Minnesota school districts have begun exploring the use of the federal New Market Tax Credit (NMTC) program in connection with financing capital projects, including construction of new schools and renovation of existing facilities. These transactions often are structured as “self-leveraged” financings where, among other things, funds raised by a school district through the sale of its obligations would be “leveraged” through an NMTC financing. Typically, the financed facilities would be subject to certain leasing arrangements between the school district and a special purpose entity formed for purposes of the NMTC financing (normally referred to as the “QALICB”). QALICB stands for Qualified Active Low Income Community Borrower.

Attached as Exhibit A is a sample diagram illustrating a typical NMTC financing structure for a transaction involving a public body.

Leasing

Ground Lease and Sublease. In these leasing arrangements, the site for the project (together with any existing improvements situated on the property) would be ground leased from the district to the QALICB for an extended term, such as 30 years, and then subleased back to the district from the QALICB for a commensurate term. NMTC financings are for a seven- year period because the corresponding tax credits are available for seven years. For that reason, these transactions are structured with the contemplation that the NMTC structure, including the related leasing and financing arrangements, would be “collapsed” at the seventh anniversary of the NMTC closing. The expectation of the parties would be that, among other things, the Ground Lease and the Sublease (together the “Leases”), and the other financing arrangements, would be “unwound” at that time. Nevertheless, for the protection of the school district, the Leases should be structured so that if for any reason the expected “unwinding” failed to occur, the district would be protected.

Under the Ground Lease, the QALICB would agree to build the project, subject to supervision and approval of construction draws by the district. Contracts for construction would be publicly let in accordance with Minnesota Statutes, Section 471.345, the Uniform Municipal Contracting Law. Under the Sublease, the district would have the exclusive use of the property for the term of the Sublease. Payments of rent under the Leases would be de minimis. It should be noted that annual administration fees over the term of the NMTC financing would be owed by the school district for purposes of assuring tax law compliance with NMTC program requirements, in an amount potentially of up to one-half percent per year of the amount financed. In many transactions, amounts to pay these fees over the duration of the NMTC financing term are escrowed from NMTC proceeds at closing, to provide assurances to all parties that the payments both will be made and also will not constitute additional annual expenses to the school district. At the expiration of the 30-year term, the Leases, if not earlier terminated at the conclusion of the NMTC financing term, would be extinguished. At that time, the district’s fee title to the property would no longer be subject to the Leases or other liens granted in connection with the NMTC financing.

Statutory Authority. Minnesota school districts have authority to enter into the kinds of leasing arrangements represented by the Ground Lease and the Sublease.

Under Minnesota Statutes, Section 123B.51, Subd. 3, school boards are specifically authorized to lease real property, as follows: “When necessary, the board may lease real property for school purposes.”

Under Minnesota Statutes, Section 123B.51, Subd. 1, a school board may “acquire necessary sites of school houses or enlargements, or additions to existing school house sites by lease, purchase or condemnation under the power of eminent domain…” Further, “The board may sell or exchange school houses or sites, and execute deeds of conveyance thereof.”

It should be noted that Minnesota school districts have additional leasing authority under Minnesota Statutes, Section 465.71. This section authorizes lease-purchase arrangements where payments of rent by the school district are subject to annual appropriation. Such a lease-purchase agreement could also be used in connection with an NMTC financing.

Attorney General Opinion 622i. On January 5, 1966, an Opinion of the Minnesota Attorney General was issued, addressing the following question:

Is it permissible for an independent school district to enter into a long term agreement (lease) of real estate (up to 50 years) for the purpose of constructing a school building thereon?

The opinion concluded that the Minnesota courts:

…would hold that a lease for 50 years was unreasonable as to time, and that it is not permissible for an independent school district to lease real estate for that period for the purposes of constructing school buildings thereon.

This opinion is a bit surprising since the term of the lease appeared to substantially exceed the expected life of the facilities being financed and therefore the school district would not appear to have been at risk of losing its investment in the school buildings. In fact, the opposite position is generally taken by the State of Minnesota in awarding state grants to local units of government who enter into leasing arrangments in connection with bond and other financings. That is, if the term of the proposed lease substantially exceeds the expected life of the financed facilities, then the public body’s rights under the lease are considered sufficient to meet the state’s requirements for a publicly financed project.

