Agenda Item # 20
||May 14, 2003
||Committee Meeting Date:
||May 28, 2003
||Board Meeting Date:
||June 5, 2003
||Administration and Finance Committee
| ||Santa Clara Valley Transportation Authority|
| ||Board of Directors|
| || |
|THROUGH:||Peter M. Cipolla|
| ||General Manager|
| || |
|FROM:||Scott D. Buhrer|
| ||Chief Financial Officer|
| || |
||Sublease Agreement for UTDC Light Rail Vehicles
Authorize the General Manager to execute Sublease Agreements with the Utah Transit Authority and Sacramento Regional Transit District for the sub-sublease of 50 UTDC Light Rail Vehicles; with aggregate prepaid rent in the amount of $9.3 million; and, further authorize the General Manager to execute a Parts Distribution Agreement for the sale of UTDC spare parts for approximately $5.4 million.
On August 6, 1998 the Board of Directors authorized the General Manager to enter into a U.S. leveraged lease transaction (1998 LILO) with respect to VTAs UTDC light rail vehicles (UTDC LRVs). Subsequently, VTA implemented the transaction by simultaneously entering into two transactions: 1) to lease out the UTDC LRVs to investors (Investors), documented in a Head Lease for a period of approximately 33 years, and, 2) to lease back the same UTDC LRVs from the Investors (documented in a Sublease). Approximately two thirds of the way through the term of the Sublease (Basic Sublease Term), VTA has the right to exercise a purchase option with respect to the UTDC LRVs. The transaction was economically defeased; therefore funds (Defeased Funds) have already been provided and set aside for VTA to pay all Sublease periodic rent and to exercise VTAs purchase option. Meanwhile, VTA maintains ownership of the LRVs and is obligated to operate, maintain and insure the LRVs throughout the term of the Sublease.
In November 2000, the voters of Santa Clara County approved Measure A, a thirty-year, countywide one-half cent sales tax. Several transit improvement projects were included on the Measure A ballot, including the purchase of 70 low floor light rail vehicles (New LRVs) which would better service disabled, seniors and others as well as replace VTAs existing UTDC LRVs. To date, VTA has acquired 40 of the New LRVs.
In November 2001, the General Managers from Utah Transit Authority (UTA) and Sacramento Regional Transit District (RT) expressed their desire to jointly procure the UTDC LRVs.
Under the terms of the 1998 LILO, VTA is authorized to enter into a sub-sublease of the UTDC LRVs, for periods not extending beyond the end of the Basic Sublease Term, to any transit system operator domiciled in the United States who will operate the vehicles exclusively in the continental United States.
The authority to sub-sublease the UTDC LRVs is only given provided that VTAs obligations under the 1998 LILO will continue in full force and effect. In other words, VTA will continue to be liable to the Investors and the other 1998 LILO parties for any breach (e.g., failure to operate, maintain and insure the UTDC LRVs) under the 1998 LILO. However, pursuant to the UTA and RT Sublease Agreements (UTA/RT Agreements), UTA and RT will assume and agree to perform VTAs obligations arising under the 1998 LILO. In addition, UTA and RT will indemnify VTA for any liability VTA may incur to the Investors or the other 1998 LILO parties that would not have arisen but for the sub-sublease of the UTDC LRVs to UTA or RT (whether due to a failure by UTA or RT to perform the obligations it has assumed under the UTA/RT Agreements or otherwise). VTA will retain structural risks associated with the 1998 LILO. These structural risks consist of risks for which VTA is liable under the 1998 LILO that are unrelated to the sub-sublease of the UTDC LRVs (e.g., changes in tax laws or credit downgrading of the defeasance parties). At the time the 1998 LILO was executed, we considered these risks to be minimal based on legal counsel assessment with regard to tax laws and downgrade provisions incorporated in the 1998 LILO documents. These provisions require the defeasance parties to post collateral in the event of downgrade. VTA also has the option to substitute defeasance parties. We continue to consider these risks to be minimal.
The UTA/RT Agreements provide that UTA and RT will pay the prorated portion of the prepaid rent for the UTDC LRVs upon the delivery of each vehicle to UTA or RT. The aggregate amount of rental payments for UTA and RT are $5.2 million and $4.1 million respectively. The assumption by UTA and RT of VTAs non-structural risks and liabilities under the 1998 LILO was a significant factor guiding VTAs determination of the rent for the UTDC LRVs.
VTA will have no obligation, liability or responsibility to UTA or RT with respect to operation, maintenance, repairs, alternations, modifications, improvements, insurance, or payment of taxes resulting from the sub-subleasing of the UTDC LRVs. If any claims or threatened litigation arise involving the manufacture or design of the UTDC LRVs, or, claims for patent, trademark or copyright infringement relating to the UTDC LRVs, the UTA/RT Agreements would consider such claims Joint Defense Claims. If a Joint Defense Claim occurs and the applicability of a joint defense is verified, then VTA and UTA or VTA and RT, as applicable, would make reasonable efforts to pursue a coordinated legal position and coordinated defense utilizing a single counsel. In such an event, VTA and UTA or VTA and RT would share the cost of defense on an equitably allocated basis. We consider the possibility of any such claims being asserted as remote. Furthermore and most significantly, in the event of loss, UTA and RT, as applicable, will be responsible for payment of amounts, if any, specified in the UTA/RT Agreements, which are equivalent to VTAs undefeased obligations under the 1998 LILO. The sublease rents and purchase option amounts were economically defeased, i.e., funds were invested to grow over time to meet the rent and purchase option amounts required. In the event of loss, prior to expiration of the Basic Sublease Term and the concurrent maturity of these funds, there is an undefeased obligation, which is an amount that represents the difference between the value of the invested funds and a Stipulated Loss value. This amount is a substantial amount, which initially increases and then decreases to zero at the expiration of the Basic Sublease Term.
VTA will implement a phased delivery schedule for the UTDC LRVs; currently, delivery of the UTDC LRVs is slated to begin upon execution of the UTA/RT Agreements, with the last of the UTDC LRVs to be delivered by May 2004. At the end of the sub-sublease term (Jan 2015 for RT and Jan 2017 for UTA), UTA and RT will have the option to instruct VTA to exercise its purchase option under the 1998 LILO (which VTA will exercise using the Defeased Funds) and concurrently to acquire the UTDC LRVs from VTA for a nominal amount. If a sub-sublessee does not so instruct VTA, UTA and RT assume the economic consequences of the return provisions of the 1998 LILO in exchange for receiving the Defeased Funds from VTA.
Pursuant to the Parts Distribution Agreement, UTA and RT have agreed to purchase VTAs inventory of spare parts and supplies for the UTDC LRVs based on book value, currently estimated at $5.4 million--in exchange for the transfer of special tools and equipment at no additional cost.
UTA and RT will be responsible for costs associated with shipment of the LRVs from San Jose to their final destination.
There are no practical alternatives.
The total one time revenue generated by this transaction will be approximately $14.7 million. Approximately $3.3 million will be received in FY 2002-03, with the remainder to be received during FY 2003-04.
|Prepared by: ||Kimberly Koenig
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