Lease Financing
Today’s administrators face a diverse array of budgetary and operating challenges. As budgets and resources are reduced at the local level, funding the immediate and long term needs of your community becomes more difficult. The need for financing to purchase new equipment and facilities is growing. Lease financing is the most widely used method to finance essential use equipment and facilities while improving the management of cash flow.
When available, the tax-exempt interest feature of lease financing has tremendous value to local governments across the country. The interest earnings under a properly structured and documented lease is exempt from federal income tax to the lender under the same tax laws that enable a municipal bond to carry a tax-exempt rate. Because the lender does not pay federal tax on the interest earned, the tax-exempt lease carries a much lower interest rate than other kinds of leases and installment loans thus significantly lowering the cost of financing for the borrower.
Local governments including cities, villages, towns, boroughs, counties, special tax districts and authorities qualify for this benefit on nearly all essential equipment. Volunteer fire corporations qualify for this benefit when financing fire trucks and stations, but not ambulances and equipment. This type of financial instrument is also referred to as a “government lease-purchase”, a “municipal lease” or a “tax-exempt lease”. While documented as a lease, the characteristics are similar to a loan in that there is a principal component in each payment, and the lease can be paid off early if desired. Once the organization makes all of the lease payments, it owns the asset free and clear.
Because local government agencies are restricted from committing funds beyond one year without voter approval, lease financing for them includes an annual non-appropriation clause which provides necessary options. In most cases, their obligation terminates if the governing body fails to appropriate funds to make the renewal year’s lease payment. Because of this provision, neither the lease nor the lease payments are considered debt. Non-appropriation is not an event of default but the borrower returns the asset.
Lease financing makes the acquisition of essential use equipment extremely cost effective.
Structure and Terms
| Lease Terms: | |
|---|---|
| Fire Trucks | Up to 15 years |
| Other Trucks | Up to 7 years |
| Equipment and Vehicles | Up to 5 years (7 years at times) |
| Facilities | Up to 20 years (30 years for some projects) |
| Payment Structure: | |
|---|---|
| Payment Frequency | Annual, Semi-Annual, Quarterly, Monthly or Custom |
| First Payment Due Date | Deferrals up to one year after lease starts for annual payments |
| Down Payments | Optional |
| Custom | Step up or step down structures to accommodate budget constraints |
| Early Payoffs | Permitted throughout the lease |
| What can be Lease Financed? | |
|---|---|
| Personal Property | Garbage trucks, street sweepers, sewer trucks, landfill compactors, construction (yellow iron), fleet vehicles, fire trucks and fire equipment, ambulances, communications, computer and software, plus any essential use equipment. |
| Real Property | Public Works Offices, Fire Stations, EMS Stations, Training Facilities, City Halls, and Administrative Offices (New, Renovations and Additions) |
Why do local governments use lease financing?
- Lease financing helps overcome budget challenges.
- Lease financing allows the acquisition of equipment urgently needed without incurring long term debt.
- Lease financing saves money by replacing maintenance intensive older equipment.
- Lease financing levels capital expenditures in budgets from year to year.
- Lease financing preserves cash for other projects that are either harder to finance or cannot be financed.
- Lease financing enhances your cash position.
- Lease financing spreads the cost of a truck or equipment over its useful life rather than burdening one fiscal period (group of tax payers) with the entire cost.
- Lease financing is relatively simple to complete and allows administrations to implement buying decisions quickly. In comparison, bonds take longer to implement, could require a vote, and are too expensive (legal and issuance cost) for smaller acquisitions.
- Lease financing pays for today’s equipment with tomorrow’s dollars.