Lease/leaseback on city council agenda by David Lias The Vermillion City Council will consider a resolution Sept. 2 that ultimately could reap about $1.2 million.
Aldermen will decide Tuesday whether to enter into a lease/leaseback agreement involving the city's wastewater treatment plant.
The purpose of long-term lease/leaseback transactions is to allow a tax-exempt entity, such as the city of Vermillion, to be able to lease an asset, such as the treatment plant, to a large private bank.
Through this lease and leaseback transaction, the city will receive approximately 3.6 percent of the fair market value of the treatment plant, or approximately $1.2 million, and would retain operating control of the system.
The bank will receive the benefit of the depreciation on the asset over the life of the lease and transaction costs.
The city is considering leasing the treatment plant for a 99 year period to Fifth Third Bank, a large financial institution on the east coast.
The city would then immediately lease back the plant over a 30 year period.
Through the transaction, Vermillion would receive cash from Fifth Third Bank as the 100 percent up front long-term lease payment on the plant assets.
If alderman decide to pursue this opportunity, approximately 97 percent of this cash would immediately be placed by Vermillion into an account known as an defeasance agreement.
This account, which will be made up primarily of U.S. government securities to insure it will always be solvent, will be used by the city to automatically make payments to Fifth Third Bank over the 30 year term of the lease.
On the closing date of the lease/leaseback, which could occur this fall if approved, the city would receive the $1.2 million as lump sum proceeds.
South Dakota's Municipal Facilities Authority (MFA) would play a role in the transaction.
Should aldermen approve the resolution, the city would incur no out-of-pocket expenses by entering into the transaction.
During the lease period, the title to the treatment plant will remain with the city. The lease would not be regarded as debt, and any future tax-exempt bonds would not be adversely affected.
Vermillion would continue to operate the wastewater treatment plant in its normal fashion. The city would retain full control to operate and maintain the treatment system, and to make all upgrade and expansion decisions.
Scott Scofield, managing director of Allco Finance, Madison, described the characteristics of the lease/leaseback transaction in detail to aldermen at a special meeting Tuesday.
Legislation passed in Pierre two years ago created the MMFA, and has made it possible, he said, for municipalities to benefit financially through a lease/leaseback of certain assets.