Patent Publication Number: US-2005137957-A1

Title: Investment vehicle secured by government assets and electronic trading system for same

Description:
FIELD OF THE INVENTION  
      The present invention relates to an automated method and system for trading investment vehicles secured by governmental assets, and to investment vehicles that use the investment potential of government assets while simultaneously lowering the cost to the government for use of that government asset and freeing cash equity for governmental use for services and/or debt retirement.  
     BACKGROUND OF THE INVENTION  
      Federal, state, and local governments face fiscal pressures to provide services that the public demands with the revenue that it collects through taxes, usage fees and the like. In times of economic downturn, many government entities face severe budget issues, which require the entity to make difficult choices regarding funding, taxation, and deficits. For example, the United States Commerce Department reported that state and local governments borrowed $127 billion more than they repaid in 2002. In fact, borrowed money equaled 9.7% of state and local expenditures in 2002. Debt service on this borrowed money has become an increasingly large portion of governmental expenditures, further starving governmental entities of the cash needed to provide services.  
      Meanwhile governments at all levels have billions of dollars tied up in a variety of assets, such as real estate and other property. Government-owned buildings, which typically house governmental offices, built or purchased at taxpayer expense, represent large pieces of public equity that is presently not available to governmental entities.  
      Private sector businesses that own commercial real estate will often use the property to secure loans or to sell bonds. Alternatively, the property can be sold and immediately leased from the new owner in a “sale and lease-back” transaction. A sale and lease-back transaction allows the business to access the capital previously tied up in the asset. The lease payments made to the new property owner are deducted as a legitimate operating expense for income tax purposes. The sale and lease-back transaction provides potential investors with a stable income return on the property as a result of the lease payments, as well as a speculative return based on the potential appreciation of the property.  
      A well-known type of organization authorized by United States federal law, known as a Real Estate Investment Trust (“REIT”), invests specifically in commercial real estate. While a REIT may invest in any type of commercial real estate properties or debt instruments, including multi-family housing, shopping centers, and office buildings, it may also engage in sale and lease-back arrangements. Congress has created specific regulations regarding the distribution of profits for REITs, requiring, for example, that they distribute all taxable income to investors in the form of dividends.  
      REITs have been successful because they have three distinct advantages over traditional ownership vehicles for commercial property. First, interests in REITs can be publicly traded, increasing the liquidity of commercial real estate. Second, the value of a REIT is based on the underlying assets it owns, and hence, is typically not as volatile as other types of investments, such as equity instruments in operating companies. Third, REITs are a pass-through entity for income tax purposes and thus avoid potential double taxation.  
      Such strategies have been proposed for foreign governments that own businesses that are scheduled for privatization. In one version of this scenario, an investor purchases an asset, such as a building from the foreign government, and leases it back to the foreign government. As proposed, the lease would not be backed by any governmental guarantee. If the government defaults on the lease, the private entity would retain title to the property, but would lose the stream of lease payments that would have been due under the lease. Also, bringing an action against a government tenant for default of a lease can be problematic, especially in some foreign countries. In addition, the purpose of this investment strategy is to maximize the rental income for the owners. It is known that investment in countries with fledgling free-market economies entails a great deal of risk. As such, rental amounts are adjusted to reflect the risk of default. In such a scenario, the lease payments would likely be proportional to the investment grade of bonds issued by such governmental entity. Consequently, such a sale and lease-back scheme would likely be the same as, or even less financially attractive than, conventional debt instruments.  
      Complicating government&#39;s task of raising capital are the complexities of the securities market, where the securities each have distinctive characteristics based on the issuing governmental entity, as well as the credit rating, coupon, maturity, payment schedule or other characteristics.  
     BRIEF SUMMARY OF THE INVENTION  
      The present invention provides a computer-implemented method for providing investment vehicles secured by governmental assets via a communications network such as the Internet. In one embodiment, data relating to trading an investment vehicle secured by governmental assets is exchanged through the trading system. A live order, based upon the sale information received, can then be executed or transmitted to a point of execution. In another embodiment, the live order provides that the trading system acts as counter-party to each transaction such that a client investor can remain anonymous to a party on the other side of a trade. In this manner, a first trade can be executed between a party selling the investment vehicles secured by governmental assets and the trading system, and a second trade can be executed between the trading system and a party purchasing the investment vehicles secured by governmental assets. Numerous types of investment vehicles secured by governmental assets can be traded, as well as corporate bonds, municipal bonds and the like.  
      The computer system trades investment vehicles secured by governmental assets via a computerized network. A computer server is accessible with a network access device via a communications network. Executable software stored on the server is executed to transmit data relating to trading investment vehicles secured by governmental assets; to receive an instruction to buy or sell an investment vehicle secured by governmental assets; and to transmit a live order from an investor, wherein the live order is related to the instruction to buy or sell an investment vehicle secured by governmental assets. A database of investment vehicle profiles is maintained that includes a term, a face value, a governmental guarantee to repay the face value at the end of the term, a payment schedule requiring periodic payments by the governmental entity comprising a percentage of the face value, and an allocation of appreciation of the pool of governmental assets during the term of the investment vehicle. The computer communications system can be a private network or the Internet.  
      The present invention is also directed to a method of trading investment vehicles secured by governmental assets via a computerized network. The method includes establishing a computer server accessible with a network access device via a communications network. Software stored on the server is executed. Data relating to trading investment vehicles secured by governmental assets is transmitted. Instructions to buy or sell an investment vehicle secured by governmental assets is received. A live order is transmitted from an investor, wherein the live order is related to the instruction to buy or sell an investment vehicle secured by governmental assets. A database of investment vehicle profiles is maintained. The database includes a term, a face value, a governmental guarantee to repay the face value at the end of the term, a payment schedule requiring periodic payments by the governmental entity comprising a percentage of the face value, and an allocation of appreciation of the pool of governmental assets during the term of the investment vehicle.  
