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Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.
In the midst of a statewide recession and a budget shortfall, local governments have found themselves grasping at ways to trim budgets and raise new capital. Our Legislature has just entered into a special session to try and solve these problems. While there are many issues being debated and fought over, I’m only going to weigh in on one; the leveraging of government owned real estate assets to raise capital. This is not a new concept; the State of Arizona recently raised $735.4 million dollars using the same method that I am going to recommend. I propose that our local governments, from city to state, may be able to weather their current budget difficulties by entering into sale-leaseback agreements, more specifically through the issuance of certificates of participation.
Certificates of participation have the same underlying principles as a traditional sale-leaseback; an investor purchases a building while the seller agrees to lease it back under the terms and conditions of a sale-leaseback agreement. This structure works best with traditional property types and strong tenants that can commit to long term leases. The fact that most government buildings are special use and their leases allow for a penalty free walk-out, keeps them from being able to benefit from traditional sale-leaseback transactions. Investors would demand high cap rates to compensate for the risk, which essentially increases the governments cost of capital. Certificates of participation take the sale-leaseback concept further by essentially issuing debt that is serviced by their “lease” payments.
In COPs financing, title to a government owned asset is assigned to a bank trustee (non-profit corporation) that simultaneously leases the asset back to the agency and holds title for the benefit of the investors, the certificate holders. The participation of many investors in the lease transaction allows the transformation of what would otherwise be a straightforward financing instrument executed between a lessee and a lessor into a marketable security. This financing also allows for the government agency to issue the certificates at a rate that reflects their bond rating, not the asset specific risk of the property, resulting in a much lower cost of capital.
There are many more moving parts that need to come together for a transaction of this nature to take place. I will explain in more detail what those components are in my next blog.