the
plan for issuing bonds is unclear and needs to be changed before the County could determine if it
were feasible.
3
Development Projections
Because there is no development currently on this property, development needs to occur according
to plan to provide the tax base and the fees to repay the bonds and operate the Districts. The Service
Plan includes a series ofprojections to show how the bonds would be repaid and how services would
be financed. The development projections and the subsequent financial pro forma for the Districts
include too many schedules with too many tables. The plan needs to be simpler. The format of the
financial plan with such a complex set of schedules only confuses the reader.
Although the developer many firmly believe that he canbuild 502 (or is it 484?) homes at an average
price of $2 million, there is no data provided to support this assumption. There needs to be a market
study completed which demonstrates that this type of very expensive development is feasible in
Garfield County. If the average housing price is less than expected or the rate of development is
slower than expected, the Districts would require much higher mill levies:
George K. Baum & Company has reviewed the schedules and attempted to recreate them to the best
of our abilities. We could come pretty close but could not exactly duplicate the Plan's numbers. We
did use the new assessed valuation ratio of 9.15% for residential properties which would reduce the
numbers. We did not identify any mathematical errors however, we do recommend that any revised
financial plan include the new assessment ratio.
For our next step, we performed a series of sensitivity analyses on the projections to see what
happens to the debt service mill levy requirements. Those scenarios are attached. We looked at the
mill levy impact on the debt service for the general obligation bonds only. The revenue bonds are
proposed to be backed by a letter -of -credit from the developer and would be paid of in 2006. The
operating mill levy would be fixed and could not adjust.
Schedule 1 - 50% of Planned Buildout - In this scenario, the debt service mill levy starts at 40 mills
in 2008 and reaches a high of 65.80 mills in 2010. The analysis shows the payments through 2027
at which point all bonds are issued. No adjustment has been made for the number of homes, but the
value of the homes was reduced by 50% to an average price of around $1 million. We are not
suggesting that there is a market for homes at that price. This analysis simply shows the effect on
the mill levy if the value is half of that shown in the Service Plan.
Schedule 2 - 50% Residential Buildout at 50% ofMarket Value/50% Commercial Buildout - In this
scenario, not only are the homes worth less, but the development is slower as well. The
mathematical result is residential value of 25% of the projected number. In addition, we have
assumed that the commercial value is 50% ofprojected. This result might happen if only one of the
golf courses is built. The effect here is much more dramatic. The debt service mill levy starts at
136.49 but levels out at about 95 mills. This tax rate would be almost five times that projected in
the service plan.
The bottom line is that if development does not occur as planned, a much higher debt service mill
levy would be required. Without good reliable information showing that the type and level of
development proposed in the Service Plan could be achieved, one would have to assume that a mill
levy much higher than the proposed 20.25 would be required to service the debt.
Operating Expenses
District #2 would received various revenues to provide service to the residents of the development.
When the development is built out, that revenue is projected to be $5 million in 2021 and over $9
million in 2042. The 24.75 mills for operating is very high. Furthermore, it is not clear what all this
money would be used for. Looking at Exhibit 1 for District #2, in 2021, there is an administration
expense of $976,655, community operations expenses of $1,459,048, and traffic control/security
expense of$930,147. It is important to note that public revenues need to be spent on public facilities
and public programs. Because the golf courses, community center and equestrian center are not
public buildings, no public funds could be spent on those facilities. There could be public programs
at those facilities, however.
Because the significant amount of revenue projected to operate the Districts, and because District#2
will be controlled by the developer, there needs to be much more detail as to what kinds of public
services would be provided. The County should know what are public facilities and what areprivate
and how they will be maintained and operated. As in the analysis of for the debt service levy, if
development does not meet projections, how would the District fund all these services?
Financial Capacity of the Developer
Although this type of analysis does not usually include a discussion of the developer and its capacity
to perform as proposed in the Service PIan, it is impossible to ignore certain facts about Atlantic Gulf
Communities, Inc. Attached is an article dated May 2, 2001 found on the Bloomberg Electronic
News Service which reports that Atlantic Gulf filed for Chapter i l bankruptcy protection. Near the
end of the article is a discussion of the history of the company and the fact that it was formerly
known as General Development Corp. and that according to this article, four executives of that
company were convicted of "conspiring to bilk 10,000 Florida home buyers out of $117 million
through deceptive sales practices."