      The present invention is also directed to an investment vehicle secured by governmental assets. One or more governmental assets are arranged into a pool of governmental assets. The investment vehicle is secured by the pool of governmental assets. The investment vehicle includes a term; a face value that is less than, or equal to, an appraised value of the pool of governmental assets; a governmental guarantee to repay the face value at the end of the term; a payment schedule requiring periodic payments by the governmental entity comprising a percentage of the face value; and an allocation of appreciation of the pool of governmental assets during the term of the investment vehicle.  
      The allocation of appreciation of the pool of governmental assets can be a maximum percentage of the appreciation or a maximum percentage of the face value. The periodic payments are preferably tax-free interest payments. In one embodiment, the investment vehicle comprises a plurality of zero coupon bonds with maturity dates and face values that correspond to the periodic payments. In another embodiment, the investment vehicle comprises a plurality of coupon bonds, wherein the coupons have maturity dates and face values that correspond to the periodic payments. The periodic payments are preferably less than debt service on a conventional government security yielding the face value of the investment vehicles secured by governmental assets.  
      The system preferably includes a private entity that purchases the investment vehicles secured by governmental assets. The private entity then issues equity instruments to investors that contribute funds to the private entity.  
      In another embodiment, the present investment vehicles secured by governmental assets includes a sales document transferring title of a governmental asset to a private entity in exchange for funds. The transfer of title converts the governmental asset into a private asset. An investment vehicle comprising a general obligation lease between the private entity and the governmental entity grants the governmental entity usage of at least a portion of the private asset in exchange for periodic payments.  
      The periodic payments can be one or more of lease payments, interest payments, or a combination thereof. The investment vehicle preferably pledges the full faith and credit of the governmental entity to make periodic payments to the private entity. The general obligation lease permits the private entity to transfer all or part of its rights in the private asset to a third party. The periodic payments are preferably determined by the interest rate costs of the funds instead of the fair market value of the governmental asset. Consequently, the periodic payments under the lease are typically less than debt service on a conventional government security yielding the same amount of funds obtained through the sale of the governmental asset.  
      The funds can be greater than or less than the fair market value of the governmental asset. A tax abatement is preferably granted on the private asset during a term of the general obligation lease.  
      The private entity typically issues at least one class of equity instruments to investors that contribute funds to the private entity. The investors receive a portion of any appreciation of the private asset at the end of the lease. In one embodiment, a portion of the funds used to purchase the governmental asset are derived from granting a mortgage in the private asset to a lender.  
      The governmental entity may have an ownership stake in the private entity. In one embodiment, the governmental entity has a controlling interest in the private entity. For example, the private entity comprises a partnership and the governmental entity is a general partner, while the private investors are limited partners.  
      The present invention is also directed to a method of operating an investment vehicle secured by governmental assets. One or more governmental assets are pooled. The value of the pool of governmental assets is determined by an appraisal. A term is established for the investment vehicle. A face value that is less than, or equal to, an appraised value of the pool of governmental assets is also established for the investment vehicle. Funds are received from the investor corresponding to the face value of the investment vehicle. The investment vehicle secured by the pool of governmental assets is issued to at least one investor. The governmental guarantee to repay to the investor the face value at the end of the term is provided. A payment schedule of periodic payments by the governmental entity to the investor comprising a percentage of the face value is established. At least a portion of appreciation of the pool of governmental assets during the term of the investment vehicle is allocated to the investors.  
      The step of allocating the appreciation of the pool of governmental assets includes establishing a maximum percentage of the appreciation or a maximum percentage of the face value.  
      In another embodiment of the present method, title of a governmental asset is transferred to a private entity in exchange for funds. The transfer of title converting the governmental asset into a private asset. An investment vehicle comprising a general obligation lease between the private entity and the governmental entity is issued. The general obligation lease grants the governmental entity usage of at least a portion of the private asset in exchange for periodic payments.  
      In an alternate embodiment, the private entity may be a partnership in which the governmental entity and one or more investors are partners. In this embodiment, the governmental entity may have a controlling partnership interest, and the one or more investors may invest in the remaining interest of the partnership. In a particular embodiment, the partnership is a limited partnership, in which the government entity is a general partner and each of the one or more investors are limited partners. Optionally, each investor&#39;s interest in the private asset may be limited to a predetermined percentage of that investor&#39;s initial investment in the partnership.  
      In another embodiment, appreciation of the private asset can be allocated equally or unequally between the general partners and the limited partners. When the general obligation lease expires, appreciation on the private asset can be distributed to the owners of the private entity. In one embodiment, the portion of appreciation distributed to limited partners can be capped at some predetermined level. The balance of the appreciation is retained by the general partners. For example, in an embodiment where the government entity is the sole general partner, the government entity would participate in the appreciation to a greater extent than the limited partners. 
    
    
     BRIEF DESCRIPTION OF THE SEVERAL VIEWS OF THE DRAWING  
       FIG. 1  is a schematic illustration of a trading system for the present investment vehicles secured by governmental assets in accordance with the present invention.  
       FIG. 2  is a more detailed illustration of the communications network of  FIG. 1 .  
       FIG. 3  is a schematic illustration of the present sale and lease-back system for governmental assets.  
       FIG. 4  is a schematic illustration of an alternate embodiment of the present sale and lease-back system for governmental assets.  
       FIG. 5  illustrates a printout of the expected results of a series of exemplary sale and lease-back agreements for governmental assets. 
    
    
     DETAILED DESCRIPTION OF THE INVENTION  
      As illustrated in  FIGS. 1 and 2 , the present invention relates to a method and system that enables direct trading between market participants of the present investment vehicles secured by governmental assets. Market participants such as institutional investors, broker dealers and others can transact directly for the purpose of trading the present investment vehicles secured by governmental assets, as well as other investment grade, high yield corporate bonds, municipal bonds or other securities. A financial institution providing a trading system can act as a counter-party to all transactions, from trade execution through settlement, and has the option to serve as a credit intermediary. The market participants are able to maintain anonymity with regard to each other. The system provides price transparency and enhanced liquidity. Computer systems are utilized in conjunction with an electronic communications network to facilitate live execution of matched bids and offers. Software routines can direct an investor to various investment vehicles secured by governmental assets available according to specific criteria put forth by the investor.  
