Municipalities across the nation, large and small, often face the difficulty in meeting their capital equipment and facility needs. Tax-exempt lease purchase financing is a technique that allows a municipality to purchase equipment and make periodic lease payments over the useful life of the asset. The payments under a lease arrangement are subject to the annual budgetary process and are included as a line item in the operating budget. This results in yearly obligation, thus eliminating the need for a referendum to approve long-term debt. If structured properly, the interest portion of the lease payments is exempt from federal income tax resulting in a low tax-exempt interest rate to the borrower.
Lease Purchase generally not considered a debt?
A lease purchase agreement is a yearly obligation renewable at the option of the municipality. The obligation is subject to the annual appropriation of funds by the government entity. If funds are not appropriated for a given year, the lease agreement may be terminated. Due to the one year obligation, a voter referendum and approval is generally not required to enter into a lease purchase agreement.
Who is eligible to utilize Tax-Exempt Leasing?
Basically, any municipality or political subdivision that can use tax-exempt securities can utilize tax-exempt leasing.
What can be financed?
- A New City Hall
- A New Fire Station
- A New School Building
- A New Synthetic Turf Soccer or Football Field
- Audio/Visual Equipment
- Computer Equipment
- Copiers/Printing Equipment
- Fire/Rescue Equipment
- Heating and Lighting Upgrade
- Medical/Laboratory Equipment
- Modular Buildings
- Public Works Equipment
- School Buses Real Estate Improvements
- Telecommunication Equipment
- Waste Transfer Station
- Water Treatment Plant Upgrades
- and more . . . . .
Benefits of Tax-Exempt Leasing
- No Cash Down Payments – 100% equipment cost financing
- Flexible terms structured to meet cash flow requirements.
- Term, normally 3 to 10 years.
- No Debt Creation – payments are subject to annual appropriations and the obligation is not subject to statutory debt limitations in most states. Since debt is not created, voter approval is not generally required.
- Matches Cost with Revenue – payments correspond to the useful life of the asset being financed.
- The documentation required to close a lease purchase agreement is substantially less than a traditional bond financing. Hence, lease financing can be accomplished in a shorter time frame.
- Low Up-Front Costs – a private placement of the lease eliminates underwriting expenses, trustee fees, and expensive legal fees.