Office of the State Treasurer Lease/Purchase Program Guide. Office of the State Treasurer Lease/Purchase Program Guide

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1 Lease/Purchase Program Guide This page provides labels for notebook spines. Document follows on next page. James L. McIntire State Treasurer Lease/Purchase Program Guide James L. McIntire State Treasurer Lease/Purchase Program Guide James L. McIntire State Treasurer Lease/Purchase Program Guide James L. McIntire State Treasurer

2 Lease/Purchase Program Guide James L. McIntire State Treasurer Revised 11/08/2011

3 Introduction The purpose of the State Treasurer s Lease/Purchase Program is to provide convenient, cost-effective financing for state agencies, colleges and universities. This guide has been written to provide an overview of the program as well as some background information on municipal finance. It is our hope that the overview will enhance your understanding of the administrative policies established by the State Treasurer. The Program Guide, which is divided into four sections, details the Lease/Purchase program s background and explains the procedures to follow for financing: Overview Financing Equipment Financing Real Estate Projects Repayment and Prepayment of Lease Transactions If you have a question that is not addressed in this Program Guide, the Treasurer s staff is available to answer questions or to meet with you at any point in the process. Please feel free to contact the following individuals: Wendy Kancianich Lease/Purchase Contact (360) wendy.kancianich@tre.wa.gov FAX (360) Shelly Sweeney Vendor Disbursements/Lease Payments Shelly.Sweeney@tre.wa.gov (360) Fax (360) Revised 11/08/2011

4 Table of Contents Lease/Purchase Program Guide Overview Authorization Program Benefits Program Parameters Operating Lease or Financing Lease? Deciding to Finance Financing Equipment Submitting a Notice of Intent to Lease/Purchase Purchasing the Equipment Submitting Financing Documents Summary of the Equipment Financing Process Financing Real Estate Overview of Real Estate Financing Diagram of a Real Estate Transaction Getting Started Real Estate Document Checklist Completing the Real Estate Financing Transaction Lease Payments Making Scheduled Lease Payments Prepaying Lease/Purchase Transactions Appendix A Sample Lease Forms... A-1 Appendix B Appendix II State Agency Financing Addendum, Series 200_... B-1 Appendix C Example of Real Estate Authorization... C-1 Revised 11/08/2011

5 Lease/Purchase Program Guide Authorization Overview It s not just a good idea, it s the State agencies are not required to finance their acquisitions, but if they choose to do so, financing must be obtained through the State Treasurer s Lease/Purchase Program. Lease/Purchase transactions are financed with certificates of participation (COPs). COP payments are subject to appropriation by the Legislature. RCW was passed by the Legislature in It provides for financing of both real and personal property (real estate and equipment) by state agencies through the use of financing contracts. Financing contracts include lease/purchase agreements or any other interest bearing contract used to finance property. Real estate projects must be specifically approved by the Legislature. These projects are listed in the Miscellaneous section of the Capital Budget. For a few agencies, the project authorizations are included in the Transportation Budget. The most important stipulation of RCW is that ALL FINANCING CONTRACTS MUST BE APPROVED BY THE STATE FINANCE COMMITTEE. The State Finance Committee is comprised of three elected officials: State Treasurer, Chair Governor Lieutenant Governor. The Committee approves all securities issued on behalf of the state of Washington. These securities include general obligation bonds and certificates of participation (COPs). COPs are the securities issued to finance equipment and real estate through the Treasurer s Lease/Purchase Program. COPs are issued pursuant to a lease of financed assets that provides collateral to the lender. These securities represent ownership interests, or participations, in the future stream of lease payments. COPs have certain features that distinguish them from state general obligation bonds. General obligation bonds are backed by the full faith and credit of the state of Washington. The contractual obligation of the state to pay principal and interest is unconditional. Lease payments, on the other hand, are subject to continual appropriation by the Legislature. Although the possibility of non-appropriation is extremely remote, the State Treasurer has established policies and procedures for the administration of the Lease/Purchase Program to ensure that this risk will be perceived as minimal by investors. By minimizing this risk, the Treasurer is able to obtain the lowest possible interest rates for the state s COPs, resulting in lower lease payments for state agencies. Revised November 8,

