Building and Building and Financing OptionsFinancing OptionsFor Public - Private For Public - Private

ProjectsProjectsThomas KuffelThomas Kuffel

Senior Deputy Prosecuting AttorneySenior Deputy Prosecuting AttorneyKing County Prosecuting Attorney OfficeKing County Prosecuting Attorney Office

December 13, 2007December 13, 2007

OUTLINEOUTLINE

1.1. Private Land/Private ConstructionPrivate Land/Private Construction Build to Suit – Lease to OwnBuild to Suit – Lease to Own

Real Estate TransactionReal Estate Transaction FinancingFinancing

2.2. Public Land/Private ConstructionPublic Land/Private Construction Build to Suit – Lease/LeasebackBuild to Suit – Lease/Leaseback

Real Estate TransactionReal Estate Transaction FinancingFinancing

3.3. Advantages and DisadvantagesAdvantages and Disadvantages

Traditional DBBTraditional DBB

1.1. Public agency enters Public agency enters into separate into separate contracts for design contracts for design and construction and construction work.work.

2.2. GC selected based on GC selected based on low bid after design low bid after design work completed.work completed.

3.3. At all times the At all times the public agency owns public agency owns the land and the land and building.building.

Private LandPrivate LandPrivate ConstructionPrivate Construction

Build to Suit -- Lease to OwnBuild to Suit -- Lease to Own Private company owns land and Private company owns land and

constructs building.constructs building. Public agency leases building upon Public agency leases building upon

completion.completion. Public agency owns building at the Public agency owns building at the

end of lease period.end of lease period.

Basic Statutory Basic Statutory Requirements: The Real Requirements: The Real

Property TransactionProperty Transaction RCW 35.42.060 -- City or town (or county with RCW 35.42.060 -- City or town (or county with

population > 1million people per RCW population > 1million people per RCW 36.42.205) may execute a lease, prior to the 36.42.205) may execute a lease, prior to the actual acquisition of a site and the construction actual acquisition of a site and the construction of a building, provided:of a building, provided:

1.1. Lessee is not required to pay rent until the Lessee is not required to pay rent until the building is ready for occupancy.building is ready for occupancy.

2.2. Lessor must furnish a bond satisfactory to the Lessor must furnish a bond satisfactory to the lessee (i.e., city/town/ county) conditioned on the lessee (i.e., city/town/ county) conditioned on the delivery of possession of the completed building delivery of possession of the completed building to the lessee at the time prescribed in the lease, to the lessee at the time prescribed in the lease, unavoidable delay excepted.unavoidable delay excepted.

3.3. No part of the cost of construction shall ever No part of the cost of construction shall ever become an obligation of the city/town/county.become an obligation of the city/town/county.

Basic Statutory Basic Statutory Requirements:Requirements:

Prevailing WagesPrevailing Wages RCW 39.04.260 –Prevailing wages RCW 39.04.260 –Prevailing wages

are required if the public agency are required if the public agency leases, rents or purchases more than leases, rents or purchases more than 50% of the building.50% of the building.

ProcurementProcurement

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

FinancingFinancing

Two types of financing options:Two types of financing options:1.1. If non-profit owner, then may If non-profit owner, then may

finance with tax exempt Bonds (63-finance with tax exempt Bonds (63-20 bonds or 501(c)(3) bonds) or 20 bonds or 501(c)(3) bonds) or Certificates of Participation (COPs).Certificates of Participation (COPs).

2.2. If for-profit owner, then taxable If for-profit owner, then taxable finance for construction and tax finance for construction and tax exempt financing for takeout with exempt financing for takeout with COPs.COPs.

Public LandPublic LandPrivate ConstructionPrivate Construction

Build to Suit – Lease/LeasebackBuild to Suit – Lease/Leaseback Public agency owns land, leases to Public agency owns land, leases to

private entity for construction.private entity for construction. Private entity owns building, leases Private entity owns building, leases

back to public agency.back to public agency. Public agency owns the building at Public agency owns the building at

the end of the lease.the end of the lease.

