Public Finance: U.S. State and Local Government Abatement Lease Rating Methodology

Executive Summary

This document describes KBRA’s rating methodology as it pertains to the abatement lease obligations of U.S. state and local governments (the “government lessee”). This methodology addresses bonds and certificates of participation (COPs) that are payable by a government lessee pursuant to a lease agreement that is the security for the bonds or COPs. Payment under these types of financings can only be made out of legally available funds and there is no pledge of the government lessee’s full faith and credit or its taxing power. Lease rentals must bear a reasonable relationship to fair rental value and must be made in exchange for use and occupancy of the leased assets. To the extent that there is an event that significantly interferes with the government lessee’s use and occupancy of the asset, rentals are abatable in a proportional amount. These kinds of leases are referred to as abatement leases or the abatement lease model in this rating methodology. Abatement leases…