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On December 3, 2010, North Idaho College (NIC) became the owner of just less than 17 acres of land next to its existing campus and the City of Coeur d’Alene sewage treatment plant.  This acquisition is part of the City’s plan to market that area as the “Education Corridor.”

For the 499 days between July 23, 2009, and December 3, 2010, NIC paid approximately $10,287,420  in “rent” to “lease” this land from the NIC Foundation.  That means NIC had used Kootenai County taxpayers money to pay approximately $20,616 per day to “lease” what was essentially bare ground.

“Wait a minute!”  you say.  “Why would NIC lease 17 acres of land for only 499 days at such an outrageously high rent?  Doesn’t someone normally lease land for many years to use it rather than own it?  If NIC wanted to own it, why didn’t NIC just buy it?”

The answer both those questions is straightforward:  It is our belief that the North Idaho College Board of Trustees wanted the land so badly that in order to get it, they were willing to circumvent the taxpayer protections required by the Idaho Constitution, Article VIII, Section 3.

NIC had wanted that land for many years.  It suddenly became available, but with a $10 million price tag. To lawfully buy the land outright on its own authority and without further approvals, the NIC Board of Trustees would have to obligate $10 million for the purchase in one annual budgetary appropriation.   NIC was unable to do that, and to enter into a long-term obligation to fund the purchase,  NIC would have to comply with the Idaho Constitution, Article VIII, Section 3.  The Constitution provides NIC with two options to lawfully incur long-term debt or liability:

Option 1:  Ask Kootenai County voters to approve the long-term obligation and hope to get the required 2/3 majority of those voting, or

Option 2:  Submit the proposal to a District Court judge and hope to persuade the judge that the deal meets the very stringent “ordinary and necessary” provisions of the Idaho Constitution.

The NIC Board of Trustees didn’t trust the voters enough to put the issue to a constitutionally-required vote.  Similarly, the Trustees knew that no competent District Court judge could rule that the $10 million expenditure met the “ordinary and necessary” provisions of the Idaho Constitution.  So the NIC Trustees enlisted the aid of the NIC Foundation, a non-profit 501(c)(3) Idaho corporation, to work out a scheme to circumvent the requirements the Idaho Constitution, Article VIII, Section 3.

The scheme was simple:  Because NIC doubted its ability to buy the land lawfully in compliance with the Constitution, the NIC Foundation would buy the property instead.  Then, NIC and the Foundation would draw up a document they would label a “Lease Agreement” rather than a “sales contract.”  NIC would “lease” the property from the Foundation.  NIC could and would lawfully appropriate about $4 million which it would give to the Foundation up front as “prepaid rent.”   The Foundation would sign a promissory note and borrow the remaining $6 million from Mountain West Bank.  Then the NIC Foundation would deliver the $10 million purchase price to the seller.

Every six months thereafter, the NIC Foundation would make loan payments of approximately $1.074 million to Mountain West Bank until the $6 million loan, plus interest, was paid off.  When the last loan payment was made, the Foundation would own the property.  Under the terms of the “Lease Agreement,” immediately after the Foundation made the last loan payment and got the deed, the Foundation agreed to turn over the title to NIC, and NIC agreed to accept it.  NIC would become the owner of the land within a few days after its Foundation made its last loan payment to Mountain West Bank.

But where would the non-profit 501(c)(3) NIC Foundation get about $1.074 million every six months, particularly in this economy?     Being a private non-profit corporation, the Foundation’s records are protected from disclosure under public records laws, so we can’t say for sure where the Foundation would get the money.  But in an amazing coincidence, the “Lease Agreement” between NIC and the Foundation provided that the “lease” payments by NIC to the Foundation just happened to coincide in amounts and timing with the loan repayments the Foundation had to make to Mountain West Bank.

For some reason, in November 2010 the NIC Trustees voted to break the NIC piggy bank and come up with about $4.1 million in “prepaid rent” which it delivered to the NIC Foundation.  That amount just happened to be the exact amount of principal and interest the Foundation still owed on the loan it had received from Mountain West Bank.

The “Lease Agreement” between NIC and the Foundation did not require the Foundation to do anything specific with the $4.1 million “prepaid rent” check.  The Foundation could have simply deposited the check in an interest-bearing account and then continued to make its required semiannual loan payments to Mountain West Bank.  Instead, the Foundation immediately went running to the Bank and paid off the loan.  The Foundation then owned the land, and as required by the “Lease Agreement,” it  delivered fee simple title to NIC on December 3, 2010.  So, on December 3, 2010, NIC owned the 17 acres of land.

So, what’s the problem?

