Government Master Lease ("GML")

(FOR TO-BE-BUILT INCOME-PRODUCING PROJECTS)   

A Government Master Lease (“GML”) is a structure that facilitates the completion of to-be-built income producing properties.  Commercial real estate deflation began in late 2007 and lenders have reduced or eliminated their construction lending.  Many viable to-be-built income producing projects fail as traditional construction financing has virtually come to a halt.  When a to-be-built income producing project is stalled due to lack of financing, City and County governments cannot enjoy the increased revenues from new real estate taxes and in the case of retail and hotel developments, sales tax revenues. 

Minimum GML: $1.5 million (prefer $3 mil. or more) 

Maximum GML: No maximum 

Minimum Government Rating: “BBB+” 

Minimum Government Population: 20,000 for City and 50,000 for County (less population may be considered if Government has low current debt)  

The following is a summary of the GML structure: 

  1. A City or County Government (“Government”) enters into a 25 year Master Lease of the to-be built project wherein the Government guarantees Teutonic or a third party developer (“Developer”) a certain percentage of occupancy.      
  1. After completion, the Developer pays the Government a monthly GML Tax, a special tax assessment, in an amount to be determined based on a percentage of the to-be-built project’s income.  In addition, the Developer pays standard real estate taxes.    
  1. The Developer donates the land and improvements to the Government no later than the end of the 25 year Master Lease.  The Developer has the option to donate earlier and typically targets the 14th or 15th year as the year to donate (due to tax issues).     
  1. The Developer guarantees that actual projected occupancies are met.  If to-be-determined projected occupancies are not met over the first 6-12 months after completion, the Developer immediately donates the land and building to Government.   In this event, the Government would assume the remaining 25 year fixed rate financing and engage a competent professional leasing and management firm to carry on the affairs of the project on behalf of the Government.    
  1. To help mitigate the risks that the Government would be required to come out of pocket during the first six months after completion (due to insufficient occupancy to pay the debt service), a Rent Reserve for 6-12 months is established at closing.  Furthermore, the financing can be established with interest-only payments for the first few years to lower the required debt service during the initial years (subject to higher debt service payments and Master Lease Guarantees in later years), thus reducing the required occupancy in the initial stages.     

Advantages to Government    

  1. Government receives new Real Estate Tax revenues from the property.     
  1. Government receives new Sales Tax revenues, if retail or hotel project.    
  1. Government receives GML Tax     
  1. Government receives 100% ownership of the land and buildings at the end of the 25 year Master Lease or earlier if the Developer donates before the expiration of the 25 year Master Lease or Developer defaults on actual occupancy levels.  Once the Government owns 100% of the project, the Government will enjoy significant net cash flow if actual project occupancy exceeds minimum required levels.  Also, once the project is owned by the Government, the Government’s real estate tax is paid to itself which creates a cushion in the event of lower occupancies in the future.    
  1. If the Government receives the ownership of the land and buildings before the expiration of the Master Lease (by reason of Developer occupancy default or early donation), the Government may be able to sell the project for a substantial profit.      
  1. At the end of the 25 year Master Lease, the property is free and clear of debt and the Government will receive a substantial windfall upon sale of the property or enjoy significant net income from the property.    
  1. Typically, for a GML structure, the Government is not required to obtain voter approval through a referendum.     
  1. The proposed GML structure is a contingent liability and will likely be treated as a Capital Lease and considered debt on the Government’s Balance Sheet.  However, the GML structure may be viewed more positively by analysts than a general obligation bond as the GML tax revenues and the residual value (through the Donation) should be treated as additional Government assets.