      A computer communications network is utilized to provide a vehicle for participation. An investor can use a network access device, such as a computer, to view bond auction offerings and/or market related information and present bids in a timely manner to available offerings over the network.  
      Referring now to  FIG. 1 , an online trading system can include a trading host  250  accessible via a distributed network  220  such as the Internet, or a private network. Investor locations  241 - 244  can use a computerized system or network access device  231 - 234  to receive and view information regarding investment vehicles secured by governmental assets and to transmit bids to the host  250 .  
       FIG. 2  shows a network of computers  200  that may be used in an implementation of an online trading system. The network  200  can include a host system  250  and network access devices  201 - 206 . Each of the network access devices includes a processor, memory and a user input device, such as a keyboard and/or mouse, and a user output device, such as a display screen and/or printer. The network access devices  201 - 206  can communicate with the host  250  to obtain trading data stored at the host  250 . The network access device  201 - 206  may interact with the host computer  250  as if the host was a single entity in the network  200 . However, the host  250  may include multiple processing and database sub-systems, such as cooperative or redundant processing and/or database servers  231 - 232 , that can be geographically dispersed throughout the network  200 . In some implementations, groups of network access devices  204 - 206  may communicate with host  250  through a local area network  210 .  
      The host computer  250  includes one or more databases  245  storing data relating to trading and profiles of the available investment vehicles. The database can include for example, price, quantity, maturity date, a summary of the governmental assets used to secure the investment vehicles, the level of participation in the appreciation of the governmental asset at the end of the term of the investment vehicle, the credit worthiness of the governmental entity, and any other information pertaining to the trading activities. The host  250  may interact with and/or gather data from an investor who is operating a network access device  201 - 206 . Data gathered from the investor may be used to conduct trading or provide information to the investor.  
      Typically an investor will access the host  250  using client software executed at the investor&#39;s network access device  201 - 206 . The client software may include a generic hypertext markup language (HTML) browser, such as Netscape Navigator or Microsoft Internet Explorer, (a “WEB browser”). The client software may also be a proprietary browser, and/or other host access software. In some cases, an executable program, such as a Java™ program, may be downloaded from the host  250  to the client computer and executed at the client computer as part of the live auction software. Other implementations include proprietary software installed from a computer readable medium, such as a CD ROM. The invention may therefore be implemented in digital electronic circuitry, computer hardware, firmware, software, or in combinations of the above.  
      Interaction with the trading host can provide real time display of live orders. Order entry can be accomplished by spread, real time U.S. treasury price, or price on yield. The host  250  will effect automated matching of orders and provide full book display for all issues with markets. In addition, a trade and order history can be made available via a library.  
      The trading system operates in real time and thereby has the ability to post trades as they are consummated. If desired, the trade information can then be immediately forwarded to interested parties for confirmation and record keeping. Summary reports can also be compiled and distributed at predetermined time intervals, or upon request. Additional services, such as trade settlement and credit verification can be provided over the network  220  via servers such as a settlement server  234  or a credit system server  233 .  
      Numerous variations of the present network  220  are possible, such as illustrated in H2064 and U.S. Pat. No. 6,408,282, both of which are incorporated by reference.  
      First Embodiment of the Present Investment Vehicles Secured by Governmental Assets  
       FIG. 3  illustrates a first embodiment of an investment vehicle secured by governmental assets  10  in accordance with the present invention. Governmental entity  12  sells all or a portion of a governmental asset  14  to a private entity  16 . Title  18  to the governmental asset  14  transfers to the private entity  16 . The governmental asset  14  is converted to a private asset  26  owned by the private entity  16 . In exchange for transferring title  18  in the governmental asset  14 , the governmental entity  12  receives funds  20  from the private entity  16 . The governmental entity  12  is then free to use the funds  20  for normal government expenditures  30 .  
      As part of the overall transaction, an investment vehicle between the governmental entity  12  and the private entity  16  is created. In the illustrated embodiment, the investment vehicle is a lease  22  that provides the governmental entity  12  usage of at least a portion of the private asset  26  in exchange for periodic payments  24 . The periodic payments  24  can be characterized as lease payments, interest payments, or a combination thereof.  
      As will be discussed below, the lease  22  is preferably a general obligation lease in which the governmental entity pledges its full taxing and borrowing powers to performance under the lease  22 . In another embodiment discussed below, the governmental entity  12  retains title to the governmental asset  14 , but uses the governmental asset  14  to secure the investment made by the private entity  16 .  
      As used herein, “governmental entity” refers to federal, state or local governmental bodies having tax and spend authority, including without limitation cities, counties, airport authorities, port authorities, and economic development authorities. The term “governmental asset” refers to one or more tangible assets, including without limitation developed or undeveloped land, buildings and other structures, equipment, and infrastructure such as roads, bridges, airports, rights-of-way, and the like, or any portion thereof, owned by a governmental entity. In one embodiment, a plurality of governmental assets are pooled together to form the governmental asset. The term “private asset” refers to a former governmental asset that is now owned by one or more private entities.  
      The terms of the lease  22  depend, at least in part, on the nature of the private asset  26 . The lease  22  will typically be for a term of years, but alternatively, it could be a periodic tenancy or a tenancy at will. During the term of the lease  22 , the governmental entity  12  will have a right to use, possess, and enjoy the private asset  26  as defined in the terms of the lease  22 . At the end of the lease  22  the private entity  16  will have the right to enter into another lease arrangement with the same or a different governmental entity  12 , or utilize the private asset  26  in any manner that it chooses, consistent with the applicable rights and obligations of property ownership, including selling the private asset  26 . The lease can optionally include a purchase option that permits the governmental entity to repurchase the private asset  26  at a stated price or the fair market value.  
      The funds  20  paid by the private entity  16  to the governmental entity  12  will typically be the fair market value of the governmental asset  14 . In another embodiment, the funds  20  are less than the fair market value of the governmental asset  14  in exchange for decreased lease payments  24  over the life of the lease  22 . In another embodiment, the funds  20  are more than the fair market value of the governmental asset  14  in exchange for increased lease payments or the private entity  16  receiving preferential tax treatment, as will be discussed below.  
