Lease-purchase agreements gain in popularity with cities as taxpayers tighten purse strings

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— Passing a bond or a new tax increase in Steamboat Springs has been a daunting task in recent years.

In the past two years, both the Downtown Development Authority and a citywide excise tax for affordable housing were shot down overwhelmingly by voters.

Cities throughout Colorado, using a tactic businesses have also used for years, are employing with more and more frequency "lease-purchase" agreements, which send the city into debt but do not need to go to a vote.

The practice has been more popular since the passage of the Taxpayer's Bill of Rights in 1992, but was used previously to TABOR as well, said Finance Director Don Taylor.

The two biggest projects the city is now embarking on by using lease-purchase agreements or similar financing tools are the renovations to the Howelsen Ice Arena and the construction of Centennial Hall. Those projects will necessitate loans of $2.3 million and $1.8 million, respectively.

The city, however, has also financed buses, the Baxter property, golf equipment and a fuel truck for the airport with lease-purchase agreements.

The ice rink is actually being financed through a "certificate of participation" and Centennial Hall may be funded using that mechanism as well, Taylor said. Certificates of participation are "hybrids" of lease-purchases, often used for higher-end items that cost more than $1 million.

Lease-purchase financing is common throughout Colorado, said John Self of Wells Fargo Bank in Denver, which has been working with the city on the financing of Centennial Hall.

The lease-purchase agreement is a complex one but contains many of the basic premises of debt financing.

The city, after getting financing from the bank, owns Centennial Hall. Through the lease-purchase, however, the city offers a long-term lease on the building or another city building which can serve as collateral to the bank.

The bank subsequently leases the building back to the city in the short-term. So, technically, the lease-purchase deal involves leasing a building to the bank that leases it back to the city. But basically it's similar to a mortgage or a lease-purchase deal on a car, with one major caveat: Once the leasing period is up, the city will automatically own Centennial Hall. The bank, then, is taking a relatively big risk that the city will not pay back the loan, since once the bank's long-term lease is up the city will still own the property. Self, however, believes the risk is not that great, calling the agreement a "good investment" for the bank.

The City Council is comfortable using the financing tool, given enough public participation, Councilwoman Arianthe Stettner said.

Stettner said items such as the airport terminal might have been better off going to a vote.

"If that had been put to a vote, we might have come to a different outcome," Stettner said.

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