Who actually uses the real estate in a COP setup? The section mentions that the municipality isn’t using it - but then they rent it back from the nonprofit. Does the real estate just sit there unused?
First, let’s re-establish the important parts related to certificates of participation (COPs) as discussed in the relevant chapter:
Certificates of Participation (COPs) offer a non-traditional way for municipalities to raise money. Assume a municipality owns real estate it’s not currently using. They “give up” ownership of the real estate to a non-profit third party, then rent the real estate from the non-profit. A COP is then issued, which gives investors rights to the lease payments the city makes. The city makes a rent payment on the property they used to own, the non-profit third party collects the rent, then distributes the rent money to COP holders.
Here’s an example of how this could work - let’s assume a municipality plans on building a new police station on a plot of land it owns (but is not currently being used). Instead of issuing a general obligation bond (and obtaining voter approval, ensuring debt limits are not exceeded, etc.), the municipality wants to get creative. They “give up” the property to a third party - let’s assume a commercial bank. The municipality then leases back the property from the bank using funds appropriated to the police department through its annual budget.
Next, a COP is issued, which provides investors access to the lease payments in return for capital (money). Once the capital is raised, the municipality uses the funds to build out the police station. Lease payments are perpetually made to the commercial bank, which takes a small fee, and then distributes the remaining funds to the COP holders.
I hope this gives some context! Don’t worry about COPs much - you likely won’t encounter a single test question on this concept (although it’s possible).
Thanks for clarifying. I only asked because there’s a practice exam question on it lol