Notwithstanding these consideration, however, the circumstances addressed in Opinion 622i differ materially from the leasing arrangements that would be undertaken by a school district in an NMTC financing. This is principally because the school district referred to in Opinion 622i did not have fee title to the property on which the school buildings were to be constructed, either at the inception of the financing or during the lease term, and so the opinion concluded that the district potentially stood to lose possession and control of any remaining school buildings at the expiration of the 50-year lease. On the other hand, in the NMTC structure described above, fee title to the site of the financed property is initially in the school district and remains in the school district throughout the terms of the NMTC financing and the Leases. Moreover, during the term of the Leases, the exclusive right to possession and control of the financed property remains in the school district and, at the expiration of the terms of the Leases (if not beforehand, at the conclusion of the seven-year NMTC financing term), fee title to the site as well as the financed facilities would be in the name of the school district, free of any leasehold interests or other liens or financing arrangements entered into in connection with the NMTC financing.

Review by Commissioner of Education

Under Minnesota Statutes, Section 123B.71, Subd. 9(7), school boards must submit to the Commissioner of Education certain information in connection with the proposed construction of school facilities or improvements, including “the source of financing for the project.”

In connection with proposed school construction projects, this provision appears to require submission to the Commissioner of information with respect to an NMTC financing, as well as the other financing to be obtained for a project, such as bond financing.

Membership in Local Economic Development Authorities

Authority to Obtain Membership Interests in ED Associations. As noted above, the leasing arrangements in an NMTC financing would generally be undertaken between the school district and a special purpose entity formed for the purpose, typically referred to as the “QALICB.” For NMTC purposes, the QALICB could be formed by the school district, most likely as a limited liability company, or could be formed by a third party.

If the school district chose to form the QALICB, it could proceed under the authority of Minnesota Statutes, Section 123B.02, Subd. 24, which provides that districts have express statutory authority to “authorize and pay for the membership of the school district… in… local economic development associations…”

Under this statutory authority, it appears that a school district could become a member, or become the sole member, of an economic development association organized to fulfill economic development purposes related to the subject financing. There appears to be no reason under Section 123B.02, Subd. 24, that the economic development association could not be formed as a limited liability company or partnership; provided that the interest acquired by the school district can properly be characterized as a “membership.” This appears to be easiest with a limited liability company, where the school district would clearly become a “member” of the limited liability company.

If the QALICB is formed by the school district, rather than by a third party, the school district should consider whether to bind the QALICB to compliance with laws governing the school district itself, such as the Minnesota Open Meeting Law, the Minnesota Government Data Practices Act, and other pertinent statutory requirements. Such a decision does not appear to be required by applicable statutory requirements, but would likely not present practical difficulties either.

Application of Section 465.717. It should be noted that Minnesota Statutes, Section 465.717 prohibits Minnesota school districts and other public bodies from creating a “corporation, whether for profit or not for profit.” An important question raised by Section 465.717 is whether a “corporation, whether for profit or not for profit” includes a “limited liability company” organized under Minnesota Statutes, Chapter 322B (the “LLC Statute”), or a partnership or other form of business organization. If so, the provisions of Section 465.717 would apply to a school district interested in forming the QALICB for an NMTC financing. Unfortunately, Section 465.717 does not define the term “corporation.”

In construing Section 465.717, it should be noted that Section 465.719 is a companion provision that grandfathers certain “corporations,” organized prior to the adoption of Section 465.717, from the prohibitions of Section 465.717. In setting forth the pertinent requirements for grandfathered corporations, Section 465.719 consistently uses language that refers to corporations specifically, and that does not apply to other forms of organizations. Such references include requirements relating to an entity’s articles of incorporation and board of directors. These references do not apply to organizations formed as limited liability companies or partnerships. Limited liability companies are governed by articles of organization and boards of governors, and partnerships by partnership agreements and partners. While Section 465.719 may not provide a determinative construction of the meaning of “corporation,” as used in Section 465.717, it sheds relevant light.

Any lack of certainty over the reach Section 465.717 can be resolved by reference to Minnesota law generally. “Corporation” and related terms are defined in Minnesota’s business corporations law (Minnesota Statutes, Chapter 302A) and nonprofit corporations law (Minnesota Statutes, Chapter 317A). The LLC Statute also defines related terminology.