Basic Statutory Basic Statutory Requirements: The Real Requirements: The Real

Property TransactionProperty Transaction RCW 35.42.070 – Two components:RCW 35.42.070 – Two components:

1.1. Any city or town (or county with Any city or town (or county with population > 1million people per RCW population > 1million people per RCW 36.42.205) desiring a building for its use 36.42.205) desiring a building for its use erected on land owned or to be acquired erected on land owned or to be acquired by it lease the land for a reasonable rental by it lease the land for a reasonable rental for a term of not less than 50 years. for a term of not less than 50 years.

2.2. City/town/county leases back the building City/town/county leases back the building or a portion thereof for the same term.or a portion thereof for the same term.

Statutory Lease TermsStatutory Lease Terms1. 1. No part of the cost of construction shall ever No part of the cost of construction shall ever

become an obligation of the become an obligation of the city/town/county.city/town/county.

2.2. City/town/county shall have a prior right to City/town/county shall have a prior right to occupy part/all of the building.occupy part/all of the building.

3.3. Rent may not exceed prevailing rates for Rent may not exceed prevailing rates for comparable space.comparable space.

4.4. Lessee may rent out unoccupied portions of Lessee may rent out unoccupied portions of the building to tenants approved by the the building to tenants approved by the city/town/county.city/town/county.

5.5. Upon expiration of the lease, all buildings Upon expiration of the lease, all buildings and improvements on the land become the and improvements on the land become the property of the city/town/county.property of the city/town/county.

Basic Statutory Basic Statutory Requirements: Prevailing Requirements: Prevailing

WagesWages RCW 39.04.260 –Prevailing wages RCW 39.04.260 –Prevailing wages

are required if the public agency are required if the public agency leases, rents or purchases more than leases, rents or purchases more than 50% of the building.50% of the building.

Statutory Procurement Statutory Procurement RequirementsRequirements

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

FinancingFinancing

Three types of financing options:Three types of financing options:

1.1. Private financing during building Private financing during building construction and leaseback periods.construction and leaseback periods.

2.2. 63-20 tax exempt bonds issued by a 63-20 tax exempt bonds issued by a non-profit corporation.non-profit corporation.

3.3. COPs issued in lease, either for COPs issued in lease, either for construction or as take-out construction or as take-out financing.financing.

Miscellaneous FeaturesMiscellaneous Features

State Tax Issues: RCW 35.42 contains State Tax Issues: RCW 35.42 contains certain tax exemptions, e.g. certain tax exemptions, e.g. transactions are exempt from real transactions are exempt from real estate excise tax.estate excise tax.

Debt Limitations: Under Debt Limitations: Under lease/leaseback approach, public lease/leaseback approach, public agency’s lease would generally be agency’s lease would generally be structured as debt, subject to statutory structured as debt, subject to statutory and constitutional debt limits. Under and constitutional debt limits. Under lease to own, public agency’s lease may lease to own, public agency’s lease may be structured as debt.be structured as debt.

Advantages and Advantages and Disadvantages of Build Disadvantages of Build

to Suit Modelsto Suit Models• Private company owns building and Private company owns building and

assumes risk and financial assumes risk and financial responsibility during construction.responsibility during construction.

• Rental rate paid by public agency Rental rate paid by public agency during the term of the lease during the term of the lease remains flat. It is not subject to remains flat. It is not subject to increases over time that generally increases over time that generally occur in private sector office space occur in private sector office space rents.rents.

Advantages and Advantages and Disadvantages of Build Disadvantages of Build

to Suit Modelsto Suit Models As compared to issuing LTGO bonds there As compared to issuing LTGO bonds there

may be additional costs associated with may be additional costs associated with 63-20 and COPs financing.These include 63-20 and COPs financing.These include potentially higher issuance costs because potentially higher issuance costs because there are more players and fees if a third there are more players and fees if a third party non-profit is involved. party non-profit is involved.

Per federal tax law, public agency gets Per federal tax law, public agency gets unencumbered title to the property and unencumbered title to the property and improvements at the end of the lease for improvements at the end of the lease for no additional cost.no additional cost.