6 Lease/Purchase Program Guide Program Benefits Overview The primary purpose of the Lease/Purchase Program is to provide convenient, low-cost financing for state agencies. The State Finance Committee has delegated administrative responsibility for the Lease/Purchase Program to the Debt Management Team in the Office of the State Treasurer. By pooling financing requests in the name of the state of Washington, the State Treasurer provides individual state agencies access to the municipal securities markets and lower, tax-exempt interest rates. Prior to the inception of RCW 39.94, state agencies negotiated vendor leases to finance equipment acquisitions. These vendor leases often carried above market interest rates and many did not reflect the agencies eligibility for tax exempt borrowing or the high credit quality of the state. Administration by the State Treasurer protects the state s credit rating. Legal documents are standardized. Sample documents are pro-vided in Appendix A. Forms are available on disk or by upon request. The State Treasurer obtains a credit rating from at least one of the major New York rating agencies for most lease/purchase transactions. Administrative controls imposed by the State Treasurer are cited by these firms as a major factor in their assignment of an investment grade rating. The Lease/Purchase Program allows state agencies to benefit from the state s high credit quality and assures access to the lowest possible interest rates. The Attorney General appoints attorneys with expertise in municipal finance to serve as certificate counsel for lease/purchase transactions. Certificate counsel drafts the master financing agreements (contracts between the State Treasurer and the lenders) and sublease agreements (contracts between state agencies and the State Treasurer). Standardized documents assure agency managers of compliance with state law as well as securities and tax laws and regulations. The legal documents have been refined over time to minimize paper work for state agencies. Although the master agreements are comprehensive, the equipment sublease agreements have been reduced to three documents and a total of five pages. Legal documents for real estate transactions are unique for each project and are prepared for signature by all parties. Revised November 8,

7 Lease/Purchase Program Guide The payment process is stream-lined. Overview Lease payments are made semi-annually to the State Treasurer on June 1 and December 1. Two weeks prior to these payment dates, the State Treasurer forwards a notice to all agencies summarizing payments due on outstanding leases. A centralized lease/purchase program enhances statewide accountability. In addition to low cost and convenience, a secondary benefit of the lease/purchase program is enhanced accountability. The State Treasurer reports annually to the House Capital Committee on the status of outstanding debt for the state of Washington. Included in this report is a discussion of financing obtained through the Lease/Purchase Program. The database maintained by the debt management division is capable of generating a wide variety of reports in response to inquiries by legislative staff and the Office of Financial Management (OFM). At the close of each fiscal year, the State Treasurer provides OFM s Accounting Division with a summary report detailing outstanding lease/purchase balances for all state agencies. OFM is able to reconcile balances reported by agencies to correct errors prior to audit. The reconciliation also provides verification of the accuracy of the Treasurer s lease/purchase database. Revised November 8,

8 Lease/Purchase Program Guide The lease/purchase program is mandatory. Program Parameters Overview RCW prohibits state agencies from negotiating financing leases directly with vendors or other lenders. Finance terms must be greater than one year and may not exceed the useful life of the property. It is always possible to finance for a term that is shorter than the useful life. Finance terms cannot exceed the useful life of the asset. In lease/purchase transactions, the property serves as collateral. Consequently, there can be no outstanding principal balance when the asset has no remaining value. Useful life for specific assets should be determined by referring to the OFM State Financial and Administrative Policies Manual (SAAM), Chapter 30.50, Capital Asset Commodity Class and Location Code List and Useful Life Schedules. The SAAM manual is online at For unique or used equipment, the Treasurer s staff will provide assistance. Finance terms must be greater than one year. RCW was enacted to finance assets on a long-term basis; it does not provide for short-term borrowing. Assets must serve an essential public purpose. Financed assets must serve an essential public purpose. Restricting financing to essential property serves to mitigate the risk of non-appropriation by the Legislature. Essential does not mean generic utility. It means that the specific equipment or project must be necessary for the agency to fulfill its obligation to the public. For example, boats and motors are appropriate, essential equipment for the Department of Fish and Wildlife even though they would not serve a public purpose for the Office of Financial Management. RCW does NOT apply to rental agreements (operating leases). Revised November 8,

9 Lease/Purchase Program Guide Operating Lease or Financing Lease? Overview Agencies may negotiate operating leases but NOT FINANCING LEASES. FASB #13: the lease duck test State agencies may enter into operating leases or rental agreements at their discretion. However, managers must be certain that the lease is, in fact, an operating lease. Management intent is NOT a determining factor. Operating leases are distinguished from financing leases according to accounting criteria. Accounting standards for governmental entities are established by the Governmental Accounting Standards Board (GASB) in conjunction with the Financial Accounting Standards Board (FASB) which promulgates accounting standards for corporate entities. FASB Statement No. 13 specifies four criteria to identify a financing lease: Present value of lease payments > 90% of fair market value Lease term > 75% of useful life Lease includes a bargain purchase option Lease provides for transfer of ownership If a lease satisfies any ONE of the above criteria, it IS a financing lease subject to RCW The last three criteria are fairly straight-forward. The first item requires analysis based on the time value of money. Lease payments to be paid in the future are discounted at the lessee s effective borrowing rate to determine their value at the inception of the lease. For state agencies, the effective borrowing rate is the rate that would be paid by financing through the State Treasurer s Lease/Purchase Program. The Treasurer s lease/purchase staff will provide the current interest rate for the finance term under consideration. Revised November 8,

