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Supervisors Agree to $5.5M Seven-Year Reset Loan in 3-1-1 Vote

The loan would be used to finance a property purchased for a future community center

Supervisors voted 3-1-1 this month to accept a financing agreement with for a $5.5 million, 20-year reset loan, at a rate of 2.55 percent fixed for seven years, with the rate resetting every seven years at 67 percent of the prime, in order to finance a $1.5 million property purchased across the street from the administration building that could be the future site of a community center.

The financing would also cover the cost of the Zehr property adjacent to , which the township remains in litigation over with the Zehr family.

The township purchased the land at Stump Road and Horsham Road a month ago, after it went into foreclosure. The property was owned by Univest.

The vote went against the finance committee’s recommendation for a 17-year fixed loan with TD Bank.

Supervisor Michael Fox abstained from the vote and discussion at the voting meeting this month, due to his employment with Univest.

Supervisor Chairman Robert Birch cast the dissenting vote, opting for a loan with TD Bank for a 17-year fixed at a 3.25 percent rate.

The township has to keep its debt service under $500,000, or else taxes would need to be raised to make up the excess.

“In today’s economy, God knows what’s going to happen in five or six years,” said Birch. “We’re talking about $6 million in taxpayers’ money here. I want to go with the lowest risk.”

The Univest plan calls for an estimated principal and interest annual payment of $352,488, whereas the preferred TD Bank plan called for an estimated annual payment of $465,326.

Here are further details of the Univest 20 year reset date agreement:

Rate: 2.55 percent

Reset Rate: 67 percent of the prime

Amortization Term: 2 years interest only – 18 years subsequent

No compensating balance

Current Money Market Rate: .35 percent

Draw-Down Period: First two years – interest only

Moderate risk

Moderate flexibility for additional debt with current millage

 

Here are further details of the TD Bank 15 plus 2 year fixed plan:

Rate: 3.25 percent

No reset rate

Amortization Term: 2 years interest only – 15 years subsequent

Compensating Balance Requirement: 50 percent loan balance, or $2.75 million

Current Money Market Rate: .20 percent

Draw-Down Period: First two years – interest only

Low risk

Least flexibility for additional debt with current millage

 

Township Manager Larry Gregan said the township real estate tax bill is dedicated to the debt service, which generates about $500,000 a year in real estate taxes. The township uses the debt service to retire its current debt and any future debt.

Gregan said the loan bids spanned the spectrum of a quick reset on a five-year basis with the lowest rate, and up to a fixed rate for the longest term.

“We looked at that from the standpoint of our ability to use the annual principal and interest payments upon the full loan amount being set at the end of the first two years with the current tax millage rate without having a need to increase the real estate tax millage or allocate funds from other funds in order to make a debt service payment on this,” Gregan said.

He said both fixed and reset rates allowed supervisors the opportunity to choose a shorter reset time period or hold the debt for the long term of 15 years on a fixed basis.

Finance director Shannon Drosnock said the 15-year fixed loan would allow small flexibility in debt service millage.

Birch said the 17-year fixed had a straight fixed-rate period for 17 years at 3.25 percent, and if in seven years the interest rates go to 12 percent, the township is locked.

“Conventional wisdom is to lock it in at a fixed rate,” said supervisor Joe Walsh, “but does that fight with what we want to do in the future?”

Gregan said on the seven year reset, the township would be paying more interest on that time period on a fixed rate of 3.25 percent versus a rate of 2.55 percent.

“The longer you go, the more risk you have that that rate could be substantially higher or could change two times,” he said. “In a 20-year loan, it would be changing at seven years and 14 years, as oppose to a 15-year or 17-year fixed.”

Gregan said if supervisors want to go to market in three years, then the township ought to be paying for the least amount of interest now on the money it is borrowing because it may need to refinance that for a longer term.

Supervisor Vice Chairman Candyce Chimera said if supervisors choose a loan and borrow money at some point, then they are over the $500,000 debt service and taxes would need to go up to fund more debt.

