Lease/leaseback will generate $1 million by David Lias The city of Vermillion will gain slightly more than $1 million through a financial arrangement that takes advantage of federal tax laws.
The Vermillion City Council agreed Tuesday to approve a lease/leaseback arrangement involving the city's wastewater treatment plant.
The city intends to use the funds received through this transaction to make future capital improvements to the city's wastewater treatment facilities and other public improvements.
The long-term transaction allows 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 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 Vermillion City Council agreed Tuesday to lease 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.
Approximately 97 percent of this cash will 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.