Austin considers 'lease back'
Wastewater Treatment Plant is candidate
By Roxana Orellana
A proposition from a finance corporation could bring Austin a one-time lump of cash to help balance the city's budget.
Austin is one of several Minnesota cities that has been approached to participate in a what is called a long-term lease/lease back transaction. A representative of Allco Ventures, the finance corporation that serves as the middle person in the process, visited Tuesday's Austin City Council work session.
According to Allco Ventures' proposal, cities may "sell" the tax title of certain assets, such as a wastewater treatment plant, to private companies through a bidding process.
Once the private companies purchase a tax title, they use the depreciation of the asset as a tax deduction and lease the asset back to the city.
The city cannot get a tax benefit from depreciation, since the city pays no federal income tax.
According to director of administrative services Tom Dankert, here's how the deal works:
A private bidder purchases the tax title of a city asset, then puts 96 percent to 97 percent of the purchase price into an escrow account for the city. The city then uses the escrow account to make the monthly lease payments due the bidder. The remaining 3 percent to 4 percent of the purchase price is given to the city up front to use as it pleases.
"There would be no change of ownership. Austin would not sell the plant. It's only the tax title, essentially a piece of paper," Dankert said. "All operations and employees at the plant would be ours."
During Tuesday's meeting, Allco representative Scott Scofield said the transaction is "not a privatization of the system. The city continues to run everything at the plant.
Scofield said such deals have been struck for years, but they used to be focused on subways and other transit systems. Investors are now looking for other assets, and wastewater treatment plants fit the bill.
If the city wants to participate in the bidding, it must first write a letter of understanding that must be approved by the council. The letter does not mean that the city will go through with the transaction, but it would give Allco permission to further research the city's assets.
Allco Ventures would then have two years to arrange for appraisals and take bids.
The League of Minnesota Cities is also involved in Allco's proposal. It has hired a lawyer to review the legality of the transaction. In a letter from the league, Executive Director James F Miller said the idea "just sounds too good to be true."
But this type of transaction is fully allowed by the Internal Revenue Service Code, according to Dankert and Scofield. Every transaction is registered with the IRS.
Minnesota cities including Brooklyn Park, Burnsville, Rochester, Eagan and Duluth have expressed interest.
The Austin City Council will further discuss the deal and seek other views on the process. It will meet Oct. 6 prior to the council meeting to decide whether to proceed.