1.2.4.3 Lease Exception (the “Offner-Dean Lease Exception”)

1.2.4.3 Lease Exception (the “Offner-Dean Lease Exception”)

PREMISE – A debt obligation may be eligible for this exception if it is structured as a lease financing and the public agency has to make payments only if it has use of the leased facility that year. 

LEGAL REQUIREMENTS – The Lease Exception is a well-defined subset of the more general Contingent Obligation Exception (See Section 1.2.4.5). It is often referred to as the “Offner Dean” (or “Offner Dean Rider”) Lease Exception, referencing the leading cases.45 The requirements for an Offner Dean lease are modeled on the characteristics of transactions approved by courts. The foundational principle is that the lessee’s obligation to pay rent from the revenues of each fiscal year is contingent upon the public agency having “beneficial use and occupancy” of the leased premises during that fiscal year. The essential requirements flowing from this are as follows:

  1. The property subject to the lease must be a leasable asset (e.g., a building, plant, or equipment, not window panes or paint).

  2. Rent in each fiscal year must not exceed the “fair rental value” of the leased premises.

  3. If the lessee fails to pay rent when due, there can be no acceleration of future rent.

  4. If effective use and occupancy is not available (e.g., because construction has not been completed or because of a casualty loss), rent must be “abated” (not legally required to be paid) to the extent and during the period use and occupancy is not available. 

CAVEATS AND QUALIFICATIONS – A lease agreement that does not meet the Offner Dean requirements may be a “debt” even if it takes the form of a lease. Further, matching “fair rental value” with lease payments based on variable interest rates may be particularly challenging for certain types of facilities or lessees.

COMMON APPLICATION IN THE PUBLIC FINANCE CONTEXT – This exception is used for long term financing of governmental facilities to be paid for out of a public agency’s general revenues, often involving certificates of participation or JPA lease revenue bonds. See Section 3.6.1, Financing Leases.