By Larry Jones
October 18, 2004

The Senate voted 69 - 17 on October 11 to approve the conference report on a comprehensive corporate tax bill (H.R. 4520) which includes language that allows the Federal Transit Administration (FTA) to approve pending sale-leaseback transactions under its jurisdiction. Other pending transactions not under the jurisdiction of FTA will not be approved. Further, stiff restrictions on sale-leaseback transactions will virtually shutdown the market for any new proposals. The House approve the conference report on October 6 and the President has indicated he will soon sign the bill, which will provide a $143 billion tax cuts to corporations and repeal an export subsidy which was ruled illegal by the World Trade Organization.

In sale-leaseback transactions a city enters a long-term leasing arrangement with an investor (such as a bank). Under the terms of the lease, the city temporarily sells large'scale infrastructure property such as a subway system to an investor who agrees to lease it back to the city. In addition to receiving funds covering the cost of the lease, the city receives a transaction fee up front usually worth three to five percent of the assessed value of the property. This fee has provided significant support to cities in financing these projects. On the other hand the investor is allowed to depreciate the property each year and receive a tax deduction over the period of the lease. At the end of the lease ownership of the property reverts back to the city. State and local governments have used these transactions over the last two decades to help fund transit and other large-scale infrastructure projects.

But the FTA suspended approval of pending transactions last fall after receiving a letter from the Treasury Department urging that no more proposals be approved. The suspension was ordered following a Treasury Department investigation, which led the Department and the Senate Finance Committee to criticize sale-leaseback transactions as abusive tax shelters. However, leasing industry representatives as well as state and local representatives disagree with many of the findings from the investigation and point out that federal agencies have approved these transactions for many years with full knowledge of how they operate and no complaints about abuses until recently.

Since the suspension of sale-leaseback transactions, cities with pending proposals have been in a quandary. New York, Chicago, Sacramento, Cleveland, Boston, Atlanta and many other cities submitted proposals to FTA that have been pending since last year. Since last year they have argued that their proposals should be considered for approval under existing tax law at the time their proposals were submitted. They further argued that any changes in the tax law should not be applied retroactively. Cities also put together a number of other none transportation infrastructure proposals not under the jurisdiction of FTA which have been pending since last year.

In the final legislation Congress agreed to grandfather pending transportation proposals. Under the new law, the FTA will have until December 31, 2005 to approve pending transportation sale- leaseback proposals involving domestic property. Only proposals submitted to FTA after June 30, 2003 and before March 13, 2004 will be considered. Pending proposals outside the jurisdiction of FTA will not be considered. The new law also clarifies that traditional short-term leases (involving such items as automobiles, buildings, computers and copy machines) of five years or less will not be affected. Earlier drafts of the bill included broad language that would have applied the restrictive provisions to all leases.