10 Lease/Purchase Program Guide Overview Some associated costs may be financed and others may not for the following Deciding to Finance Questions often arise relative to the allowable cost of capital assets. The following table summarizes eligible and ineligible costs: Eligible Costs Ineligible Costs Design Maintenance Delivery & Setup Insurance Training Transactions under $10,000 Sales & Use Tax Collateral requirements Collateral requirements Financial policy TIP: Bundle items under $10,000 into one sublease. Follow all normal procurement procedures. Design costs may not be financed before equipment is acquired or construction begins because design, by itself, does not represent collateral to the lender. These costs may be reimbursed when COPs are sold. Maintenance and insurance are operating expenses and may not be financed. Although the state does not perfect a security interest in financed equipment, in order to minimize risk to investors, agencies must pledge to maintain and insure the financed property. Insurance is discussed in the Financing Equipment section of the Program Guide. Transactions for less than $10,000 should be purchased with available funds. The Treasurer has established the minimum threshold at a very low level in order to accommodate the financing requirements of even the smallest state agencies. State agencies should acquire equipment in accordance with state law and internal agency procurement policies. Construction projects are subject to public works requirements. The Internal Revenue Code exempts the interest paid on municipal securities from the investors federal income tax. As a result, municipal issuers, like the state of Washington, pay a lower rate of interest than corporations. Congress intended this benefit for the construction and acquisition of local infrastructure. Revised November 8,

11 Lease/Purchase Program Guide Overview Decide BEFORE you buy! It was NOT intended as a means of earning arbitrage investing proceeds from municipal securities at a higher rate than the interest rate paid for debt service. To discourage arbitrage abuse by municipalities, the Internal Revenue Service (IRS) has issued reimbursement regulations that must be followed in order to maintain the tax exempt status of the COPs to investors. These regulations stipulate that the municipal issuer must file a written statement of its intent to be reimbursed for project (or equipment) costs within 60 days of payment to a contractor or vendor. The Notice of Intent to Lease Purchase (discussed in the Financing Equipment section) satisfies these IRS regulations. The State Treasurer is subject to audit by the IRS for compliance with the Internal Revenue Code arbitrage rules. Failure to comply with these regulations will subject an entire pooled transaction to loss of its tax exempt status and have serious credit implications for the state. In order to safeguard lease/purchase securities, sublease documents will be reviewed to ensure that the date of the Notice of Intent precedes the date of remittance to vendors when reimbursement is requested. The Treasurer s staff is available to assist with the decision process. Please feel free to call us to determine the current interest rates, payment options or for any other lease/purchase questions. Please direct your equipment and real estate financing questions to Wendy Kancianich at (360) Revised November 8,

12 Lease/Purchase Program Guide Financing Equipment Submitting a Notice of Intent to Lease/Purchase As soon as the decision to finance through lease/purchase has been made, agencies should submit a Notice of Intent to Lease/Purchase. An example of this form is provided in Appendix A. The information provided on the form assists the State Treasurer in planning for future state-wide financing requirements and to demonstrate compliance with Internal Revenue Service regulations as discussed in the Overview section. Keep the Treasurer s staff informed of the identity of agency contacts. The Notice of Intent asks for the names and phone numbers of agency purchasing and accounting contacts. The Treasurer s staff communicates with purchasing contacts for pending transactions and with accounting contacts for lease payments. Some agencies have chosen to delegate responsibility for lease/purchase transactions to one individual. A single designated contact has proven very beneficial and the Treasurer strongly recommends this practice. Provide a brief description of the equipment to be financed. Please be specific; for example, telephone system or vehicles and indicate in the second column the quantity, if applicable. In the third column, provide your best estimate of the amount to be financed. IRS regulations prohibit reimbursement of amounts that exceed this estimate. It will be necessary to amend your Notice of Intent, even for modest variations, when the actual amount exceeds the initial estimate when reimbursement is requested. Estimate on the HIGH side. Refer to the OFM Manual to determine useful life. The total amount should exceed $10,000. For equipment that falls below this threshold, consider combining requests with the same finance term. In the fourth column, request a repayment term in years. Remember that the finance term may not exceed the useful life of the equipment as discussed in the Overview section. Revised November 8,

13 Lease/Purchase Program Guide Financing Equipment Submitting a Notice of Intent to Lease/Purchase Agencies may request a shorter finance term. If you would like assistance with this decision, the Treasurer s staff will provide you with alternative payment scenarios. In the fifth column provide your best estimate of your expected acceptance date. This is the date when the equipment will be delivered and installed. Ideally, the Notice of Intent should be submitted prior to acceptance. In order to comply with federal tax regulations discussed on pages 1-7 and 2-1, in no circumstances will a Notice of Intent be accepted 60 days after payment has been made to the vendor or contractor. Finally, indicate which fund, or funds, your agency will charge when lease payments are made. Where do I send the Notice? The Notice should be signed by the agency director or by an individual authorized by the director. Forward the signed Notice of intent to: Debt Management Division PO Box Olympia, WA The Treasurer s staff will review the Notice for: Completeness Essentiality of equipment Length of finance term Acceptance date compliance with tax laws Signature How will I know if my financing has been approved? What if I change my mind? A transaction identification number will be assigned and a letter acknowledging acceptance of the financing application will be mailed to the individual identified as the purchasing contact on the Notice of Intent. The Treasurer s staff can provide verbal approval by telephone for agencies that require an immediate response. If you subsequently decide NOT to finance your equipment, please forward written notification to the State Treasurer. Revised November 8,

