The Puerto Rico Oversight Board is seeking to invalidate Puerto Rico government rent payments made to the Puerto Rico Public Buildings Authority, which support the authority’s roughly $4 billion in outstanding bonds.
Success in the board’s adversary proceeding in Title III bankruptcy court would cut off revenue backing the authority’s bonds while allowing Puerto Rico government entities that occupy the buildings to continue skipping payments to the authority.
The board filed the adversary proceeding on Friday in the central Puerto Rico Title III bankruptcy court case asking Judge Laura Taylor Swain to declare that the Puerto Rico government entities that normally pay rent to the authority have no responsibility to do so.
Though the board isn’t explicitly calling for the authority to not pay its bonds, it said in a footnote to its filing it “reserves the right to challenge the validity and enforceability of the PBA bonds, the guarantees by the commonwealth of the PBA bonds, and/or the entire PBA structure.”
In its filing, the board said it “seeks a declaratory judgment that the leases are not ‘true leases,’ but, rather, disguised financing transactions.” If the judge granted the board’s request, the board could put an indefinite freeze on the payments of rent, because they would be considered debt payments.
If the court were to find the Puerto Rico government entities’ payments to be truly rent and not just financial transfers, then the payments from those entities in Title III bankruptcy would have to continue, as they would be considered administrative expenses outside of the stay found in the Puerto Rico Oversight, Management, and Economic Stability Act.
The PBA is in default on its bond debt, which it began to stop paying in July 2016. The PBA leases specify that the lessees are supposed to pay $402 million in annual rent, according to the board. The Puerto Rico government entities have a total of $600 million in unpaid “rent” to the PBA since their respective dates of filing for petitioning for bankruptcy.
The board argued that the U.S. Congress has treated municipal property leases of government property as debt obligations rather than true leases.
The board argued that PBA leases to Puerto Rico government bodies “contain a number of indicators that establish that they are, in reality, disguised financing mechanisms, including: a. establishing ‘rent’ payments at levels required to be sufficient, in the aggregate, to pay, when due, the principal of and interest on the PBA bonds; b. termination on the date on which the principal of and interest on the PBA bonds have been repaid in full; and c. … the lessees must continue making ‘rent’ payments even if the leased property is destroyed or otherwise rendered unusable.”
The board asked the judge to declare that the PBA isn’t entitled to the rental payments under an “administrative expense claim” found in sections of the bankruptcy code included in PROMESA.
Some of the leases are held by government entities that are not Title III debtors. An example is the Municipal Revenue Collection Center. The board said that the bankruptcy code incorporated into PROMESA doesn’t require these entities to make “rent” payments to PBA. It asked the court to release a judgment agreeing to this.