3.6.3 Certificates of Participation

In a lease COPs financing the governmental obligation is a lease entered into between the public agency as lessee and a financing entity as lessor. The financing entity may be a governmental entity (such as a JPA), a nonprofit corporation, or even a for profit corporation. Public agencies often create a nonprofit corporation to play this role. Under the lease, the public agency lessee is obligated to make base rental payments, which are separated into principal and interest components. The right to receive base rental payments is assigned by the financing entity to the trustee of a trust established under a trust agreement. The basic documents are a lease (between the public agency and a lessor), an assignment agreement (between the lessor and a trustee), and a trust agreement (among the public agency, the lessor, and a trustee). The trustee executes and delivers COPs evidencing interests in the right to receive base rental payments and the COPs are sold to investors. The public agency lessee makes base rental payments to the trustee, who makes payments to COP holders.

In an installment sale agreement COPs financing the governmental obligation is an installment sale agreement entered into between the public agency as purchaser and a financing entity as seller. Under the installment sale agreement, the public agency purchaser is obligated to make installment sale payments and interest thereon and the right to receive the payments is assigned by the financing entity to the trustee under a trust agreement. The basic documents are an installment sale agreement (between the public agency and a seller), an assignment agreement (between the seller and a trustee), and a trust agreement (among the public agency, the seller, and a trustee). The trustee executes and delivers COPs evidencing interests in the right to receive installment sale payments and interest thereon and the COPs are sold to investors. The public agency purchaser makes installment sale and interest payments to the trustee who makes payments to COP holders. See Figure 3-4 for a cash flow diagram.

The principal advantage offered by the COP structure is the flexibility it offers with respect to the identity of the financing entity. For governmental entities that are not able to establish a JPA with another governmental entity, the COP structure may be an attractive alternative. In most other cases, however, the disadvantages inherent in COP structures outweigh any advantages they have over JPA revenue bonds: public agencies that have or can easily form a financing JPA tend to structure transactions as JPA lease revenue bonds or JPA installment sale revenue bonds rather than as lease COPs or installment sale COPs.

Other reasons the JPA lease or installment sale structure may be preferred to a COP structure include:

Although the lease or installment sale agreement, and consequently the security and source of payment for the debt holder, would be the same whether the transaction is structured as COPs or JPA bonds, publicized problems with COP transactions—even if entirely unrelated or in another state—sometimes make COPs less attractive to investors than bonds. This perception of problems may result in increased interest costs for COP transactions.
COP structures are even more complex than JPA revenue bond structures and therefore are more difficult to document and explain to non experts.