14 Lease/Purchase Program Guide Purchasing the Equipment Financing Equipment The State Treasurer does not interfere with the agency in the selection of equipment. However, agencies should follow all state procurement regulations when acquiring equipment through the Lease/Purchase Program. For example, when agencies request financing for computers or telecommunications equipment, Department of Information Systems (DIS) approval is required for acquisition amounts which exceed the agency s delegated authority. Community colleges must comply with standards established by the Communications Technology Center. Energy conservation projects must be approved by the Energy Conservation Program in the Department of General Administration s Engineering and Architectural Services Division. Pay the vendor and request reimbursement if possible. Agencies pledge to maintain equipment in lease documents submitted to the State Treasurer. Agencies may not withhold lease payments if equipment malfunctions or if it is damaged or destroyed. The State Treasurer pledges, but does not perfect, a security interest in all financed equipment. Agencies should list themselves as both legal and registered owners on titled assets. Inspect your equipment and accept it before submitting final financing documents. The equipment will serve as collateral for financing and should be in good working order. Subsequent warranty issues must be resolved between your agency and the vendor. Because the equipment provides collateral security for the lender/investors, both liability and property damage insurance must be obtained through the Office of Financial Management s Office of Risk Management. The Office of Risk Management has a self-insurance pool for liability. However, the liability pool does not cover aircraft and certain vessels. A commercial policy must be purchased for these assets. The Office of Risk Management does not offer a self-insurance pool for property damage. Agencies may purchase a commercial policy or they must agree to accept financial responsibility in the event of damage or destruction of the equipment. In such event, the agency must either prepay the lease or replace the equipment with similar assets. The Office of Risk Management will prepare a written declaration of your agency s selection of insurance for the state s fiscal agent and will provide your agency with copies.. Revised November 8,

15 Lease/Purchase Program Guide Financing Equipment Submitting Financing Documents Timing is everything. The State Treasurer pools agency requests for equipment financing on a quarterly basis. The Lease/Purchase Program has established cut-off dates for acceptance within a pooled transaction. The sale of COPs in the municipal bond market imposes certain timing constraints. In order to successfully market COPs, the Treasurer cannot accommodate agency financing requests submitted subsequent to these cut-off dates: Cut Off Date Financing Date First Payment Due January 10 March June 1 June 20 August December 1 **The cut off and financing dates listed above are target dates, please contact your Lease/Purchase Representative for information on all future COP sale dates. When the first of the month falls on a weekend or a holiday, the cut-off date will be the next business day. Comment [PJ1]: Per RCW If possible, pay the vendor and request reimbursement. Pooled equipment COPs are sold by competitive bid during the first week of the month following the cut-off date. Closing and disbursement of proceeds will generally occur by the middle of the same month. Sale and closing dates may vary due to market conditions. If you would like to know the exact date for disbursement of proceeds, please feel free to call Wendy Kancianich or Shelly Sweeney. Lease documents should be submitted after the equipment has been accepted. If at all possible, pay the vendor or contractor and request reimbursement through the lease/purchase program. This avoids delays inherent in the quarterly financing process. The State Finance Committee has approved a Master Financing Contract that authorizes the sale of COPs to finance equipment acquired by state agencies. The Master Contract includes standardized lease documents to be used for equipment acquisition. Forms will be provided by or on disk upon Revised November 8, 2011 In order to finance equipment, state agencies enter into a Financing Addendum with the State Treasurer. The Agency Financing Addendum, including Exhibits and 2-4

16 request. Lease/Purchase Program Guide Financing Equipment supporting documents, are discussed in the following pages. Sample forms are provided in Appendix A. Agency Financing Addendum SIGN the Sublease! The Agency Financing Addendum is a one page document that establishes the contractual obligations of the state agency in the transaction. It further confirms the intent of the agency to sublease equipment and remit lease payments to the State Treasurer. The Agency Financing Addendum is signed by the agency director or a designated representative. It is countersigned by the Designated State Treasurer Representative, usually the Deputy State Treasurer for Debt Management. The Agency Financing Addendum is submitted with several exhibits: Exhibit A Notice of Intent A copy of the Notice of Intent is the first exhibit to the Sublease. Exhibit B Personal Property Certificate Enter the assigned transaction number in the upper right corner. Request reimbursement by completing the line Disburse to Agency It is more efficient to wire funds than to mail warrants. Revised November 8, 2011 The Personal Property Certificate is a one page document that identifies the state agency and the designated signer. It also describes the equipment, the vendor(s), the amount to be financed and directions for disbursement. Generic forms have inherent limitations. When the space provided is insufficient, you may refer to an attached list. If you have acquired forms by or computer disk, the templates will allow you to enter additional lines of data. An important function of the Personal Property Certificate is to provide direction to the State Treasurer for the disbursement of proceeds. The State Treasurer will reimburse agencies by completing a transfer JV (Journal Voucher] crediting the fund(s) designated in the Notice of Intent. Unless directed otherwise, the JV will be forwarded to the Accounting Contact designee on or before the disbursement date with an explanatory cover memo describing the transaction. Colleges, universities and state agencies using separate bank accounts will receive reimbursements by electronic transfer or state warrant. The State Treasurer prefers to 2-5