NIC and the Foundation have denied that the “Lease Agreement” was a constitutionally prohibited installment sales contract with a $4 million down payment and six semiannual installment payments of about $1.074 million.  First District Court Judge John T. Mitchell agreed with them.  If Judge Mitchell was correct, then all the money paid to the Foundation by NIC must have been “rent.” The “Lease Agreement” did allow NIC to prepay rent, but it gave NIC the option to purchase the land only if the Foundation defaulted on its loan.  The Foundation did not default on its loan, and the “Lease Agreement” was never amended or supplemented to allow any other purchase options.  The “Lease Agreement” between NIC and the NIC Foundation is the only agreement known to us that results in NIC owning the 17 acres.  If the money paid by NIC to the Foundation wasn’t purchase payments, then it could only have been “rent.”

The “Lease Agreement” stated that the agreement could only exist for a maximum of four one-year terms.  So the “Lease Agreement” covered the period from July 23, 2009,  until July 2013.    But as of December 3, 2010, NIC owned the land!  By that time, NIC had paid the Foundation approximately $10,287,420  in “prepaid rent” for the entire lease term which would have ended in July 2013.  For the period December 3, 2010, until July 2013, NIC paid the Foundation several million dollars in “prepaid rent” on land NIC already owned.  By our calculation, using the dollars and dates in the “Lease Agreement,” NIC is due a refund of approximately $6,745,602  in “prepaid rent” from the NIC Foundation.  The exact amount of the refund due would have been determined at trial if Judge John T. Mitchell had allowed this to go to trial.

The hyperlinks attached to this post try to explain many of the details behind this transaction, including:

• Why NIC could not simply buy the 17 acres of land it had wanted for a decade.
• Why the NIC Board of Trustees intentionally avoided putting this $10 million expenditure to a vote of the people or even submitting it for judicial confirmation as required by the Idaho Constitution.
• How the City of Coeur d’Alene’s Planning Commission and Mayor and City Council, the NIC Board of Trustees, and the NIC Foundation worked together to inflate the purchase price taxpayers would have to pay.
• The scheme that NIC and the NIC Foundation concocted to enable NIC to own land it could not constitutionally buy outright.
• Who was involved most directly in this transaction.
• Evidence supporting the belief that NIC used the NIC Foundation as a straw man to do indirectly that which NIC was constitutionally prohibited from doing directly.
• How NIC paid several million taxpayer dollars in “rent” on property it already owned.
• What three taxpayers and their attorney are trying to do to recover money improperly paid as “rent” by NIC to its own NIC Foundation for land NIC already owned.

This first link is NIC’s 499-Day “Lease” of 17 Acres of Bare Land (The Brief Version), a 3-page summary of information contained in the longer report.

This second link is NIC’s 499-Day “Lease” of 17 Acres of Bare Land (The Long Version).  This is the longer (17 pages) and much more detailed report with footnotes.

This third link is the “Lease Agreement” between NIC and its Foundation.  This is the most pivotal and important document in this transaction.  There are several areas in The Long Version report where I referred to specific sections of this “Lease Agreement.”

In creating this “Lease Agreement,” I believe NIC and the Foundation were trying to have the best of both worlds.  In one world, they needed to make the Internal Revenue Service believe that NIC was buying the land so the interest on the Foundation’s loan would be tax-exempt to the lender, Mountain West Bank.  In the other world, they needed to make the State of Idaho believe that NIC was only “leasing” the land and not really buying it in order to give the appearance of compliance with the Idaho Constitution, Article VIII, Section 3.  There was a lot of “make believe” going on.

Finally, this fourth link is the Tax Agreement Regarding Revenue Ruling.  This is the agreement between NIC and the Foundation which is the basis for the 63-20 corporation referred to in The Long Version report.  It is this agreement which gives Mountain West Bank the federal tax exemption on the hundreds of thousands of dollars in loan interest.

To evaluate the official conduct and performance of the NIC Board of Trustees and other elected public officials, voters in Kootenai County should take time to understand exactly what NIC, the NIC Foundation, and the Mayor and City Council of Coeur d’Alene did.

First District Court Judge John T. Mitchell decided that there just wasn’t enough evidence to justify allowing the lawsuit to proceed to trial.  His summary judgment is being appealed to the Idaho Supreme Court.  If the Idaho Supreme Court agrees that the scheme NIC and the Foundation used was lawful, the Supreme Court will have effectively amended the Idaho Constitution, Article VIII, Section 3 from the bench and endorsed a method to allow entities of the state to incur long-term debt or liability without either voter approval or judicial confirmation.

For Kootenai County property taxpayers, a personally important point may be that the NIC Trustees approved using our money to pay a private corporation (the NIC Foundation) between $6 million and $7 million in “rent” on land NIC already owned.  So far, the NIC Trustees have not sought to have the Foundation return the excess rent paid after NIC owned the land.  Neither has the NIC Foundation repaid it on its own initiative. Thus, it appears the NIC Trustees agreed to “rent” just less than 17 acres of land from the NIC Foundation for approximately $20,616 per day.

Do you understand and approve of the methods used by the NIC Trustees to acquire this land?  Were the NIC Trustees good stewards of the Kootenai County property taxes they used on this transaction?

Your questions and comments are welcome.