Gregan said supervisors can also look for the longer term to try and keep the debt service payment down.

Drosnock said the fixed rate is the best option for the township.

“If the board feels like it will take on a significant amount of debt additional to this in the near future, it might be wise to look at the short term,” Drosnock said. “Are you comfortable with going long term and having very minimal risk on the rate, but very little window on the debt service versus taking on more risk with the rate, but having more flex with the debt service? Ultimately it seems to me the decision is long-term risk versus short term, and the rates speak for themselves.”

Supervisor Jeff McDonnell said he was OK with a lower term for the parcel across the street, but the township could pay cash for the Zehr parcel.

Walsh said the idea is to finance both because rates are low, and it spreads the obligation over a period of 15 years.

“I do see us taking on additional financing for the community center and that is a significant issue,” he said. “In two years from now, if we build the center, what’s the best option?”

Drosnock said capital reserves could be used to fund the community center. The township has a reimbursement resolution, which allows itself to repay any cash that would be paid out back to itself through a financing alternative.

“If you take the longer term loan, it doesn’t mean you can’t decide in five years to refinance. You always have that option,” she said. “It’s that you would have paid a little bit of additional interest.”

Walsh said his mindset was you lock in a great rate as long as you can if you are buying a house; in this case, the township is talking about debt service and keeping within the mills and having flexibility in financing.

McDonnell said the township should going with the short term if it is going to refinance.

“I don’t see rates getting lower,” said Walsh. “The reality is if we have to, we can pay cash for this. We do have that luxury. We’re not doing that because it makes more sense to refinance it.”

Birch reiterated he was nervous about the economy and wanted the lowest risk.

Gregan said the most flexibility would be the seven year reset loan.

“If we held up to that loan, and got to a point of a reset at seven years, and we weren’t happy with the rate increase, we could utilize cash to pay down the debt service,” Gregan said. “If we were to refinance, we would have been able to have spent a couple years planning for the new financing, and we would have as low an interest payment as possible. If you are looking to move forward with additional projects and anticipate to refinance, to do that in next seven years, that would be the most appropriate.”

Walsh said his inclination was to go with the 17-year fixed loan, but he wanted to stay under the millage threshold so taxes don’t have to be raised in the future, and opted for the seven-year reset loan.

McDonnell and Chimera agreed with Walsh.

“I think if we we’re going to buy a community center that’s already built, and land that went with it, we’re nuts not to get a fixed rate and ride it out, but that’s not what we want to do,” Walsh said.

Birch said the community center could be a “pie in the sky idea.”

“The problem is, what if something happens and we don’t do it in seven years and the rates go up to 10 percent? Now, we spent $6 million of taxpayer money and spending 10 percent, when we had the opportunity to lock in at 3 percent, and we always could refinance,” Birch said.

Walsh said the township would be paying more interest over the last two years.

The seven-year reset “makes more sense from a finance perspective,” he said.

After the meeting, Birch said he would never vote for a tax increase.

“If we had gone with the one proposal, there is the potential of going over the existing tax millage of $500,000 at a 13-year fixed. If we went with the 17-year fixed, that was well under,” Birch said.

Birch said the township can borrow from wherever it wants to borrow, as it has one of the best credit ratings of any municipality around and has one of the best business bases in the area.

“The township is never going to default. If by chance our revenues would go down, the township also has the taxing authority to increase its taxes and pay the debt if it had to,” he said. “I couldn’t see that as a possibility.”

He said his fear is no one knows when and if the township will build a center in two years or five years.

“The board looked at a seven-year rate, and in the eighth year, all bets are off,” Birch said. “We’re not prevented from refinancing the loan. If we wanted to build this in four years, we can go back to TD Bank and say, ‘We want $15 million to restructure this loan’ and they would restructure this loan.”

zacharyorr December 28, 2011 at 05:45 AM
Though loans may be more difficult to get than a few years ago, 123 Refinance is still helping plenty of people. It's back to common sense underwriting, and guidelines to make the refinance possible for you.

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