17 Lease/Purchase Program Guide Financing Equipment reimburse electronically. Agencies should include wire instructions on the line that sets forth the Method of Payment. This line should also be used to request warrant or JV distribution. The State Treasurer will also remit payment directly to vendors and contractors for those agencies not seeking reimbursement. The Treasurer will disburse to vendors by warrant unless directed to pay electronically. For electronic disbursements, the Treasurer will confirm bank coding directly with the vendor. Directions for vendor payments should be indicated on the Method of Payment lines. It is critical that the correct amount is stipulated on the Disbursement Amount line. This should be the exact amount to be financed and repaid. The Treasurer s staff will review attached invoice(s) (discussed below) to determine that the amount does not exceed the invoice total. When partial financing is desired, be sure to stipulate the lesser, targeted amount to be financed. Once the COPs are sold, it is not possible to revise a payment schedule. The Personal Property Certificate requires three attachments: 1. Invoices for all equipment to be financed, including evidence of payment for reimbursement requests 2. Payment Schedule (Exhibit E) This is prepared by the State Treasurer following the sale of COPs. TIP: It may be difficult to have your agency director sign lease documents when the cut-off date approaches, so plan to submit documents as soon as possible. 3. Certificate Designating Authorized Agency Representatives (Exhibit C) This document is to be prepared on agency letterhead. An original Certificate may be filed with the State Treasurer so that photocopies may be submitted with future subleases. The format is provided in Appendix A. Note: Certificate of Insurance This document is prepared by the Office of Risk Management. Insurance Certificates should be housed within agency records. Three sets of lease documents (original and two copies) should be forwarded: Revised November 8,

18 Lease/Purchase Program Guide Debt Management Division PO Box Olympia, WA Financing Equipment Documents must be received by the cut-off date! Subleases must be complete in order to qualify for financing. Why THREE copies? The Treasurer s administrative and accounting staff will review the sublease packages to determine that they are complete, signed and accurate. The invoices will be audited to ensure that they support the amount requested to be financed. Following the sale of COPs, the State Treasurer s finance staff will prepare payment schedules and countersign the subleases. A copy of fully signed documents, with a cover letter informing agencies of the completed transaction, will be returned to the Purchasing Contact specified on the Notice of Intent unless your agency has designated another individual as the lease/purchase contact. The Treasurer retains the remaining copy and places the original together with the transcript for the certificate of participation issue. On the transaction closing date, the lender/underwriter who submitted the least cost bid for the COPs wires payment to the State Treasurer. The Treasurer s accounting staff distributes the proceeds to vendors and agencies as directed on the Sublease Personal Property Certificates. This completes the financing process for equipment lease/purchase transactions. Revised November 8,

19 Lease/Purchase Program Guide Financing Equipment Summary of the Equipment Financing Process Follow these steps for a successful lease/purchase. Attention to detail is important to the successful financing of lease/purchase transactions. The following summary of steps is provided for those already familiar with the process and for those who might benefit from a quick review. Submit a Notice of Intent to Lease/Purchase with a Certificate Designating Agency Representatives (if necessary). Purchase and accept the equipment Request a Certificate of Insurance Assemble THREE complete sets Financing Addendum Copy of Notice of Intent Personal Property Certificate Supporting Invoices Evidence of Payment (Reimbursements) Certificate Designating Agency Representatives SIGN the documents Deliver to the State Treasurer before the cut-off date Still have questions? Help is just a phone call away! The State Treasurer will pool all transactions received by the cut-off date and sell COPs by competitive bid. The purchaser of the COPs provides the financing for the equipment purchases. The Treasurer s staff will prepare payment schedules following the sale of COPs, countersign the sublease agreements and return copies to financing agencies. Every effort has been made to provide answers to frequently asked questions and to provide clear directions to prevent errors and their frustrating aftermath. However, we KNOW we haven t thought of everything! Please feel free to call us with your questions. Revised November 8,

