Building corporations are a tool for schoolsOctober 7, 2019
By LEANN BURKE
Anytime a school corporation plans a major building project or renovation, a building corporation is bound to come up at school board meetings.
But it’s likely not clear to the general public what a building corporation is or why schools need one. The answer to both questions: legal reasons.
Indiana law forbids government entities, like school corporations, from taking on debt that is to be repaid through property taxes unless the amount of debt is less than one-third of 2% of assessed value. For most corporations, that amount is not enough to cover major renovations or the construction of new schools.
Take the Southwest Dubois County School Corporation, for example. Attorney Philip Schneider, who represents the district, said that according to the law, the corporation can only take on about $2 million in debt in its name. That’s why when the corporation built Huntingburg and Holland elementaries about 20 years ago, it set up a building corporation.
A building corporation is a nonprofit corporation created for the express purpose of acquiring the land and/or buildings that schools will need for their projects. The building corporations include a board of directors made up of taxpayers from the district, and the corporation owns the property and manages funding for the project.
When a project involves new construction, the building corporation owns the land before its built and the building once it is completed. When a project is a renovation, the building corporation assumes ownership of the building or buildings being renovated. Throughout the project, the building corporation manages the finances, including taking out bonds and repaying the bonds once the work is complete. With this structure, then, it is the building corporation — not the school corporation — that takes on the debt.
Once the building corporation is set up, the school corporation and the building corporation enter a lease agreement where the school leases the property from the building corporation. Lease payments come out of schools’ debt service funds and are equal to the bond payments the building corporation makes to lenders to pay off the construction or renovation. And since building corporations are quasi-government entities, they still receive the lower interest rates lenders offer government entities.
It’s a workaround the Indiana court system has upheld.
“All school corporations throughout the state of Indiana use this process,” Schneider said.
Once a project is complete, the building corporation will continue to own the property and the school corporation will continue to lease it until the bonds are paid off. At that point, Nordhoff said, the property is transferred to the school corporation. Should a school corporation default on the lease, Schneider said, it loses the property. In that case, the building corporation retains ownership and is able manage it as the building corporation board sees fit.
Once a project is complete and the bonds are paid off, school corporations can either reuse a building corporation for the next project or dissolve it. Right now, the building corporation Southwest Dubois set up when it built the elementary schools is dissolving. Northeast Dubois and Greater Jasper, however, are reusing their building corporations.
Northeast Dubois is utilizing the building corporation it set up to build Dubois Middle School for renovations to Northeast Dubois High School as administrators prepare to move the seventh and eighth grade to the high school building. The project is estimated at $3.6 million, and bids for the project will be opened at a special meeting at 1 p.m. on Tuesday at the corporation office, which is located at 5379 Main St. in Dubois.
Greater Jasper will use its building corporation to bond about $11 million next year after that same amount falls off the corporation’s debt load later this year. Those funds will go primarily to updating security at the schools, as well as a handful of other maintenance projects around the corporation.
It is common for school corporations to take on new projects through their building corporations once old ones are paid off. Usually, Nordhoff said, new maintenance or construction needs have arisen in the 10 to 20 years since the previous large project. And taking on new debt once old debt is paid off helps school corporations keep their tax rate level by keeping a steady amount in their debt service funds.
But why not just let school corporations borrow the money they need for projects themselves? The answer to that question lies in the state’s budgeting structures, Jasper attorney Art Nordhoff said.
Nordhoff represents Northeast Dubois, Southeast Dubois and Greater Jasper school corporations. The budgeting systems are not set up for school corporations to have a lot of debt, Nordhoff said, adding that if schools were to allowed to take on the debt themselves, taxpayers would see large increases in their property taxes when the bonds were first taken out. Taxes may decrease as the debt is paid off, but it would increase again the next time a school needed to do another major project. With a building corporation, school corporations can avoid those fluctuations in the tax rate.
“Schools don’t have that kind of money in their general budget [to cover large projects],” Nordhoff said. “[Building corporations are] a tremendous system.”
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