CHICAGO — A recent ruling by the Nebraska Department of Revenue effectively removes the use of lease-purchase agreements as a tool to finance municipal projects, and the impact is reverberating throughout the state.
The Nebraska property tax commissioner recently ruled that a small-town city hall project will not be exempt from property or sales taxes because the financing features a lease-purchase agreement.
Only if a political subdivision directly issues the bonds financing a project and owns the property will it enjoy the tax exemptions, the commissioner said. Ownership of underlying land makes no difference.
Lease-purchase agreements where a city sets up a nonprofit corporation to issue debt for a project are popular financing tools nationally and a favored option in Nebraska.
Such borrowing does not count against a Nebraska city’s debt limit and does not require approval from voters.
The bonds often carry general obligation pledges and are paid from lease payments made by the political subdivision to the nonprofit issuer.
The nonprofit issuer is typically not much more than a board made up of city or county officials, and the political unit is responsible for all property-related costs, including insurance, taxes and maintenance.
The municipality gets the title once the bonds are paid off.
The advisory affects dozens, and perhaps hundreds, of properties across the state, including Omaha’s new $140 million downtown baseball stadium.
“It’s a commonly used technique around the state,” said Lauren Wismer, bond attorney and director at Gilmore & Bell PC’s Lincoln office.
“In the state of Nebraska, this goes back to the 1930s,” said Wismer, noting that the University of Nebraska used the financing structure with the University of Nebraska Dormitory Corp., and that the state itself set up the Nebraska State Building Corp. in the 1980s to finance a state building.
The Revenue Department’s recent decision doesn’t prohibit lease-purchase agreements, but effectively eliminates their value to local governments by requiring them to pay property and sales taxes if they use the popular technique, according to local market participants.
“There are probably very few political subdivisions that would be willing to go down this road,” Wismer said. “They don’t want to pay property taxes. They’ve never had to and they don’t think they should have to now.”
Despite the popularity of lease-purchase arrangements among local governments, the relatively new administration in the state’s Department of Revenue had little knowledge about them until recently, according to Nebraska Tax Commissioner Doug Ewald.
“We weren’t aware of it at all,” Ewald said.
No new law or court ruling triggered the department’s advisory, he said. The move was taken based on the administration’s interpretation of existing laws.
Ewald and the state’s property tax commissioner, Ruth Sorenson, have been in office less than five years and had not yet had reason to scrutinize the lease-purchase agreements until the city of Norfolk requested a routine tax-exemption ruling on a project to acquire and renovate a new city hall.
Reviewing the deal, Sorenson determined that because the city itself would not be issuing the bonds and owning the property, it would be subject to state and local taxes.
A conference call with bond counsel followed, during which attorneys told the state that lease-purchase agreements are used by political subdivisions across the state.
“Bond counsel kind of highlighted certain things for us,” Ewald said. “As we became more aware, we have been asking for follow-up.”
County assessors have started calling his office to report on various properties that are now eligible to put on the property tax rolls, he added.
“It’s been kind of a snowball effect,” Ewald said. “We know we’re still missing a lot of stuff. We weren’t aware of a lot of these things and as we did [become aware] we tried to level the playing field and treat them all appropriately.”
If it remains in place, the decision will likely prove costly for Omaha, said Paul Kratz, the city attorney.
“It’s going to impact us potentially in the millions of dollars. We’re going to market all the time with these,” Kratz said. “In the end it’s going to mean that we have to borrow more to pay for the project, or build a lesser project.”
The city used the technique on one of its largest projects, a $140 million baseball stadium, TD Ameritrade Park, which is located downtown adjacent to the city’s convention center.
The venue was built to keep the annual College World Series tournament in Omaha.
In 2009 and 2010, the Omaha Public Facilities Corp. issued a total of just under $100 million in bonds for the ballpark. The bonds are rated Aaa by Moody’s Investors Service and AA-plus by Standard & Poor’s; both agencies rate the city triple-A.
The issuer’s three directors, who are not compensated, are Omaha’s budget manager, deputy city attorney and recreation supervisor. The nonprofit entity was created in 2005 to help Omaha with the acquisition, construction and renovation of public buildings, according to bond documents.
The bonds are general obligations, payable from the city’s general fund every year. The debt is an unconditional obligation of Omaha and not subject to annual renewal.
Ewald said the city charter specifies that any lease-purchase agreements are not chargeable against the city debt limit, according to bond documents.
The state is still reviewing the Ameritrade transaction and has not yet ruled on whether the city will have to pay property taxes on the baseball stadium,
Kratz said the city is prepared to sue if a property tax is levied. However, the state has ruled that a new, smaller baseball stadium in nearby Sarpy County can enjoy property and sales tax exemptions because the county itself issued the bonds and owns the ballpark.
Most agree that a legislative solution to preserve the exemptions on existing projects and future ones is needed to clarify existing law.
Sen. Mike Flood, who represents Norfolk and is speaker of the Nebraska Legislature, is expected to make legislation addressing the problem a top priority when the new session begins in January.
Ewald said the Department of Revenue has talked with Flood’s office about legislation that would iron out the problem.
“It would also be one less thing for the county assessor to worry about,” he said. “It would make our life easier.”