University Village continues to expand amid bond defaults.

While a default on $55 million in revenue bonds to pay for infrastructure at University Village Colorado doesn’t seem to come with many consequences, there likely will be some cleanup required.

When the Colorado Springs Urban Renewal Authority announced last December that it wouldn’t be able to make the minimum payment on one of two bonds, business carried on as usual at the city, the authority and the shopping center on North Nevada Avenue.

Nothing changed after an independent investigation, commissioned by Mayor Steve Bach, revealed earlier this fall that the authority has exhausted its reserve funds for the bonds and likely will default on the other bond as well.

And business will continue to carry on as usual, according to those familiar with the bonds and how they work.

The revenue bonds aren’t secured against anything. The bondholders bought them based on projected returns from sales and property tax revenue that the project was expected to generate. The city had agreed to commit tax incremental financing — the tax revenue from increased sales and growing property values that wouldn’t have existed without the urban-renewal project — to the bond repayment in order to revitalize the area west of the University of Colorado at Colorado Springs.

Because the economy dived soon after the bonds were issued in 2008, the project grew much more slowly than expected, said Jim Reese, a URA consultant.

John Cook, an attorney with Hogan Lovells law firm, which conducted the investigation for Bach, reported that the project likely will continue to be in default going forward.

No one is liable for the slow revenue growth — not the city, the authority or the developer. The bondholders are the only losers in the deal, says Paul Benedetti, the attorney who crafted the University Village deal and who wrote most urban-renewal law in Colorado. And, he adds, they’re probably not that worried about it, either.

“I don’t want to minimize the default,” Benedetti said. “But it’s probably not as bad as everyone thinks. It’s not a complete failure to pay anything.”

He said the project still could reach build-out and, if it exceeds expectations, catch up with payments.

“I think these were relatively sophisticated investors who realized the risks,” Benedetti said.

Investors who buy revenue bonds generally are savvy, he said. There’s more risk and no one to hold accountable if a project doesn’t fare as well as expected. That’s why the bonds pay a higher interest rate. University Village’s $7.5 million and $47 million bonds pay 7 and 7.5 percent interest.

Sam Sharp, the bond underwriter with D.A. Davidson in Denver who crafted the deal for the investors, declined to comment about how the bondholders are dealing with the default.

But Benedetti said bondholders are usually patient investors.

Tarnished name

City Attorney Chris Melcher said he hopes the city and Urban Renewal Authority will be able to work with the bondholders eventually to keep reputations intact.

“I can’t help but think that future bond offerings will be more successful and more welcomed by the market if past bonds have been successful,” Melcher said.

There’s some concern, he said, that a bond default could hurt the ability to find buyers for future bonds.

That’s unlikely, Benedetti said.

“In my experience, this will not hurt any future offerings,” Benedetti said. “Each of these projects stands on its own. One project does not have any effect on any other.”

Reese agreed. Since there is no co-mingling of funds between urban-renewal projects, investors should be able to judge the validity and long-term projections of each project.

Benedetti said there aren’t many examples of failed TIF bonds for urban renewal. He can think of two that weren’t resolved: one in Littleton, for which there are few details, and another in Englewood.

Alan White started as Englewood’s community development director in 2007, just as the 25-year TIF bond for the city’s downtown URA project was expiring.

“It was just never built to the density or intensity expected,” White said. “It was more speculative.”

The authority issued TIF bonds to make downtown infrastructure improvements not far from 1960s super-mall Cinderella City. But there was just one mixed-use project built there. It always had high vacancy until King Soopers wanted the space and bulldozed the mixed-use development.

The authority continued to make payments to bondholders, but dramatically lower payments than promised. That default started in 1987.

It was the last TIF bond Englewood’s Urban Renewal Authority ever issued.

“We haven’t had an opportunity to use any more bonds for urban-renewal projects,” White said. “So it’s a coincidence. But, my personal opinion, I wonder how successful we would be if we did try to issue one. As an investor, I don’t know if I would look at it as a good deal.”

He said the authority has resorted to more private financing for urban renewal projects.

Successful project

There’s one big difference between the failed Englewood project and University Village.

“The good thing,” Melcher said, “is that University Village is successful.”

While it hasn’t built out as quickly as expected, it’s generally regarded a success.

This is the first TIF bond Reese said he knows of the URA issuing directly. But the local URA has worked with developers who have created municipal districts so they could support TIF bonds with mill levies on property owners. That could be how future projects, such as the Vineyard high-tech center planned for the south part of town, could be financed. Others have used tax incremental financing, but on a pay-as-you-go platform rather than through bond issues. That might be how the Copper Ridge project works.

Reese sees no reason the URA couldn’t pursue another TIF bond.

“We’re ultimately going to work to cure this default,” Reese said.

That could involve anything from reworking the interest rate with bondholders to adjusting loan terms. TIF bonds can’t go beyond 25 years for repayment, but Reese said the authority will be better equipped to negotiate with bondholders after the project is fully built out. Projections will be more meaningful then, he said.

Combining efforts

Until then, the authority will continue making payments to bondholders.

URA usually takes a fee off the top of revenue before paying bondholders. But that’s not how this deal is arranged. The URA doesn’t get paid until the bondholders do, which means the authority’s revenue is lower than anticipated.

“It’s kind of break-even right now,” Reese said. “We make our budget every month.”

Cook’s report to Bach suggested that the authority could cut expenses by combining efforts and sharing resources. He suggested URA could move into city offices; Melcher said it could use city planning and legal expertise.

The idea is in keeping with the recent Urban Land Institute advisory panel’s suggestions for downtown revitalization that the city coordinate its efforts and resources better.

“We’re just touching the edges of that,” Reese said.

He said the authority needs to keep a separate and independent board, but that there are probably areas where the authority and city could combine efforts.