On December 21, 2018, the Committee and the Oversight Board jointly filed a complaint against the Puerto Rico Public Buildings Authority (“PBA”), seeking a declaration that certain “lease” agreements between the PBA (as lessor) and certain agencies, departments, and municipalities of the Commonwealth (as lessees) are not true leases, but in fact are disguised financing mechanisms that effectively allow the Commonwealth to fund the purchase and improvement of the leased properties. Because the leases are not true leases, the “rent” due under the leases is not subject to priority payment under PROMESA and the Bankruptcy Code.

The PBA is an instrumentality of the Commonwealth created to issue bonds in connection with the acquisition, construction, and/or improvement of office space to be used by departments, agencies, and municipalities of the Commonwealth. Ostensibly, the PBA leases facilities to the public agencies, departments, and municipalities of the Commonwealth and these occupants in exchange make rent payments to the PBA.

The Committee believes, however, that these lease agreements are in fact parts of a financing structure that uses the proceeds of PBA-issued bonds to fund the purchase and improvement of property for the Commonwealth’s use.

Several factors illustrate that the payments made by the Commonwealth to the PBA are not true “rent” payments but are a means to pay for bond debt, including:

  • the “rent” payments are not tied to market rent rates but instead to the amount due to pay PBA bonds;
  • under certain subleases, the Commonwealth “rents” facilities it already owns;
  • rent is due even if a property has been sold or destroyed; and
  • the leases terminate on the date on which principal and interest payments on PBA bonds have been repaid.

The Committee and the Oversight Board are seeking a declaration that the payments due under these leases are not “rent” payments being made pursuant to true leases. Obtaining this declaration will ensure that more than $600 million in “rent” that has accrued under the leases is not entitled to payment in full under PROMESA and the Bankruptcy Code but rather only gives rise to an unsecured claim by the PBA against the Commonwealth. In short, the Committee and Oversight Board’s complaint, if successful, will increase the amount of funds available for unsecured creditors.