With this information in hand, it is important to understand that once formed, the Spring Valley
Metropolitan Districts are independent local governments subject to minimal oversight. Although
there is no indication that any similarproblem would occur with this development, the County needs
to evaluate its appropriate level of future involvement with this project.
5
Conclusion
As currently presented, it is not clear that the spring Valley Metropolitan Districts meet the financial
standards set forth in the Colorado Special District Act. The financial plan needs to be changed to
address the questions raised in this letter. Once amended, a new Service Plan could be submitted to
the County for review.
I hope this analysis is helpful to Garfield County. We would be happy to meet with you to discuss
this project in more detail.
Sincerely,
GEORGE K. BAUM & COMPANY
Alan T. Madosz
First Vice President
ATM/dn
Enclosures
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Salem Rihani
Analyst
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Wilmington, Delaware, Mau 1 (Bloomberg) -- Atlantic Gulf
Communities Inc., a developer that once was one of Florida's
largest landowners, filed for Chapter 11 bankruptcy protection in
the face of continuing losses.
The Miami—based developer of home lots in Florida, Texas,
North Carolina and Colorado listed 5148.5 million in assets and
$170.2 million in debts In papers filed today in U.S. Bankruptcy
Court in Wilmington, Delaware.
The company's goal in the Chapter 11 case is to restructure
its business and continue operations, Atlantic Gulf Chief
Executive Patrick Ahern said.
"We're hopeful of having the reorganization completed in
about 120 days," Ahern said.
The company has secured a $2 million credit line from
existing lenders so it -can continue selling developed real estate
during the court—supervised Chapter 11 reorganization, Ahern said.
ggThe company in April delayed filing its annual report with
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Prince
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064n Equity CN
Sesmh 00 0Ons Related kl}0 ON Ntry 22001 11;62
(Atlantic Gulf Communities Files for Chapter 11 (Correct) Page 2/31
the U.S. Securities and Exchange Commission, Atlantic Gulf said in
Q 1'dUU1ntiar9 ruing tnat recently it has reduced its operations,
sold assets to reduce debt, fired workers and moved its offices.
Last August, Atlantic Gulf reported a $9.3 million second
quarter loss, compared with a $13.7 million loss in the second
quarter of 1999.
Atlantic Gulf, which was at one time controlled bu a real
estate fund managed by financier Leon Black's Apollo Advisors and
Morgan Stanley, Dean Witter & Co., hired an investment banker in
1999 to explore "strategic alternatives."
The company's largest unsecured creditor is former executive
vice president and chief operating officer John Laguardia, who is
owed $349,000 from a legal Judgment, court papers show. Laguardia
In November was named president of ALH II Inc., a holding company
involved in the consolidation of regional homebuilders in the
Southeast.
Atlantic Gulf's second— and third—largest unsecured creditors
are Broad River LLC, which is owed $138,514, and American Stock
Transfer, owed $114,763, according to court papers.
The land development company was once known as General
Development Corp., which filed for bankruptcy in 1990.
Copyrlaht 2001 BLOOMBERG L.P. FronKfuri,69-920410 Hong Kong12-977-6000 London -207-330-7500 Net
Prinoe on.609-27"000 Singapore -65-212-1000 Sydney,2-9777-8686 Tokuo,3-9201-e9OO Sae
Mr mPM041g
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064n Equity CN
seamh Bo OptlansI Related lnfG BN Why 2 2001 t t:M
Atlantic Gulf Communities Files for Chapter 11 (Correct) Page 3/3
Four former GDC executives were convicted in 1992 of
conspiring to bilk 10,000 Florida home buyers out of $117 million
through deceptive sales practices. The company pleaded guilty to
fraud, agreed to set up a $169 million restitution fund and
reorganized with new management. The company emerged from
bankruptcy as Atlantic Gulf in 1992.
Atlantic Gulf shares fell 15 cents to 55 cents in aver -the -
counter trading today.
--Jeff St.Onge in Wilmington, Delaware (302) 984-3362 or
Jstonge@Bloomberg.net through the Washington newsroom (202) 624-
1917/ta/gcb
Story illustration: To graph Atlantic Gulf's stock performance
Compared to relevant indexes, enter
AGLFE US <Equity> COMP D <GO> .
Copyrigght 2001 BLOONBERG L.P. FronKfurt-69-920410 Hong Kon 2-977-6000 London, 207-330-7500 New York212-318-2000
Princeton,609-279-3000 Singapore365-212-3000 Sydney -2-9 77-8656 Tftc-3-3201-8910 Sao POaaulooy11013048-4808
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