      The private entity  16  is preferably one or more investment entities created specifically to purchase governmental asset  14  and enter into lease-back arrangements with the governmental entity  12  from which it purchased the property. The “private entity” may be any authorized organization, such as a corporation, partnership, limited liability corporation, trust, real estate investment trust (REIT), and the like. Furthermore, the governmental entity  12  may purchase or otherwise receive a partial ownership interest in the private entity  16 . Typically, a REIT may be a corporation or a partnership. While a REIT is a preferred private entity to enter into such sale and lease-back arrangements with the government, it is to be understood that the private entity may be any suitable entity.  
      The private entity  16  has two potential avenues for a return on its investment. First, the lease payments  24  provide a revenue stream over the life of the lease  22  (or the present value of that revenue stream, should the private entity  16  decide to sell that interest). Second, any appreciation that the governmental asset  14  may realize would be the property of the private entity  16 . The private entity  16  also has the right to sell some or all of its interest in the private asset  26  and/or the lease  22  to a third party, subject to the rights granted to the governmental entity  12  in the lease  22 .  
      These sources of return should attract investors  34 , which supply capital  36  to the private entity  16 . The investors  34  can be individuals, other private entities  16 , or one or more governmental entities  12 . In return, the private entity  16  sells ownership interests or issues equity instruments  38  to the investors  34 . These equity instruments  38  may be bonds, ownership shares, membership in a partnership, or any other suitable equity interest. The equity instruments  38  of the private entity  16  can preferably be publicly or privately traded.  
      Some embodiments of the present investment vehicles secured by governmental assets  10  contemplate different classes of investors  34 . For example, the investors  34  can be a mix of general and limited partners. The equity instruments  38  issued by the private entity  18  can be a mix of preferred and common shares. Consequently, the rights of the investors  34  to participate in the proceeds from the transaction can vary. For example, all investors  34  may participate in the lease revenue in proportion to their respective investments, while certain classes of investors participate preferentially in appreciation of the private asset  26 . Similar results may be achieved through terms related to shareholder voting.  
      In another embodiment, the private entity  16  obtains a portion of the funds  20  needed to purchase the government asset  14  using conventional equity financing. For example, the private entity  16  obtains a mortgage from one or more lenders. The mortgage funds are combined with funds  36  from the investors  34  to purchase the governmental asset  14 . A portion of the lease payments  24  are used to service the mortgage. The percentage of financing obtained from the lender and the investors  34  can vary depending upon the nature of the governmental asset  14  and a variety of other factors. The term of the mortgage is preferably the same as the term of the lease  22 .  
      One advantage of including an equity financing component in the present investment vehicles secured by governmental assets  10  is that a portion of the equity in the private asset  26  is retained by the lenders during the term of the mortgage. At the expiration of the lease  22 , that equity can be used to upgrade the private asset  26  for use by other tenants or in preparation for resale. For example, the lenders may hold a mortgage for 40% of the value of the private asset  26 , while the investors  34  own the other 60%. The mortgage is preferably paid-off at the end of the lease  22 . Consequently, approximately 40% of the equity of the private asset  26  is available to finance remodeling or other improvements.  
      In one embodiment, the governmental asset  14  is a building in which the governmental entity  12  may only require a portion of the space. The lease  22  can be written to cover only a portion of the building, while the private entity  16 , as owner of the building, is free to dispose of the unused space in the open market.  
      In another embodiment, the governmental asset  14  is land on which a governmental building is situated. The governmental entity  12  sells the land to the private entity  16  in exchange for funds  20 . The private entity  16  enters into an extended lease  22  for the land with the governmental entity  12  in exchange for lease payments  24 . The governmental entity  12  retains title to the building, but not the underlying land. At the end of the lease  22 , title to the building automatically transfers to the private entity  16 .  
      Minimizing Governmental Payments in Sale and Lease-Back Arrangements  
      When an investor engages in a conventional sale and lease-back arrangement with a private corporation, the investor assumes a risk that the corporation will default on the lease. In the event of default, the investor retains title to the property, but loses any future lease payments and may incur significant costs to find another tenant. Therefore, the investor will factor in the risk of default when determining the level of lease payment required to make the investment worthwhile. The greater the risk, the higher the lease payments the corporation will have to pay.  
      In a conventional sale and lease-back arrangement, in order to attract investors the governmental entity  12  would have to make a lease payment  24  on the lease  22  comparable to that paid by corporations with a high-grade bond ratings. Unfortunately, such lease rates are typically higher than what a governmental entity might pay as interest on conventional governmental bonds. Thus, the governmental entity will likely pay a premium for the capital it raised by a sale and lease-back arrangement in excess of the cost of raising capital by issuing a debt instrument, such as a bond. Therefore, there is little financial incentive for governmental entities to utilize a conventional sale and lease-back arrangement.  
      Conversely, if the market rate for sale and lease-back arrangements with corporations having high grade bond ratings creates a higher lease rate than what the governmental entity is willing to pay, investors may not be attracted to private entities  16  attempting to engage in a sale and lease-back transaction. What is needed, then, is a method by which the governmental entity  12  can attract investors to participate in the investment vehicles secured by governmental assets  10 , while allowing the governmental entity  12  to pay the lowest lease rate that will attract investors.  
      State and local governments as well as the United States Government have long used their “full faith and credit” to back financial instruments, such as general obligation bonds. A general obligation bond is a debt instrument that is guaranteed by the taxing and borrowing power of a governmental entity. With general obligation bonds, the governmental entity pays interest and principal that amortizes the entire principal balance of the debt. The phrase full faith and credit refers to any security for which a governmental entity pledges its full taxing and borrowing power, plus any revenue other than taxes that it collects to support payment of debt. For example, the State of Minnesota, when issuing a general obligation bond to incur public debt pledges “[t]he full faith, credit, and taxing powers of the state” to repay the principal and interest of the bond. M INN.  S TAT.  16A.641 S UBD. 1 (2002).  
