By John S. Egan
Frost Brown Todd LLC
The Commonwealth of Kentucky, in conjunction with a development team led by CRM Development Company of Lexington, on Feb. 22 closed a financing for a new P3 state office building project to be built on the site of the old Capital Plaza Tower on Mero Street in downtown Frankfort, Ky.
The P3 procurement model, used for the second time in Kentucky for a large state office building project:
- Provides a quicker conception-to-completion process than the traditional design-bid-build;
- Allows the developer to jump start the process with upfront investment;
- Keeps construction risk with the development team until the project has been completed and accepted by the Commonwealth;
- Places ongoing maintenance responsibilities on third parties, rather than state employees.
State lease makes way for COPs to investors
The financing structure involves a Facilities Lease to the Commonwealth and the sale of Certificates of Participation (“COPs”) in the Facilities Lease to investors.
The P3 project calls for the demolition of the vacant, functionally obsolescent Capital Plaza Tower in Frankfort and the construction of a new office building and parking structures on the site. The new office building will have five stories and be approximately 385,022 square feet in size, with an adjoining 1,086-space parking garage and a 112-space surface parking facility. Once completed, the new office building will accommodate 1,500 state workers from a number of state agencies.
The Commonwealth issued a Request for Proposals for the demolition of the Capital Plaza Tower and construction of the new office building and related parking structure in early summer 2017. The RFP sought a private entity to finance, design, develop, construct, maintain, operate and lease the structures to the Commonwealth for approximately 30 years, in accordance with KRS §56.8161(2). Proposals were initially due to the Commonwealth by Aug. 25, 2017.
In this project, the Commonwealth followed an RFP process similar to the one used for the 371,160-square foot “300 Building” on Sower Boulevard in Frankfort. That structure was completed in 2016 and is being used for state offices.
The winning proposal was submitted by the same team that financed and built the 300 Building: CRM Development Company, Inc. of Lexington (developer and manager of the facility), D.W. Wilburn, Inc. (contractor), EOP Architects (architect), Commonwealth Economics Partners (financial consultant to the development team), KeyBanc Capital Markets (underwriter), Huntington National Bank (trustee), and Dinsmore & Shohl (bond counsel). Frost Brown Todd joined the team as underwriter’s counsel for the transaction. (Editor’s note: Both Commonwealth Economics and Frost Brown Todd are members of the P3 Kentucky Roundtable.)
The financing structure involves the offering of COPs evidencing proportionate interests in base rent to be paid by the Commonwealth of Kentucky under the Facilities Lease. The financing structure uses capitalized interest to provide for payment of interest to certificate holders during the estimated construction period (two years), with additional capitalized interest providing a “safety net” for interest payments due to COPs holders for a period of time after the expected completion date.
Investor offering opened this month
KeyBanc Capital Markets offered the COPs to investors pursuant to a Preliminary Offering Circular dated Feb. 6, 2018. The COPs were rated “A-1” by Moody’s, based on the obligation of the Commonwealth under the Facilities Lease. The COPs were ultimately sold to investors in two series: $107,260,000 Certificates of Participation, Series 2018A (tax exempt) and $3,415,000 Certificates of Participation, Taxable Series 2018B. The last maturity of the Certificates is April 15, 2050 and the average coupon is 4.10%. The average annual debt service on the COPs is $6,266,842.
During the construction period, capitalized interest will be used to pay interest to holders of the COPs; after the construction has been completed, the Commonwealth’s obligation pay rent under the Facilities Lease commences and base rent payments will be used to principal of and interest on the COPs. Additional rent payments by the Commonwealth will be applied to management and maintenance costs, applicable insurance premiums and costs of utilities and janitorial services.
The Facilities Lease is renewable by the Commonwealth on July 1 of each even numbered year; the lease payments and the purchase price for the project are subject to the biennial appropriations of the Commonwealth through the final renewal period ending June 30, 2050. The Commonwealth has the right to purchase the project at any time by paying the sum necessary to retire the outstanding principal amount of the COPs at the redemption price set forth in the indenture, plus any Additional Rent then due.
Although the financing of the COPs has just closed, construction activities at the project site are well under way, with an eye to meeting the projected final completion date of April 10, 2020. The implosion of the old Capital Plaza Tower is scheduled for Sunday March 11, 2018 at 1:30 p.m.
For more on the project, click here.