A downtown campus for the University of the District of Columbia, new public housing and a new jail for the District, a seafood market in Jessup, Md., college dormitories in Towson, and a correctional facility in Alexandria all have one thing in common:
Each is the subject of a proposal that proponents say will cut costs and increase tax revenue for local governments while giving investors a bundle of tax breaks.
They are among proposals put forth in the Washington metropolitan area and across the nation by investors and local governments eager to take advantage of provisions in the 1981 federal tax law.
Local governments, nonprofit organizations and other tax-exempt bodies can sell property to private investors, who in turn lease back the building, jail, football field, or other structure to the tax-exempt body. Advantages to the local jurisdiction are an infusion of cash, and, in many cases, increased income from property taxes.
Investors often can use multiple tax advantages in the same deal, such as investment tax credits on an old bulding they rehabilitate and accelerated depreciation . In these transactions, local governments and other tax-exempt bodies pass along the tax breaks they don't need to the private purchasers.
Everybody is happy--except several congressmen, who argue that the federal treasury is the big loser.
The congressmen got some backing this week in form of a General Accounting Office report that said leaseback deals almost always cost more than purchasing. The report was the result of a study of proposed long-term leasing of equipment by the Defense Department.
A Navy plan to lease 13 cargo ships rather than buy them caught the attention of Rep. J. J. Pickle (D.-Tex.) early this year, according to an aide. The result of Pickle's probing is a bill he has sponsored that would eliminate or scale back many of the tax breaks. Among the provisions are longer depreciation periods for property used by tax-exempt entities, and denial of the rehabilitation credit when a facility is financed by tax-exempt industrial development bonds.
Because sale-leaseback transactions are complex to structure, only a handful in the country have been completed since local governments and investors began to realize the potential tax savings opened up by the 1981 law.
"We . . . caught this thing just as the wave was cresting," said Reg Todd, administrative aide to Pickle. "Another six months and it would have been impossible to get legislation because every city, county and state agency would be involved in one of these deals."
The bill also carries an effective date of May 23, with the result that many sale-leaseback deals have been put on hold.
Todd said he has collected his list of saleleaseback deals by simply listing all the government and private entities who have telephoned his office pleading for mercy.
Nationally, estimates of property tax revenue gains by local jurisdictions are hard to find, according to Todd, who said "there is no clearinghouse of information on this subject. Many deals are privately placed, and that is one of the problems in trying to assess the width and depth" of the amount of money at stake in sale-leaseback transactions.
Washington and Baltimore area jurisdictions say they have not made estimates of new tax revenue from sale-leasback deals.
During hearings before the House Ways and Means Committee, a Congressional Budget Office staff member said the potential loss of revenue to the federal treasury amounts to $2 trillion. He later revised his estimate to $1 trillion, said Todd.
District of Columbia officials have received a number of sale-leaseback proposals from investment banking companies, including Goldman Sachs and E. F. Hutton. The city, however, does not plan to enter into any deals "in the short term," said a spokesman.
In Alexandria, the city fathers want to build a new correctional facility at an estimated cost of $18 million to $20 million. The city "has been talking about the possibility of creative financing but no decision has been made on the form," said Deputy City Manager Clifford H. Rusch. The introduction of the Pickle legislation "would have a certain dampening effect on anyone considering" a sale-leaseback deal, he added.
Alexandria is the site of the Washington areas's only completed sale-leaseback transaction. Rehabilitation of the Torpedo Factory Art Center was financed by $3.5 million in industrial development bonds at below-market rates. The factory was sold to investors, who leased it back to the city.
The Maryland Food Center Authority, a state agency, will create a $5 million wholesale food market in Jessup for the state's wholesale seafood merchants. The developer, Seafood Market Associates, will lease the market to the state food authority, which in turn will sublease it to seafood merchants.
The deal "is not one that the leasing bill was designed" to curb, because the ultimate users of the market will be seafood merchants who are not exempt from taxes, said Charles C. Hartman Jr. of Severna Park, an attorney for the developer.
A House Ways and Means Committee staff member agreed, saying that committee Chairman Dan Rostenkowski (D.-Ill.) is expected to offer an amendment to the bill that would allow rehabilitation credits and tax-exempt financing when the property will be used by "taxable entities" such as the seafood merchants.
A Baltimore budget official said the city has completed only one sale-leaseback transaction, for a fire station, but has several other deals under consideration. "We don't have a figure yet" on the tax revenue the city could from the deals if they are completed, said Harold R. Tall, deputy director of finance for Baltimore.