Rather than risk IRS scrutiny, a quorum of the Moab City Council on Nov. 1 voted 3-0 to tweak a recently approved $1.8 million loan from Zions Bank–funding needed to purchase a Walnut Lane trailer court on which to build an affordable housing complex.
City Senior Projects Manager Tracy Dutson told council members the city did not meet the requirements to obtain a tax-free loan. Loans to government entities can be tax exempt in most cases, but not if the loan is for business purposes, according to Moab City Attorney Chris McAnany.
He said since the city would enter into lease and property management agreements – engage in business, in other words – obtaining a tax-exempt loan under circumstances “known to be false” would be problematic.
McAnany said attorneys at Zions Bank said the requirements don’t fit and trying to make them fit was like “trying to put a round peg into a square hole.”
Dutson said the taxable loan would be much more “conservative and doesn’t expose” the city to an IRS audit.
The loan is in the form of a lease purchase agreement, meaning the city will acquire the land and lease it to Zions, which would then lease it back to the city. The lease would terminate when the loan is paid off within a year or two, said McAnany.
The interest rate will be set at 4.4 percent, which would add a few thousand dollars to the purchase price if it is paid off as early as planned, said City Manager David Everitt following the meeting. The previous tax-exempt rate the city council initially approved was 3.19 percent.
Roughly 20 families currently live in aged singlewide trailers at the Walnut Lane trailer park. The plan, once zoning and other preconstruction issues are settled, is to build 80 units for low-income tenants, with current tenants given the opportunity to move into one of the new apartments.
While the Zions Bank lease-purchase agreement is for the land, the city will likely have to bond for construction funding.