20 Lease/Purchase Program Guide Real Estate Overview of Real Estate Financing All real estate projects must be specifically approved by the Legislature. The Legislature authorizes projects in the capital budget or, for certain agencies, in the transportation budget. The State Treasurer requires that all authorizations be current in order to be eligible for financing. Authorizations lapse at the end of the biennium. If a financing contract has not been completed by the last day of a biennium, a project must be re-authorized in the ensuing biennium capital budget in order to be financed. A line item amount should be specified for the cost of each authorized project. An example is provided in Appendix C. ALL other required approvals must be obtained before a project is financed. The authorizing language should specify a net amount for the cost of the project to be financed: the maximum allowed for the actual cost of acquisition and/or construction to be financed through a financing contract, net of financing expenses or reserves. Agencies should provide for lease payments in their operating budgets. Some agencies, such as colleges and universities, are required to obtain approval from their governing boards. A copy of this approval must be provided to certificate counsel, a law firm appointed by the Attorney General. Occasionally, the Legislature will require approval of a project plan by the Office of Financial Management (OFM). The Treasurer s staff will provide assistance to agencies and OFM in the form of optional financing structures and repayment scenarios. Selection of contractors, construction plans and purchase negotiations are the responsibility of the agency and the Department of General Administration (GA). Construction projects financed through the Lease/Purchase Program must be built as public works projects. Real estate financing contracts consist of two lease agreements and a trust agreement. These agreements are drafted by the certificate counsel. Revised November 8,

21 Lease/Purchase Program Guide Real Estate Financing Lease State agencies agree to make lease payments in exchange for property. The financing lease is an agreement between the state agency and the lessor that provides for the use of the land and facility in exchange for lease payments to be made by the agency. The State Treasurer appoints a lessor, currently the Washington Finance Officers Association (WFOA). The role of WFOA is nominal. WFOA assigns its rights under the lease to a trustee bank or to the state fiscal agent, currently The Bank of New York. The trustee or fiscal agent serves the investors who purchase COPs. Ground Lease In the state of Washington, a ground lease provides collateral security for investors. The ground lease is an agreement between the state agency and WFOA that provides for the lease of the land for a period that extends 5 years beyond the term of the financing lease. Again, WFOA will assign its rights to the trustee or fiscal agent. The ground lease provides collateral for the financing lease. Should the agency fail to keep its commitment under the financing lease to make lease payments, the ground lease allows the trustee or fiscal agent to assume control of the property for the extended term of the ground lease. During this period, the trustee may release the facility in order to make the investors whole. At the end of the term of the ground lease, the property will revert to the state agency. However, if the agency makes all of the payments required under the financing lease, the ground lease will terminate at the end of the financing term. Trust Agreement A trust agreement between the state, WFOA and the fiscal agent is required for all projects. The Trust Agreement requires the fiscal agent to hold the collateral for the benefit of investors and to be available to represent investors in any event of default. Pursuant to the Trust Agreement, COP proceeds are held by the State Treasurer or the fiscal agent, and disbursed for approved construction expenses. Details about disbursement procedures will be reviewed with the agency at the time of financing. Revised November 8,

22 Lease/Purchase Program Guide Real Estate Diagram of Real Estate Transaction Financing Document Document Lease Ground Lease Trust Agreement WFOA (Nominal Lessor) Certificate Holder Assign $ COP Proceeds Selling Seller/Contractor $ COP Proceeds Trustee or Fiscal Agent (Lessor) $ COP Proceeds Underwriter Purchase & Sale Construction Management Agreements Awards Bid Title $ Lease Payments State Agency (Lessee) $ Appropriated Lease Payments State Treasurer Revised November 8,

23 Lease/Purchase Program Guide Real Estate Getting Started COPs are issued in strict compliance with municipal securities laws. is the key to a successful financing experience Real estate projects are financed on an individual basis so that the COP may be structured to meet the specific financing requirements of each project. The legal agreements described earlier are unique for each transaction. In addition to the legal agreements, a disclosure document called an official statement must be prepared in accordance with federal and state securities laws. Information which must be provided in the official statement includes: Terms and conditions of the financing A description of the agency and its purpose A description of the project and its relevance Appropriation history over the past five biennia Population served over the past five years Agency or program employment history. Preparation of these documents requires substantial lead time. Agencies should allow a minimum of 60 days for straight-forward acquisition or refinancing transactions. Construction projects and more complex acquisition projects generally require a minimum of 90 days lead time. ALL ancillary legal agreements must be reviewed by COP counsel even if they were drafted by the agency s AG. At the beginning of each biennium, the State Treasurer will communicate with each agency with authorized projects to determine expected timing of transactions. For acquisition projects, the requests the agency complete the purchase of the real estate prior to the COP being issued. The proceeds from the COP will be used to reimburse the agency for the approved amount. It is also critical that any agreements with outside parties be reviewed by the Treasurer s certificate counsel prior to execution to ensure their compatibility with the issuance of COPs. These include purchase and sale agreements, construction management agreements and any lease agreements between the agency and current or prospective tenants. ALL ancillary legal agreements must be reviewed by the certificate counsel even if they were drafted by the agency s assistant attorney general. Revised November 8,

