Leasing Questions and Answers:

We would like to introduce you to our Tax-Exempt Municipal Lease Financing Program. With the increasing demand for services, public agencies have embraced tax-exempt leasing as an alternative means of acquiring needed equipment, real property and facilities construction or upgrade.

What is a Municipal Lease/Purchase Agreement?

A Tax-Exempt Municipal Lease/Purchase Agreement is essentially an installment sale contract that fully amortizes during the term of the Agreement. There is no balloon payment or purchase option at the end. The Lessee owns it from day one. The issuer (lessee) is able to acquire and utilize equipment or facilities and pay for them over a specified time period. If structured properly, the interest portion of the lease payment is exempt from federal and state income tax resulting in low tax-exempt interest rates to the borrower. However, care must be taken if the property has a private use or involves federal funds.

Why is a Municipal Lease/Purchase generally not considered debt?

A Municipal Lease/Purchase Agreement is a yearly obligation renewable at the option of the lessee. The obligation is subject to the annual appropriation of funds by the borrower. If funds are not appropriated in a given year, the Municipal Lease/Purchase Agreement may be terminated. While voter approval is generally not required for a public agency to enter into a Municipal Lease/Purchase Agreement, terms of the transaction are fully disclosed in their annual audited financial statements. Due to a non-appropriation clause in the contract, payments are considered an operating expense rather than debt.

Who is eligible to utilize tax-exempt leasing?

Basically, any municipality or political subdivision who can issue tax-exempt securities may utilize tax-exempt leasing. Examples: State and Local government agencies, special assessment districts, public hospitals, fire districts (including volunteer departments), public transit districts, school districts, etc. The interest can also be done at a taxable rate.

Why should Government Officials consider Lease/Purchase Agreements?

Lease/Purchase Agreements should be used to compliment, rather than replace, traditional bond financing. Many times Lease/Purchase Agreements can be a more timely, efficient, and cost effective means of financing essential equipment and facilities. In addition to the low cost of issuance, uncomplicated financing documents save both administrative and legal expenses. For issuers expecting to do multiple transactions over a period of time, additional savings can be attained by use of a Advance Payment/Purchase Agreement.

What type of equipment should I consider leasing?

Virtually any type of essential use equipment may qualify for a Lease/Purchase Agreement. In general, terms may be offered from two to ten years or more, depending on the useful life of the asset.