Arvada, Colo., agency to swallow a bitter pill and sell some land to forestall bond default.

DENVER - A municipal authority in suburban Denver that issued $54.4 million in revenue debt will try to sell land in an effort to stave off default on the bonds.

A $2 million interest payment is due in September and the authority has enough money to cover the payment. Future payments are in jeopardy, however, even though the authority collects $4 million a year in tax increment revenue taxes.

As of March 1, the authority has about $46.13 million of debt outstanding from a 1987 bond refunding.

In 1985, the Arvada Urban Renewal Authority issued $48 million of combination serial and term bonds to finance the development of a 136-acre parcel of land in Arvada, a suburb northwest of Denver.

The plan was for the authority to buy commercially zoned land, install utilities, and resell it to developers at a loss. The subsidized program would revitalize the area's historic "Old Town."

Several years later, the hoped for retail merchandisers did not materialize. Moody's Investors Service downgraded the bonds to B from Baa in February 1989, where they remain to this day. Shortly after the Moody's action, both the trustee and the underwriter of a later Arvada refunding, Dain Bosworth Inc., began notifying bondholders that reserve funds were being used to make up principal and interest payment shortfalls.

While the local economy has improved and the authority is continuing its efforts to attract retailers to its project, the authority says the bonds will default March 1, 1995, if they have to depend on the revenue from the incremental sales tax that backs the bonds.

The authority is $2 million short of its $4 million March debt service payment. The March 1995 payment is higher than the September 1994 payment because a portion of the principal must be paid.

"As there was only $188,589 in the reserve account as of March 1994, there is a likelihood of a default, absent intervention by the infusion of additional revenue from some source, or restructuring of the debt," authority director Michael R. Chitwood wrote in a May 16 letter to bondholders.

The authority is negotiating to sell 51 acres that it still owns and to use the money to pay bondholders. Of the 136 total acres owned, the authority has already developed and sold 85 acres. But 27 acres of that was vacated by a wholesale shopping club a few years ago, leaving the authority with no sales tax from that property.

Chitwood said in an interview that the authority's remaining land is worth about $6 million at today's prices. The authority has signed contracts to sell $4 million worth of that land. After using $1.5 million of that to put in utilities and other development work, the authority would use the remainder to pay bond debt.

"Approximately $4 million worth of land sales could close between now and next March. Those are under contract and we're working with them," Chitwood said.

The largest contract is a $1.4 million deal for 11 acres with Home Depot, set to close Jan. 1, 1995, Chitwood said. Negotiations with Cub Foods for a 60,000 square foot grocery store are also underway.

Another possible source of tax revenue is an agreement signed by Eagle Hardware to take the old wholesale club's 27-acre site.

Dain Bosworth analyst Rudy Andras said the land sales are good for bondholders. "That's what they need to be doing to get retail revenues in, to sell to those retailers who will build stores," Andras said.

He produced a research report that showed if Home Depot, Eagle Hardware, and Cub Foods deals are successful, the authority would have enough money to pay its debt service in March 1998.

The authority could also gain another $200,000 a year in additional sales tax revenue from a 0.21% tax increase approved by city voters last fall. But the wording of the ballot was challenged in court by supporters of Amendment 1, Colorado's tax and spending limitation law. A lower court decision was made in favor of Arvada. An appeal is pending in the Colorado Court of Appeals.

The sales taxes are of more concern to bondholders than property taxes because the city and school district receive a base level of property taxes. The lion's share of the sales tax revenue goes to the authority.

"It's a tax increment district. New sales and property tax is what's going to make the project work," Andras said.

Andras said the authority might lend $2 million from its $2.6 million general fund to the bond fund to get past March 1, 1995, but only if the pending deals are successful.

Richard Lehman, president of the Bond Investors Association in Miami Lakes, Fla., observed that usually, when authorities begin selling land to make bond payments, "It's like eating your seed corn. You buy time but it doesn't help the bondholder."

The most responsible alternative in most cases is to restructure the bonds, Lehman said, something the Arvada authority decided not to do this year.

But Andras and others note that the revenue tax expires on July 6, 2006, with just $3 million in revenues projected to be collected after the March payment in that year. Such a small margin leaves little flexibility for a workout.

The Arvada deal was originally underwritten in 1985 by Hanifen, Imhoff Inc. and the former Kirchner Moore, both of Denver, bond documents show.

When Dain Bosworth underwrote the 1987 refunding of the Arvada bonds, the growth projections were reasonable, said Dain investment banker Rus Heise.

In the 1987 refunding, $37 million of term bonds due March 1, 2006, were priced at 99.25 with a coupon of 8.75%. Another $17.4 million in serial bonds matured from 1988 to 1998 and carried coupons ranging from 5.25% to 8%. The bonds have traded in the low 50s and now sell in the high 60s to 70, Heise said.

"Hindsight is different. But at the time, not only did we feel they were realistic, but we got a Baa rating out of Moody's," Heise said. "It's unfortunate the development didn't happen. We really thought we had plenty of cushion."

The two developers at the time were Trammell Crow of Dallas and an Australian developer. The Australian developer pulled out. Trammell Crow remains involved in the project.

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