      Governmental entities  12  use their full faith and credit to reduce the risk of financial instruments they issue, and hence, reduce the cost of borrowing. Since a governmental entity  12  can bring in future revenue through taxation, the risk that a governmental entity will default on a financial instrument is extremely low, making the financial instrument virtually risk-free. As a result, investors are willing to accept a lower rate of return on a government financial instrument than on a corporate bond from a company with a high-grade bond rating.  
      In order to minimize the risk to the private entity  16 , and hence minimize the cost to the governmental entity  12 , the present investment vehicle secured by governmental assets  10  comprises a general obligation lease  22 . A “general obligation lease” has the investment risk characteristics of a general obligation bond, but lease payments under the lease are less than the debt service on conventional government securities yielding the same amount of funds obtained through the sale of the governmental asset. In another embodiment, the lease  22  is a conventional government backed lease.  
      The lease payments  24  on the present general obligation lease  22  only have to amortize the difference between the purchase price of the governmental asset  14  and the residual value of the asset  26  at the end of the lease  22 , thus lowering the amount paid by the government versus a conventional government bond. In some embodiments, the present general obligation lease  22  has the characteristics of a Real Estate Bonded Investment Trust (“REBIT”). The general obligation lease  22  is guaranteed by the full faith and credit of the governmental entity  12 .  
      Financial Benefits of the Present Sale and Lease-Back System  
      In the present sale and lease back system  10 , the risk that the governmental entity  12  will default on the lease  22  is essentially the same as the risk of default by the governmental entity  12  on a government security. In order to entice the governmental entity  12  to participate, the lease payments  24  will be a function of the cost of obtaining the same amount of funds  20  through conventional government debt instruments, not the fair market value of leasing a comparable private asset. In practice the lease payments  24  will typically be lower than the cost of obtaining the same amount of money through the issuance of a government security because the present investment vehicles are secured by governmental assets  10  and have at least three significant financial advantages over such government securities.  
      First, the private entity  16  will realize the benefit of the appreciation on the private asset  26 . Since the private entity  16  holds the title  18  to the private asset  26 , it is free to sell the private asset  26  at any time, subject to the lease  22  to the governmental entity  12 . If the private asset  26  experiences significant appreciation, the private entity  16  is free to cash-out some or all of that appreciation.  
      Second, at the end of the lease  22  the private entity can lease the private asset  16  to a non-governmental entity at fair market value, which will likely be significantly higher than the lease payments  24  made by the governmental entity  12 . Thus, the private entity  16  has an opportunity for a higher return because it can then lease the private asset  26  based on commercially competitive rates.  
      Third, governmental entities commonly waive property tax obligations on buildings used for governmental purposes. The general obligation lease  22  preferably waives or reduces the property tax obligations on the private asset  26  for some period of time. Since the governmental entity  12  was not previously receiving property taxes on the governmental asset  14 , there is no net loss of revenue to the governmental entity  12 . The property tax abatement is preferably for at least the term of the lease  22 , and more preferably, for the life of the private asset  26 .  
      Other mechanisms are also available to further reduce the cost of the lease payments  24 . The governmental entity  12  can waive or reduce income tax liability on the lease payments  24  preferably during the term of the lease  22 , and more preferably for the life of the private asset  26 . Such a waiver is analogous to the use of tax-free status of municipal bonds to attract investors to lower-yield investments. In yet another embodiment, the Federal government can grant preferential tax treatment for lease payments  24  made in connection with the investment vehicles secured by governmental assets  10  of the present invention. Again, such preferential tax treatment reduces the lease payments  24  made by the governmental entity  12  and/or increases the funds  20  received by the governmental entity  12 .  
      If a particular investor  34  elects to sell the equity instruments  38  or the private entity  16  liquidates some or all of the private asset  26 , the investors will typically be subject to the capital gains tax. The lease payments  24  can be further reduced by permitting investors  34  to defer capital gains if the proceeds are reinvested in another sales and lease-back system  10 .  
      With the availability of the present invention, governmental entities will be unwilling to make lease payments  24  greater than the cost of obtaining the same amount of funds  20  through conventional debt instruments, such as issuing bonds. The cost of obtaining the funds  20  will be less than conventional debt instruments and will represent a theoretical cap on what the governmental entity  12  would be willing to pay in lease payments  24 . From an investor&#39;s point of view, the present investment vehicles secured by governmental assets  10  pays a lower rate of return than a conventional government security, but provides potential appreciation of the private asset  26  that is not available with conventional government securities.  
      The one exception to this general rule is that as the governmental entity  12  issues more debt instruments, the incremental cost increases. That is, the more debt the governmental entity  12  incurs, the lower the credit rating for that governmental entity, and hence, the greater the cost of issuing debt instruments. Consequently, the lease payments  24  may vary depending on the credit status of the governmental entity  12 .  
      The general obligation lease of the present invention can be structured in a variety of ways. In one embodiment, the general obligation lease  22  is secured by contractual provisions in the lease document that pledge the taxing and borrowing power of a governmental entity to fulfilling the lease payments  24 . The contractual provision may also grant the private entity  16  the right to bring actions against the governmental entity  12  in the event of disputes over the lease  22 . In still another embodiment, the general obligation lease  22  is structured to comply with statutory provisions that allow the governmental entity  12  to pledge the full faith and credit of the governmental entity  12  to make lease payments to the private entity  16  on the lease  22 .  
      In one embodiment of the general obligation lease  22  is secured and/or paid by an investment vehicle  32  guaranteeing the lease payments  24  under the lease  22  issued in favor of the private entity  16 . The investment vehicle  32  guarantees that the governmental entity  12  will use every available means to ensure that it will honor the terms of the lease  22 . The investment vehicle  32  is preferably a separate, fully negotiable, financial instrument pledging the full faith and credit of the governmental entity  12  to fulfill its obligations under the lease  22 .  
