Opinion ID: 1360563
Heading Depth: 1
Heading Rank: 9

Heading: the lease-purchase agreement

Text: During 1993, the Alaska Court System (ACS) determined it did not have enough office and warehouse space in Anchorage. At that time, ACS was leasing property from Carr-Gottstein Properties. Upon expiration of that lease, ACS determined its property needs could be met by leasing what is known as The Anchorage Times Building (Property) owned by VECO. ACS commissioned two appraisals of the Property, and the Property was valued at between $3.3 to $3.75 million. The owner of the Property and ACS negotiated a purchase price of $3.15 million. To acquire the Property, ACS used what is known as a lease-purchase agreement. Under the terms of the agreement, the bi-annual lease payments on the Property for the agreed ten-year lease are essentially equal to one-tenth of the negotiated purchase price. The bi-annual lease payments also include the costs of improvements and renovations needed to meet the interior space requirements of ACS. If the Legislature appropriates funding for each yearly lease payment, the State may acquire the building at the end of the lease for a nominal purchase price. The mechanics of the ACS/DNR lease-purchase agreement involve multiple parties: (1) ACS, the lessee, (2) DNR, the lessor, (3) VECO, the owner of the property, (4) the bank, acting as Trustee, and (5) the purchasers of certificates of participation (COPs) sold by the Trustee. The agreement specifies that DNR, the lessor, holds title to the Property, and ACS, the lessee, makes bi-annual lease payments to DNR. The yearly lease payments are divided between principal and interest, and the interest is excluded from the seller's gross income for federal income tax purposes. Under the agreement, DNR assigned its rights under the lease without recourse, to Seattle First National Bank, acting as Trustee. As Trustee, Seattle First National Bank sold certificates of participation (COPs) to VECO. At this juncture, VECO holds the COPs, and will eventually sell them to COP purchasers. The COPs are negotiable. Each COP holder is entitled to a percentage share of the payments made by ACS over the term of the lease. When the COPs are sold to investor-purchasers, the proceeds will go to the previous owner, VECO. DNR granted a deed of trust on the Property to be held by a trustee as security for the COP purchasers in the event that the legislature does not appropriate funds for future bi-annual lease payments. Finally, rather than make improvements prior to the lease of the Property to ACS, VECO and ACS agreed that VECO would deposit $2.85 million in an account held in trust solely for the purpose of renovating the Property. The $2.85 million may be spent at the direction of ACS to renovate and modify the building to its particular needs.