difficult because the government usually has no
eventual equity interest in the facility. Ownership
of the building being leased normally resides with
the developer after the government makes all of its
lease payments. Therefore, the incentive to make
lease payments in later years is not enhanced by
the expectation of eventual ownership.
■Triple-net lease: Despite vendor involvement or
developer ownership, the lease must be triple-net,
without the right of offset.
■Bankruptcy: An absolute assignment of rental
payments from the private third-party lessor to
the trustee is required.Nontax-Supported Leases
Higher education leases
Colleges and universities frequently use leases as a
means of financing capital improvements and
equipment such as computers, telecommunications
equipment, and research facilities. Historically,
capital leases were the most used form of leasing
for institutions of higher education. From a rating
perspective, many of these capital leases are no
different than other bonded, long-term debt. An
institution wishes to finance an academic or
research building over a long period of time, but
may be subject to state debt restrictions, which
prohibit the issuance of GO debt. For public uni-
versities, because of these debt limitations, capital
leases are often subject to annual renewal or reap-
propriation of debt service. However, public uni-
versities often issue capital leases that are not
subject to appropriation. Typically, this instance
occurs when a university wishes to involve outside
developers, or affiliation foundations.
Capital leases’ payment of debt service can be
subject to annual appropriation, or it can be a con-
tinuing and unconditional obligation without the
option of termination. The rating assigned by
Standard & Poor’s depends on the underlying secu-
rity; if a lease for a public university is subject to
annual appropriation of debt service, the rating
analysis follows the criteria established for other
municipal entities such as states and local govern-
ments. Therefore, in most instances, a lease sup-
ported by legally available funds of a university
will be rated one notch from the general obligation
equivalent rating. There is one caveat, of course,
which is that the lease rating is still a function of
the underlying nature of the lease pledge and theobligor’s general credit quality. If the underlying
security on an appropriation lease is not legally
available funds, or the broadest possible pledge,
such as a general revenue pledge, then Standard &
Poor’s might notch it further than leases for state
and local government entities.
For instance, consider an appropriation lease for
a parking system. If the revenues that actually
secure the lease are only parking revenues, a fairly
narrow revenue stream, the rating would likely be
notched lower than that on a general revenue
appropriation lease. For a capital lease to be rated
on par with a general obligation equivalent rating,
it should be continuing and unconditional, not sub-
ject to annual renewal or appropriation, and
secured by the broadest possible pledge of revenues.
Most capital leases for private colleges and univer-
sities reflect an unsecured general obligation. Most
private college bond ratings also reflect an unse-
cured general obligation pledge. Unlike health care
institutions, which historically have placed a lien on
gross revenues, private colleges and universities typ-
ically do not. Therefore, a capital lease, which is an
unsecured corporate pledge, can be rated on par
with other unsecured debt of the institution.
Health care leases
In the not-for-profit health care sector leases are a
fairly common means of financing for major
equipment, such as radiology machines, telephone
systems, and computers. From time to time they
are used to lease additional space for physicians’
offices, research facilities, or back-office func-
tions. These leases are usually operating leases
although capital leases do occur from time to
time. Capital leases are rare but are always incor-
porated in the long-term debt structure of the
organization. If a capital lease for a health care
system is subject to annual appropriation of debt
service, the rating analysis follows the criteria
established for other municipal entities, such as
states and local governments.
Transportation leases
Generally speaking, leases are not used as a financ-
ing vehicle in the transportation sector. In the very
rare instance when an airport issues lease bonds,
where debt service is subject to appropriation risk,
but not abatement risk, the rating analysis follows
the criteria established for other municipal entities,
such as states and local governments.■Tax-Secured Debt106 Standard & Poor’s Public Finance Criteria 2007