Planetizen is quoting a Philadelphia Business Journal article that suggests that leasing the Pennsylvania Turnpike could produce enough revenue to deal with much of the State’s transportation funding needs, including transit service.
But the legislature is skeptical…
3 responses to “Creative Financing, or Pact with the Devil?”
I would be in favor of such a “lease” only if the corporation that owned the infrastructure were an American-held company, not something like Maguire Group or that one in Spain (can’t remember the name). However, in reading the story it looks like SEPTA (their Tri-Met) is where the real change is needed.
Well, leasing MAX hasn’t gotten us anywhere.
(Yes, it’s true. TriMet entered into a sale/leaseback agreement for the light rail fleet a couple years ago. According to Note 9(b), in 1997/1998 31 cars were leased to what TriMet only described as a “foreign investor”. At the same time, those same 31 cars were then sub-leased to a “domestic investor”, and then re-leased from that party – along with 41 more cars plus the two maintenance facilities (Ruby Junction and Elmonica).
In 2005, an additional 28 LRVs were leased under a similar arrangement.
(Source: 2006 TriMet annual report as filed with the Oregon Secretary of State’s Office.)
Well, it looks like TriMet’s creative financing deal is going to BITE THEM IN THE BUTT.
As reported by a number of major news outlets, the AIG deals are falling part and investors are calling in their loans made out to “about 30 transit agencies” for these sale/leaseback arrangements in which the agencies buy assets, then sell them to the investors to gain quick cash, then lease them back over a period of time.
LACMTA is being asked to find $43 million dollars in one week, as one example.
According to TriMet’s 2008 Annual Report, the details of these transactions can be found on page 31:
During fiscal years 1997 and 1998, the District entered into sale-leaseback transactions for 31 light rail vehicles with a foreign investor. Additionally, in fiscal years 1997 and 1998, the District entered into a series of lease-leaseback transactions with domestic investors for the same 31 light rail vehicles, plus an additional 41 light rail vehicles and two rail maintenance facilities.
Equipment sales to the foreign investor resulted in original proceeds to the District of $80,600. The investor leased all assets back to the District for a period of 18 years. The leases qualify for accounting treatment as operating leases. Using the proceeds of the sales, the District fully funded payment agreements with American International
Group, Inc. (AIG) totaling $65,849. Under the payment agreements, AIG is obligated to make all required lease payments. The prepayments are recorded as prepaid lease expense in the accompanying balance sheets and are expensed over the term of the lease. The payment agreement does not constitute legal defeasance. Thus, if AIG fails to fulfill its contractual obligation to make future payments, the District will be required to meet all financial
obligations required under the lease transaction.
The District has the option under the sale-leaseback agreements to buy back the assets at the end of the lease terms. The District also deposited $11,995 with AIG, which represents the present value of the options at the buy back dates. These deposits earn interest at rates ranging from 5.3 percent to 5.9 percent and are recorded as restricted deposits on the District’s balance sheets. The interest earned on the restricted deposits is recorded as a component of net leveraged lease expense on the statements of revenues, expenses and changes in net assets.
The arrangement discussed in this paragraph does not constitute legal defeasance. Thus, if AIG fails to fulfill its contractual obligation to fund TriMet’s buy back of the vehicles, the District will be required to complete the buy
back with other funds.
In simultaneous transactions, the District leased its leasehold interest (the Head Leases) in the equipment to domestic third party investors (the Leasehold Investors) under the 1998 and 1997 leasehold agreements for a
period of 36 and 30 years, respectively. The Head Leases qualify for accounting treatment as operating leases. The Leasehold Investors prepaid all required lease payments totaling $175,849, which have been recorded as deferred lease revenue on the accompanying balance sheets. The deferred revenue is recognized over the terms of the leases.
The 1998 and 1997 Leasehold Investors sublet all assets back to the District for a period of 18 and 15 years, respectively. The subleases also qualify as operating leases. TriMet used the proceeds of the lease transactions to fully fund payment agreements with AIG totaling $130,562. Under the terms of the payment agreements, AIG is required to make all sublease payments. The prepayments are recorded as prepaid lease expenses in the accompanying balance sheets and are expensed over the terms of the leases.
In addition, the District deposited the present value of the Head Lease buy out options with AIG. The deposits accrete interest at rates ranging from 5.8 percent to 7.1 percent and are recorded as restricted lease deposits on
the District’s balance sheets. The payment agreement does not constitute legal defeasance. Thus, if AIG fails to fulfill its contractual obligation to make future payments, the District will be required to meet all financial obligations required under the lease transaction.