      In one embodiment, the investment vehicle  32  is a security, such as a general obligation bond, for which the interest payments are in an amount and have due dates that correspond to the lease payments  24  under the lease  22 . The interest payments on the investment vehicle  32  are used to make the lease payments  24 . For example, the credit instrument  32  can be a general obligation coupon bond that pays the private entity  16  a specified amount of money at given dates until maturity. The given dates and the amounts paid preferably correspond to the due dates and the amounts of the lease payments. The face value of the bond at maturity is typically zero. In this embodiment, general obligation coupon bonds actually pay the lease payments  24  and are freely negotiable by the private entity  16 . Since some or all of the coupons can be sold, the general obligation coupon bond embodiment provides the private entity  16  added liquidity.  
      In another embodiment, the credit instrument  32  can be general obligation zero coupon bonds. Zero coupon bonds are sold at a discount of the face value and mature at the face value. The governmental entity  12  can issue a series of general obligation zero coupon bonds with maturity dates and face values corresponding to the due date and amount of the lease payments  24 . Again, the general obligation zero coupon bonds actually pay the lease payments  24  and are freely negotiable by the private entity  16 . Under U.S. tax law, the imputed interest on a zero-coupon bond is taxable as it accrues, even though there is no cash flow. In order to make this embodiment more attractive to investors, the tax code will preferably be modified to exempt the imputed interest from tax liability until such bonds are redeemed.  
      The general obligation lease  22  and/or the investment vehicle  32  preferably allow either the private entity  16  or the governmental entity  12  to transfer all or part of their interest in the private asset  26 . For example, the governmental entity  12  may have a lease for the entire private asset  26 . As the needs of the governmental entity  12  fluctuate, it may wish to utilize only a portion of the building for its own uses and sublease or assign a portion of its lease  22  obligations in the private asset  26  to a third party. In such an instance, the investment vehicle  32  may allow the governmental entity to engage in such activity, and provide a means for the governmental entity  12  to collect rent from the sublease or assignment. In the preferred embodiment, the full faith and credit of the governmental entity  12  backs the lease payments from the sublessee.  
      Further, it is possible, but not necessary, that the investment vehicle  32  may provide a means for the private entity  16  to share in any increased revenue that may be generated as a result of the sublease or assignment. In exchange, it is possible that the investment vehicle  32  may provide that the governmental entity  12  need only apply the full faith and credit for a portion of the lease payments  24  or duration of the lease.  
      The investment vehicle  32  also preferably permits the private entity  16  to transfer all or part of its rights in the private asset  26  and/or the lease  22  to a third party. For example, the private entity  16  may want to transfer the rights to some or all of the future lease payments  24  to a third party in exchange for a lump sum payment. In addition, the private entity  16  may want to sell its remainder interest in the private asset  26 . The investment vehicle  32  may allow the private entity  16  to engage in some or all types of rights transfers, while pledging the full faith and credit of the governmental entity  12  to the lease payments  24 .  
      In another embodiment, the portion of the private asset  26  leased by the governmental entity  12  may fluctuate over the life of the lease  22 . The investment vehicle  32  can be structured to permit this fluctuation, while maintaining the full faith and credit guarantee on the lease payments  24 .  
      It can be seen that a general obligation lease like the one described above would provide governmental entities  12  an opportunity to exploit the equity it has in various governmental assets  14 . The general obligation lease  22  allows governmental entity  12  to retire debts, to provide services, and to reduce its illiquid assets without increasing the cost of obtaining capital. The general obligation lease  22  also allows a governmental entity to reduce the risk a potential investor may assume in a typical sale and lease-back arrangement, thereby allowing the governmental entity to lease the properties back at lower lease rates, while still providing an attractive investment alternative for private entities.  
      During times when interest rates are low, the lease payments  24  operate as a guaranteed stream of income to the private entity  16 . During times of high interest rates, the appreciation of the underlying private asset  26  off-sets, at least in part, the opportunity cost of lease payments  24  that pay a return lower than prevailing rates. Thus, the present investment vehicles secured by governmental assets  10  provides a competitive return in a variety of market conditions with minimal risk.  
      Government as General or Managing Partner  
      An alternate embodiment of the present invention is schematically illustrated in  FIG. 4 . In the investment vehicles secured by governmental assets  110  of this embodiment, title  118  of governmental asset  114  is transferred to a private entity  116  that is preferably a partnership. The governmental entity  112  and one or more investors  134  are the partners. The governmental asset  114  is transferred to the partnership  116 . The governmental entity  112  receives funds  120  and lease  122 . In return, the governmental entity makes lease payments  124  to the partnership  116 . A lease agreement  122  governs the terms of the lease and the arrangement is secured by an investment vehicle  132 . The investors  134  are generally private entities that invest funds  136  in the partnership  116  in exchange for a partial interest  138  in the partnership  116 . The governmental entity  112  may have a controlling interest in the partnership  116  such that control of the private asset  126  essentially remains with the governmental entity  112 .  
      In the preferred embodiment, the partnership  116  is a limited partnership, in which the governmental entity  112  is a general partner, and the one or more investors  134  are limited partners. The governmental entity contributes title to the governmental asset  114  to the partnership  116 . The investors contribute funds  136  to the partnership  116 . The partnership  116  uses the funds  120  from the investors  134  to pay the governmental entity  112  for some portion of the asset  114 . For example, the funds  120  may equal 80% of the appraised value of the governmental asset  114 . In this example, the governmental entity  112  would own 20% in the partnership  116  and be the general partner. In another embodiment, the funds  120  are less than 50% of the appraised value of the governmental asset  114 . The governmental entity  112  owns more than 50% in the partnership  116  and is the general partner. Since the governmental entity  112  is the general partner, the private asset  126  is preferably exempt from property taxes.  
      The partnership  116  grants the governmental entity  112  a lease  122  to some or all of the private asset  126 . The lease  122  can be a general obligation lease or a conventional government backed lease. A conventional government backed lease preferably has the characteristics of revenue bond type payments with appropriate governmental guarantees. Preferably, the governmental entity  112  guarantees the principle investments  136  made by the investors  134 .  
      The lease  122  requires the governmental entity  112  to make periodic payments  124  to the partnership  116 . These payments  124  can be characterized as lease payments, interest payments or some allocation of lease and interest payments. In the preferred embodiment, the payments  124  are primarily characterized as interest payments to investors, similar to tax free government bonds. The partnership  116  distributes the payments  124  to the investors  134  in proportion to their respective interests  138 .  