24 Lease/Purchase Program Guide Real Estate Lease agreements with current or prospective tenants may have a significant effect on COP transactions. When these tenants are private businesses or an agency of the federal government, interest paid to investors on the COPs may be subject to federal income tax. Agencies should discuss their intentions prior to the offering of COPs to avoid unintended restrictions on the type of tenants allowed. Agreements for projects on land that will not be owned by the state must be approved by the Treasurer s certificate counsel. A preliminary meeting with the financing team will be scheduled with agency project managers. Agency representatives should be prepared to discuss their project s timing and budget. Occasionally, projects have been authorized on land that will not be owned by the state of Washington or a state agency. In this situation, it is imperative that a legal review of the land lease occurs prior to the agency finalizing the agreement. Lease/purchase financing with COPs will not be possible unless specific structural and legal criteria are met. When a project has been authorized and acquisition and/or construction is expected to occur within three to four months, the agency should submit the Notice of Intent and Project Overview forms. It is important that the Notice of Intent be submitted to the Office of the State Treasurer prior to the agency spending any funds expected to be reimbursed by the COP proceeds. After the receipt of the Notice of Intent and Project Overview forms the Treasurer s staff will arrange a meeting to introduce agency project leaders to the financing team and to discuss the project and its financing structure. For agencies that have prior experience with real estate financing through the Lease/Purchase Program, this preliminary discussion may occur through a conference call. The financing team includes the Treasurer s staff, certificate counsel and the Treasurer s financial advisor. In addition to the agency project leaders, representatives from GA s Property Development and Architecture and Engineering Divisions will also be included whenever GA will be negotiating the purchase and sale agreement and/or administering the project construction or renovation. Revised November 8,

25 Lease/Purchase Program Guide Real Estate Be sure to inform the financing team of any material project timing modifications. The financing team will explain the COP financing process and will discuss the specific requirements for the project. Agency project leaders should be prepared to provide an overview of the project, including the estimated cost of acquisition and/or construction and timing. Any special budget and financial issues will also be discussed so that the Treasurer s staff and the financial advisor will be able to provide viable scenarios for the structure of the COPs. Following the meeting, the Treasurer s staff will provide a summary of the discussion including a list of contacts and telephone numbers. A checklist citing the information and documents required from responsible parties will also be provided. A summary checklist of typical documents required for real estate projects is illustrated on page 3-8. The financing team will develop a time line schedule for the transaction working toward a sale and closing date for the COPs. If the project time line changes, it is imperative to inform the Treasurer s Office promptly. This is critical for all real estate projects since COPs will not be offered for sale until the construction contract is awarded or acquisition completed, except in very rare instances. Revised November 8,

26 Lease/Purchase Program Guide Real Estate Real Estate Transaction Checklist Required Documents Purchase and sale agreement Name and address of seller Affidavit regarding nationality of seller (FIRTPA) Copies of any building warranties or guarantees Acquisition Renovation Construction Construction time schedule Bid documents Payment and performance bonds Ground lease if land is leased from third party Legal description of land Title report and title insurance Phase 1 environmental report Service contracts or management agreements If personal property is included in the project: Schedule of personal property UCC search Equipment leases, if applicable Use tax affidavit, if applicable For facilities to be occupied by non-state agencies: Percentage of space to be occupied by tenants Copy of proposed lease For facilities with continuing tenants: Copies of leases Assignment of leases to state agency Estoppels from tenants Security deposits and prepaid rents Revised November 8,

27 Lease/Purchase Program Guide Real Estate Completing the Real Estate Financing Transaction The State Treasurer s financing team will assume the responsibility for completing the financing transaction and the issuance and sale of the COPs. The sale of COPs will be coordinated with the acquisition and construction schedule provided by the agency. The state agency s responsibility is limited to providing the items specified in the checklist and informing the Treasurer s staff of any changes in the expected timing of their acquisition and/or construction. Accounting staff need to be informed of transactions prior to closing. For acquisition projects, the real estate transaction should be closed prior to the closing of the COP. In rare cases, if it is not possible to close the real estate first, the COP closing must occur simultaneously with the real estate closing. Prior to closing, a conference call will be scheduled. Representatives of the agency, Treasurer s accounting staff, agency project leaders and financing team members will discuss the closing process, subsequent disbursement for construction projects and the lease payment process. Because each real estate project is unique, timely communication between client agencies and the Treasurer s staff is conducive to a smooth, trouble-free financing experience. If you have questions, please feel free to call or Wendy Kancianich (360) FAX Wendy.Kancianich@tre.wa.gov Revised November 8,

