Originally posted January 25, 2018
A COPS is a Certificate of Participation with a bank or other financial institution. When a school district is looking for options on how to finance facility improvements, many have found significant savings in utility bills by installing more energy efficient operating systems. The cash needed to pay for the installation of these new systems can be generated through a COPS. Under an energy savings performance contract, the school district pays back the principal and interest due semi-annually on the COP from the savings realized through reduced utility bills. Below is some basic information on a COP.
This information was pulled from “Certificates of Participation” by Kori Donaldson, and “An Introduction to Municipal Lease Financing: Answers to Frequently Asked Questions” by the Association for Governmental Leasing & Finance.
Characteristics of a Certificate of Participation
A certificate of participation is a certificate executed by a trustee under a trust agreement acknowledging that the owner of the certificate is entitled to receive a proportionate distribution of the moneys received by the trustee from the rental payments to be made by or on behalf of a Government Body under a specified lease or leases. The certificate represents the fractionalized interest of its owner in the lease payments, and the trustee that executes the certificate is obligated only to make distributions with respect to the certificate to the extent that it receives rental payments from the Government Body under the lease.
Appropriate Use of Certificates of Participation Financing
Certificates of Participation financing is typically used in larger equipment or real estate financings where the Government Body must access the capital markets to obtain the financing necessary for its project. A certificate of participation financing is typically done in situations where the principal amount involved is relatively substantial so that the distribution of certificates may be made more broadly than would otherwise be the case in a simple equipment acquisition lease, which is generally placed with one or a limited number of investors.
As a practical matter, certificates of participation financing will resemble in many respects a negotiated underwritten bond issue, including $5,000 denominations, stated serial and term payment dates and prepayment options as well as the related primary and secondary market disclosure responsibilities under the federal securities laws. Consequently, while certificates of participation financing contain the elements that are also present when a Government Body uses a simple equipment acquisition lease, an advance funded equipment acquisition lease or a master lease to finance equipment and/or real property, the certificates of participation introduce additional complications to the transaction that are like those associated with any public offering of municipal securities.
Structure of a Certificates of Participation Financing
In addition to the standard elements of a municipal lease, in typical Certificates of Participation financing the lessor (simultaneously with the execution of the lease) assigns all its right, title and interest in the lease, including the right to receive the rental payments, to a trustee under a trust agreement. The trust agreement provides elaborate detail on the security for the certificates, the funds, and accounts to be administered, the terms for the certificates (such as distribution dates, interest rates and prepayment features) and the provisions applicable to the trustee and the discharge of its responsibilities. The trustee under the trust agreement executes the certificates of participation that are purchased by an underwriter or institutional investor.
Disbursement of Proceeds Received from the Sale of Certificates of Participation
A construction account is created under the trust agreement and is funded with the proceeds of sale of the certificates of participation. Moneys are disbursed from the construction account by the trustee as acquisition and construction of the project progresses, upon receipt of written requisitions from the Government Body. Investment Earnings on Amounts Held in the Construction Account Unless one of the exceptions to the arbitrage rebate requirement is available, the Government Body will typically be entitled to the investment earnings on amounts held in the construction account only up to the amount of such earnings that would be generated if the investments were made at a yield equal to the yield on the lease and any earnings in excess of that yield would have to be rebated to the United States as required by the Internal Revenue Code.
About the author – Paul Harrell is a business development manager with Navitas. His background as a Certified Public Accountant and 33 years of experience in the education sector help him bring a practical approach to developing strategies for school districts wanting guidance in how to manage their overall budget and utility costs. He can be reached at pharrell@navitas.us.com or 913-344-0049