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Building and Financing Options For Public - Private Projects

Building and Financing Options For Public - Private Projects. Thomas Kuffel Senior Deputy Prosecuting Attorney King County Prosecuting Attorney Office December 13, 2007. OUTLINE. 1. Private Land/Private Construction Build to Suit – Lease to Own Real Estate Transaction Financing

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Building and Financing Options For Public - Private Projects

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  1. Building and Financing OptionsFor Public - Private Projects Thomas Kuffel Senior Deputy Prosecuting Attorney King County Prosecuting Attorney Office December 13, 2007

  2. OUTLINE 1. Private Land/Private Construction • Build to Suit – Lease to Own • Real Estate Transaction • Financing 2. Public Land/Private Construction • Build to Suit – Lease/Leaseback • Real Estate Transaction • Financing 3. Advantages and Disadvantages

  3. Traditional DBB • Public agency enters into separate contracts for design and construction work. • GC selected based on low bid after design work completed. • At all times the public agency owns the land and building.

  4. Private LandPrivate Construction Build to Suit -- Lease to Own Private company owns land and constructs building. Public agency leases building upon completion. Public agency owns building at the end of lease period.

  5. Basic Statutory Requirements: The Real Property Transaction • RCW 35.42.060 -- City or town (or county with population > 1million people per RCW 36.42.205) may execute a lease, prior to the actual acquisition of a site and the construction of a building, provided: 1. Lessee is not required to pay rent until the building is ready for occupancy. 2. Lessor must furnish a bond satisfactory to the lessee (i.e., city/town/ county) conditioned on the delivery of possession of the completed building to the lessee at the time prescribed in the lease, unavoidable delay excepted. 3. No part of the cost of construction shall ever become an obligation of the city/town/county.

  6. Basic Statutory Requirements:Prevailing Wages • RCW 39.04.260 –Prevailing wages are required if the public agency leases, rents or purchases more than 50% of the building.

  7. Procurement • No statutorily-required procurement process for Lessor/Nonprofit/Developer.

  8. Financing • Two types of financing options: • If non-profit owner, then may finance with tax exempt Bonds (63-20 bonds or 501(c)(3) bonds) or Certificates of Participation (COPs). • If for-profit owner, then taxable finance for construction and tax exempt financing for takeout with COPs.

  9. Public LandPrivate Construction Build to Suit – Lease/Leaseback • Public agency owns land, leases to private entity for construction. • Private entity owns building, leases back to public agency. • Public agency owns the building at the end of the lease.

  10. Basic Statutory Requirements: The Real Property Transaction • RCW 35.42.070 – Two components: • Any city or town (or county with population > 1million people per RCW 36.42.205) desiring a building for its use erected on land owned or to be acquired by it lease the land for a reasonable rental for a term of not less than 50 years. • City/town/county leases back the building or a portion thereof for the same term.

  11. Statutory Lease Terms 1. No part of the cost of construction shall ever become an obligation of the city/town/county. 2. City/town/county shall have a prior right to occupy part/all of the building. 3. Rent may not exceed prevailing rates for comparable space. 4. Lessee may rent out unoccupied portions of the building to tenants approved by the city/town/county. 5. Upon expiration of the lease, all buildings and improvements on the land become the property of the city/town/county.

  12. Basic Statutory Requirements: Prevailing Wages • RCW 39.04.260 –Prevailing wages are required if the public agency leases, rents or purchases more than 50% of the building.

  13. Statutory Procurement Requirements • RCW 35.42.080 – Procurement of the Lessee: Statutory procurement process based on a call for bids upon terms most advantageous to the city/town/county.

  14. Financing Three types of financing options: • Private financing during building construction and leaseback periods. • 63-20 tax exempt bonds issued by a non-profit corporation. • COPs issued in lease, either for construction or as take-out financing.

  15. Miscellaneous Features • State Tax Issues: RCW 35.42 contains certain tax exemptions, e.g. transactions are exempt from real estate excise tax. • Debt Limitations: Under lease/leaseback approach, public agency’s lease would generally be structured as debt, subject to statutory and constitutional debt limits. Under lease to own, public agency’s lease may be structured as debt.

  16. Advantages and Disadvantages of Build to Suit Models • Private company owns building and assumes risk and financial responsibility during construction. • Rental rate paid by public agency during the term of the lease remains flat. It is not subject to increases over time that generally occur in private sector office space rents.

  17. Advantages and Disadvantages of Build to Suit Models • As compared to issuing LTGO bonds there may be additional costs associated with 63-20 and COPs financing.These include potentially higher issuance costs because there are more players and fees if a third party non-profit is involved. • Per federal tax law, public agency gets unencumbered title to the property and improvements at the end of the lease for no additional cost.

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