Minnesota Statutes, Chapter 302A, governs business corporations. For purposes of Chapter 302A, Section 302A.011, Subd. 8, defines “corporation” as “a corporation, other than a foreign corporation, organized for profit and incorporated under or governed by this chapter.” Significantly, Section 302A.011, Subd. 19, separately defines “organization” as a domestic or foreign corporation, limited liability company, whether domestic or foreign, partnership, limited partnership, joint venture, association, business trust, estate, trust, enterprise, and any other legal or commercial entity.” Under these provisions, the term “organization” is used broadly to include limited liability companies and other forms of business associations or organizations, and the term “corporation” is used narrowly to encompass only “corporations… incorporated under or governed by” Chapter 302A.

Minnesota Statutes Chapter 317A governs “nonprofit corporations.” Section 317A.011, Subd. 6, includes a definition of “corporation” that specifically applies only to nonprofit corporations, as follows:

"Corporation" means a corporation that is governed by this chapter. A corporation may not:

  1. be formed for a purpose involving pecuniary gain to its members, other than to members that are nonprofit organizations or subdivisions, units, or agencies of the United States or a state or local government; and
  2. pay dividends or other pecuniary remuneration, directly or indirectly, to its members, other than to members that are nonprofit organizations or subdivisions, units, or agencies of the United States or a state or local government.

In addition, Section 317A.011, Subd.16, contains a definition of “organization” virtually identical to the one in Section 302A.011, Subd. 19, where “organization” means “a domestic or foreign business or nonprofit corporation, limited liability company, whether domestic or foreign, partnership, limited partnership, joint venture, association, trust, estate, enterprise, or other legal or commercial entity.”

Minnesota Statutes, Section 322B.03, Subd. 34, provides a definition of “organization” similar to those found in the business corporations law and the nonprofit corporations law.

The above provisions reflect a consistent statutory pattern in Minnesota of referring to business organizations generally through generic terminology, such as “organization,” rather than “corporation.” In contrast, the term “corporation” is consistently used in the narrow sense of a business or nonprofit corporation formed under Minnesota Statutes, Chapter 302A or Chapter 317A. This statutory pattern is further reflected in Minnesota Statutes, Section 645.445, where the term “business,” rather than “corporation,” is used to refer to a variety of types of corporate organizations, including a corporation, partnership or other association.

These provisions, taken together, express a clear statement of legislative intent that, for purposes of Minnesota law, limited liability companies are not “corporations” and vice versa. Since Section 465.717 provides no specific guidance on the meaning of “corporation,” this term should be construed in light of Section 465.719 and by reference to Minnesota law generally. Accordingly, a limited liability company (or partnership or other form of association or organization not formed under Chapter 302A or 317A) should not be deemed to be a “corporation” under Section 465.717.

Even if Section 465.717 is construed otherwise, for policy or other reasons, its prohibitions still do not extend to a school district that forms a limited liability company or partnership under the circumstances described above. The reason for this is that Section 465.717 includes an important exception to its general prohibition. Under Section 465.717, a public body may create an otherwise prohibited organization when it is “explicitly authorized to do so by law.” As noted above, Minnesota school districts, under Minnesota Statutes, Section 123B.02, Subd. 24, are explicitly authorized to obtain a membership interest in a local economic development association. Such economic development associations may consist of limited liability companies, partnerships or other forms of unincorporated business organizations.

Issuance of Bonds

Minnesota Statutes, Section 475.52, Subd. 5, provides that:

For capital improvements any school district may issue bonds for the acquisition or betterment of school facilities…

In an NMTC financing, the proceeds of bonds or other obligations issued by a school district would be injected into the NMTC structure to provide funding, along with the corresponding NMTC proceeds, for the acquisition or betterment of school facilities. Although the school district would enter into a Ground Lease of the property in favor of the QALICB, the school district would, under the Sublease and other agreements to be entered into, maintain control during the construction period over the expenditure of proceeds and oversight of construction, and would, under the Sublease, enjoy exclusive possession and control of the school facilities. During and after the expiration of the terms of the Leases, the school district would have fee title to the site of the facilities.

Click here for Exhibit A.