      At the end of the lease  122  the private asset  126  is appraised. The investment vehicle  132  provides the general partner, the governmental entity  112 , with a number of options.  
      First, the governmental entity  112  buys back the private asset  126  from the partnership  116 . The investors  134  receive their principle investments  136  and some portion of the appreciation, if any, as determined by the appraisal. The investment vehicle  132  preferably provides a formula for calculating the value of the private asset  126 . For example, participation in any appreciation by the investors  134  can be capped at 20% of their initial investment of funds  136 . The formula preferably provides that the investors  134  receive at least their initial capital contribution. If the appraisal of the private asset  126  indicates a decrease in value, the governmental entity  112  is required to make up the difference.  
      Second, the partnership  116  sells the private asset  126 . Again, the investors  134  receive their principle investments  136  and some portion of the appreciation, if any, as determined by the appraisal. The governmental entity  112  preferably guarantees that the investors  134  will receive at least their initial capital contribution. If the sale of the private asset  126  generates insufficient funds to pay the investors  134  their capital contribution, the governmental entity  112  is required to make up the difference.  
      Third, the governmental entity  112  wants to retain ownership of the private asset  126 , but does not have the funds to buy it back from the partnership  116 . The governmental entity  112  has the option to form a new private entity to raise the capital to buy out the prior partnership  116 .  
      Fourth, the governmental entity  112  sells its ownership interest in the private asset  126  to the partnership  116 . Again, the investment vehicle  132  preferably provides a formula for calculating the price of the private asset  126 .  
      In this manner, the governmental entity  112  controls the disposition of the private asset  126 , while the investors  134  receive lease and/or interest payments  124 , and some portion of any final payout for the appreciation of the private asset  126 . The portion of appreciation received by the limited partners  134  is optionally capped at a particular level, allowing the general partner  112 , in this case the government entity, to realize a greater percentage of the appreciation in the private asset  126 .  
      The value of each of the investor&#39;s  134  ownership in the private asset  126  is preferably limited to a percentage of that investor&#39;s  134  initial investment in the partnership  116 . In this manner, the governmental entity  112  may realize an increased gain from appreciation in the private asset  126 , which may result in a gross gain to the governmental entity  112  over the term of the lease. Thus, the sale/lease back agreement may be an even more beneficial source of funds than conventional debt or equity instruments for the governmental entity  112 .  
      In yet another embodiment, the private entity  116  is a corporation that issues common stock  138  to the investors  134  and preferred stock  140  to the governmental entity  112 . Again, the governmental entity  112  retains control of the private asset  126  and optionally receives a larger portion of any appreciation in the private asset  126  upon liquidation or at the end of the lease  122 .  
      The private entity  116  can be dissolved at a time and under conditions specified in the partnership agreement and in accordance with applicable state law. Once the private entity  116  is dissolved, the private asset  126  may be reorganized in a new private entity for the generation of new non-tax revenues. When the private entity  116  ends, the private asset  126  is reappraised. Normally the property will show substantial appreciation. The value of the investors&#39;  134  investment may be a predetermined percentage of the appreciation, but can optionally be capped at a percentage of the initial investment. The general partner, in this case the governmental entity  112 , captures the remaining appreciation. Thus, the investors  134  not only receive a guaranteed annual return, but also have the potential for principle appreciation. The general partner reserves the majority of the appreciation potential for future usage.  
      Government Retains Title to the Governmental Asset  
      In another embodiment of the present invention, title  118  of governmental asset  114  is retained by the governmental entity  112 . There is no conversion of the governmental asset  114  into a private asset  126 . The governmental entity  112  receives capital contribution or funds  120  from the private entity  116 . The amount of the funds  120  is preferably capped at some percentage of the appraised value of the governmental asset  114 , such as for example, 80% of the appraised value of the governmental asset  114 .  
      In return for the funds  120 , the governmental entity  112  issues the investment vehicle  132  to the private entity  116 . The investment vehicle  132  has a term (e.g., 20 years) and a face value equal to the funds  120  provided to the governmental entity  112 . The investment vehicle  132  includes a guarantee from the governmental entity  112  to repay the funds  120  at the end of the term. The investment vehicle  132  requires the governmental entity  112  to makes periodic payments  124  to the private entity  116  and to pledge the governmental asset  114  as security for the investment vehicle  132 . The investment vehicle  132  provides for participation at the end of the term in any appreciation in the governmental asset  114  by the private entity  116 . The participation by the private entity  116  is typically capped at some pre-determined percentage of the appreciation.  
      The investment vehicle  132  preferably resembles a bond. In one embodiment, the investment vehicle  132  is a certificate of participation (COP) bond. The governmental asset  114  is optionally a pool of a plurality of governmental assets  112 . Consequently, the investment vehicle  132  is secured by all of the governmental assets  114  in the pool. The investment vehicle  132  can optionally be recorded as a lien against the governmental asset  114 . The investment vehicle  132  is preferably non-callable.  
      The investment vehicle  132  requires the governmental entity  112  to make periodic payments  124  to the private entity  116  for a specified period of time. The periodic payments  124  are preferably a fixed percentage (e.g., 4%, 5%, etc.) of the capital contribution  120  paid to the governmental entity  112 . In the preferred embodiment, the periodic payments  124  are primarily characterized as interest payments to investors, similar to tax-free government bonds. The private entity  116  distributes the periodic payments  124  to the investors  134  in proportion to their respective investment  136 .  
      At the end of the term of the investment vehicle  132  (e.g., when the investment vehicle  132  matures), the governmental asset  114  is re-appraised. The investment vehicle  132  provides the governmental entity  112  with several options.  