28 Lease/Purchase Program Guide Lease Payments Making Scheduled Lease Payments Agency purchasing contacts or project managers should inform their accounting staff of lease/purchase contract payment schedules. NEW POLICY: For all state agencies operating out of the state treasury, the State Treasurer will transfer lease payments on the payment due dates. Agencies unable to remit payment electronically should call Shelly Sweeney for directions. ALL lease payments are due to the State Treasurer on June 1 and December 1 according to payment schedules provided at the closing of each transaction. For equipment transactions, the schedules are prepared by the Treasurer s staff immediately following the sale of COPs. The schedules are returned to state agencies with their copies of the countersigned sublease agreements. Unless other arrangements have been requested, the sublease agreements will be returned to the purchasing contact named on the Notice of Intent to Lease/Purchase. Real estate project payment schedules will be provided to agency project managers as part of the closing process for each transaction. The State Treasurer will forward a payment notice to each agency accounting contact on May 15 and November 15. The notice will provide an itemized list of payments due for all outstanding lease/purchase transactions and a summary total due. For those agencies operating out of the state treasury, the Treasurer will prepare a journal voucher (JV) for the amount due. The amount will be charged to the general fund. Agencies will prepare their own JVs to reverse the Treasurer s accounting entry and record their payments in compliance with OFM budget and accounting guidelines. OFM ACCOUNTING For Lease/purchase accounting requirements refer to the Office of Financial Management State Administrative & Accounting Manual (SAAM), sections: Chapter general Chapter Equip. Chapter RE aamintro.htm Community colleges, universities and agencies operating from local funds, should remit payments electronically to the State Treasurer as follows: Bank of America, Olympia Branch ABA: # for ACH; # for wires Account # Credit WA State Treasurer Concentration Account Questions related to scheduled lease payments should be directed to: Shelly Sweeney (360) FAX Shelly.Sweeney@tre.wa.gov Revised November 8,

29 Lease/Purchase Program Guide Lease Payments Prepaying Lease/Purchase Transactions Convenience Lower Interest The Treasurer will establish escrow accounts to accommodate agency prepayment requests. With the exception of certain real estate transactions which are structured to suit specific agency requirements, the State Treasurer issues all COPs on a non-callable basis. When an investor purchases a non-callable security, he/she will be certain of receiving all principal and interest payments. When an issuer sells securities that may be called (prepaid) before they are due, investors will demand a higher rate of return. This may be provided by a call premium (usually expressed as a percent of the prepaid principal balance), a higher interest rate or a combination of these features. The State Treasurer receives relatively few requests to prepay lease/purchase transactions. In order to provide financing at the lowest possible cost for the majority of state agencies, the Treasurer has opted to forgo the convenience of callable COPs for the minority. Non-callable COPs may still be prepaid. The State Treasurer will purchase U.S. Treasury fixed income securities and establish an escrow account on behalf of agencies requesting prepayment. The escrow account will be structured so that the income stream from these securities will provide the payments due to the COP holders. The amount required to prepay a transaction will be the actual cost of the securities plus escrow fees charged by the trustee or fiscal agent. The State Treasurer will provide an initial estimate of escrow costs for agencies inquiring about prepayment of lease/purchase contracts. Once the decision to prepay has been made, it is irrevocable. The State Treasurer will commit to the purchase of the escrow securities and advise the agency of the amount due. Funds must be remitted immediately either by journal voucher, electronic transfer or check. An important function of the is to promote good financial management for state government. The State Treasurer does not encourage the prepayment of Revised November 8,

30 Lease/Purchase Program Guide Lease Payments The State Treasurer does not encourage use of pre-payments as a budget adjustment tool. NEW POLICY: Effective July, days notice is required lease/purchase contracts because the interest rate paid by state agencies is less than the rate of return earned on the state s operating cash balance. We request State Agencies do not attempt to prepay before they have made 3 payments. Prepayment requests prior to this time will only be arranged for exceptional circumstances. Agencies frequently attempt to use lease contract prepayment as a budget adjustment tool at the end of the fiscal reporting period. Because prepayment is not a primary service of the lease/purchase program, the State Treasurer requires a minimum of 30 days notice to complete a prepayment request. THIS POLICY WILL BE STRICTLY ENFORCED. Prepayment inquiries should be directed to: Wendy Kancianich (360) Wendy.kancianich@tre.wa.gov FAX Revised November 8,

31 Appendix A Sample Lease Forms The following forms are standardized for financing equipment through the Treasurer s Lease/Purchase Program: State Agency Financing Addendum Personal Property Certificate Certificate Designating Authorized Agency Representatives Notice of Intent to Lease/Purchase The Notice of Intent to Lease/Purchase should also be used to apply for financing real estate. Please make copies from the samples provided in this manual. If you prefer to complete your forms electronically templates, created in Microsoft Word, are available on our web site: Or you may request these templates by phone or by contacting Wendy Kancianich at (360) , wendy.kancianich@tre.wa.gov. The forms are legal components of the Master Installment Agreement approved by the State Finance Committee. DO NOT MODIFY THE LANGUAGE ON THESE FORMS. 11/08/2011 A-1