      In the first option, the governmental entity  112  can repay the private entity  116  the capital contribution  120 . In the preferred embodiment, the private entity  116  also receives some portion of the appreciation of the governmental asset  114  during the term of the investment vehicle  132 , if any, as determined by the appraisal. The investment vehicle  132  preferably provides a formula for calculating the value of the governmental asset  114 . Participation in any appreciation by the investors  134  is typically capped, such as for example at 20% of the capital contribution  120  originally paid to the governmental entity  112  or 20% of the appreciated value of the governmental asset  114 . The investment vehicle  132  preferably provides that the private entity  116  receives at least an amount equal to the principal  120 , regardless of the appraised value of the governmental asset  114 .  
      In the second option, the governmental entity  112  can sell the governmental asset  114 . Again, the private entity  116  receive its capital contribution  120  and some portion of the appreciation, if any, as determined by the appraisal and/or the sale price of the asset  114 . The governmental entity  112  preferably guarantees that the investors  134  will receive at least their initial capital contribution  120 . If the sale of the private asset  126  generates insufficient funds to pay the investors  134  their capital contribution, the investment vehicle  132  preferably requires the governmental entity  112  to make up the difference.  
      In the third option, the governmental entity  112  lacks the funds to pay the investors  134  their capital contribution  120 . The governmental entity  112  forms a new private entity to raise new capital and uses the funds received to pay off the previous private entity  116 .  
      The present investment vehicle secured by governmental assets  110  is essentially a tax-free, interest paying, non-callable bond, which is secured by one or more governmental assets  114 . Upon maturity, the effective interest rate can be increase the appreciation of the governmental asset  114 , typically up to some predetermined maximum percentage of the initial investment or percentage of the appreciation. Consequently, the present government backed investment vehicle  110  provides all of the investment benefits of a government bond, with the additional guarantee of specific governmental assets securing the investment  120  and the prospect of additional return on the investment  120  tied to appreciation of the governmental asset  114  during the term of the security instrument  132 .  
      Computerization of the Present Investment Vehicle  
      In one embodiment, the present sale and lease-back system and method may include a general or special purpose computer programmed to calculate the lease payment  24 . As previously noted, the value of the lease payment  24  made by the governmental entity  12  to the private entity  16  may be a function of one or more variables, including the value of the funds  20  paid to the governmental entity  12  and the interest rate costs of those funds. Additional variables may include the risk of default by the governmental entity  12 , the expected appreciation of the governmental asset  16 , the debt service on an equally-valued conventional security, the terms of the transfer of the governmental asset  14 , as well as any tax implications of the arrangement with the governmental entity  12 .  
      In a particular embodiment, the present invention may utilize a computer system to calculate the lease payment  24  as a function of one or more of these variables. In one example, the lease payment  24  may be a function of the value of the funds  20  transferred and the interest rate costs of those funds  20 . In another example, the lease payment  24  may be lowered due to a high expectation of asset appreciation or favorable tax treatment. In yet another example, the lease payment  24  may be raised due to restrictions on transfers of the private asset  26  by the private entity  16 . Most likely, the lease payment calculation will be a function of many variables, which will differ based on the nature of the agreement between the governmental entity  12  and the private entity  16 . Conventional computer systems capable of performing the required algorithm are suitable for use in embodiments of the present invention.  
      Further embodiments of the present invention may include a system adapted to calculate the expected or actual performance of the sale and lease-back agreement (or a series of agreements) over the period of the lease(s). The expected or actual performance may be calculated as a function of one or more variables, including the expected or actual appreciation of the governmental asset  14  and the interest rate value of the funds  20  transferred to the governmental entity  12 . The system may also compare expected and actual results after performance of the agreement. This system may include a computer system capable of performing the necessary calculations. Conventional spreadsheet software may be utilized in this embodiment.  
      Computer systems may also be used in other aspects of the sale and lease-back system and method of the present invention. For example, a computer system may be used to monitor the receipt of lease payments  24  from the governmental entity  12 , and the payment of dividends or other profits to investors  34 . Additionally, a computer system may be used to calculate the value of the governmental asset  14  and/or to estimate the appreciation of the private asset  26 . Further, a computer system may be used to store and generate various databases of information, for example, information related to participating investors, the governmental assets  114  included in the agreement, the funds to be transferred, the lease terms, the sale document, etc. Such information may be manipulated using the computer system and generated into reports and other printed documents to further implement and administer the system of the present invention.  
       FIG. 5  illustrates an example of a print-out of the expected results of a series of sale and lease-back agreements calculated by a computer system using conventional spreadsheet software. The data inputted into the spreadsheet (all values in thousands) include the value of the governmental asset  114 , the investment value of the one or more investors  134 , and the estimated appreciation over the 20-year lease period for each agreement at an estimated 4.32% compounded annually. Based on these variables, the computer system calculates the total interest payments to the investors  134 , the asset appreciation payments to the investors  134 , the total cost to the government (interest payment+asset appreciation payment) and the relative gain or loss to the governmental entity  112  as a function of the governmental entity&#39;s  112  share of the asset appreciation less the total cost to the governmental entity  112 . Furthermore, the computer system calculates the total gain or loss to the governmental entity  112  for a series of agreements commenced over  5  consecutive years.  
      In this example, the investors  134  are limited partners, and are limited to payment of 20% of the appreciation of the private asset  126 . The governmental entity  112  retains the remaining 80% of the appreciation. Under this scenario, the governmental entity  112  actually realizes a gross gain over the 20 years of each agreement, as well as a total gain for the series of agreements.  
      The print-out may be used to demonstrate to the governmental entity  112  that the sale and lease-back system provides the governmental entity  112  with immediate funds, as well as a gross gain at the end of the lease period due to expected property appreciation. The computer system may also be used to calculate actual results and to compare expected and actual results. Such computer output will provide both the governmental entity  112  and the private entity  116  with the data necessary to determine the economic viability of moving forward with the agreement. Although this Example is directed to one embodiment of the present invention, similar spreadsheet models may be used for any of the embodiments reported herein.  
      Although the present invention has been described with reference to preferred embodiments, workers skilled in the art will recognize that changes may be made in form and detail without departing from the spirit and scope of the invention. In addition, the invention is not to be taken as limited to all of the details thereof as modifications and variations thereof may be made without departing from the spirit or scope of the invention.