Municipal Lease Purchase
The IRS requires these transactions be a) a lease to ownership plan (installment purchase); b) for equipment that is essential to the government function; and c) have no significant residual or balloon payment at the end of the contract term.
A Municipal Lease is a contract that has many of the characteristics of a standard commercial lease, with three primary differences:
In a Municipal Lease, the intent of the lessee is to purchase and take title to the equipment. The financing is a full payout contract with no significant residual or balloon payments at the end of the lease term.
The lease payments include the return of principal and interest, with the interest being exempt from Federal income taxation to the recipient. Typically, a tax-exempt interest transaction will be financed at interest rates lower than equivalent commercial financing.
The Municipal Lease provides for termination for non-appropriation of funds by the Government Agency.
Termination for non-appropriation distinguishes a Municipal Lease from all other types of leases. The clause normally is required so that the lease does not constitute a long-term debt instrument (which would require a lengthy process for issuance). The obligation to pay is subject to appropriations being made annually over the term set forth in the lease. To justify non-appropriation, the municipality generally must certify that it does not have funds to continue payments and has made its best efforts to procure funds by requesting the funds in its budget.
A Municipal Lease offers several advantages over alternative methods of financing. First and foremost is simplicity. Under most state statutes, municipal contracts with terms of over one year require significant investments in time and money in order to comply with municipal debt restrictions. Since a Municipal Lease is, in effect, a year-to-year obligation, many of these requirements do not apply. The ease of executing a Municipal Lease minimizes the elapsed time and the expenses associated with issuing any kind of certificate of indebtedness or bond.
Another major advantage is economy. A Municipal Lease is most often the least expensive method of financing equipment that costs from $5,000 to $2,000,000 or more. The very slight interest rate advantage offered by a municipal bond is offset by the legal and administrative costs incurred in generating the bond issue. The Municipal Lease requires neither the bond election nor the long-term administration of the bond. The Municipal Lease exerts no impact on the organization’s credit availability and provides greater flexibility in allocating available resources. Additionally, a Municipal Lease does not require the separate legal or underwriting fees that the municipality would incur with a bond issue. Leasing provides a rapid solution to the municipality. Other than accrued interest, there is no penalty for early buyout of the lease. Municipal Leases are not true leases, but are firm purchase agreements and are similar to conditional sales contracts or installment purchases subject to termination in the event of non-appropriation.
WHO QUALIFIES FOR MUNICIPAL LEASES?
Municipal Lease transactions can be provided for states and their political subdivisions such as counties and cities. Departments or agencies such as state universities, fire and police departments, school districts, sanitation, hospitals, or special districts may also be eligible. To be qualified, a governmental entity must possess one of three characteristics of a government; they must possess the power of eminent domain, police powers, or the power to levy taxes. The fact that an agency is supported by government funds or is not subject to sales tax does not always ensure qualification. Non-profit corporations do not qualify for Municipal Leasing.
DOCUMENTATION
Alliance Funding Group (AFG) provides all documentation for the transaction. On occasion, the lessee will be required by law to employ local jurisdiction lease documents and supporting legal instruments. When this occurs AFG makes every reasonable effort to accommodate these requirements. In all cases, as a Municipal Lease specialist, AFG provides appropriate documentation to support the transaction.
WHAT CAN BE LEASED?
- Virtually any type of personal property:
- Computers and Software
- Office Equipment
- Furniture
- Surveillance Equipment
- Vehicles and Accessories
- Heavy Equipment
- Refuse Equipment
- Telephone and Communications Equipment
- Modular Structures
- Heat/Air Conditioning Equipment
- Energy Management Equipment
WHY CHOOSE A MUNICIPAL LEASE?
Quick Delivery: Lease financing allows a government entity to obtain needed equipment immediately without waiting for voter approval through a bond issue. This means increased productivity for the government entity.
Non-Appropriation: In most jurisdictions, the authority of an administrator to enter into debt or obligation of future funds is severely limited. For this reason, a Municipal Lease is characterized by a non-appropriation clause that specifies that the lease can be terminated in the event funds are not made available in subsequent fiscal years. Title to the equipment usually resides with the lessee so that the Government Agency’s sales and property tax exemptions apply.
$1 Buyout: The Lessee owns the equipment at the end of the lease term.
Early Purchase Option: If funds become available, the Government Agency has the option to buy-out the lease at any time after the completion of the first fiscal year. A detailed amortization schedule is provided for each transaction.
Flexible Terms: The payment can be tailored to suit the needs of each Government Agency. Annual, semi-annual, quarterly and monthly payment intervals are available with terms extending to the useful life of the equipment. Deferrals, down payments and advance payments can also be arranged. Terms reflective of the useful life of the equipment have a lower interest expense as compared to long-term bond issues. Lessees can choose payment schedules most suited to their needs, including length of contract, payment interval and advance or arrears payments. Up to 100% of the equipment cost can be financed as well as training and maintenance.
Nothing Down: under most payment plans, there is any down payment or security deposit required. However, structuring the lease with advance payments may lower the net cost of financing to the Lessee. AFG can also defer the first payment up to one (1) year; however, a down payment is required with the delayed payment option.
Because the acquisition costs are spread over multiple fiscal years, a Municipal Lease removes budgetary constraints, permits the purchase of needed equipment, allows an upgrade of the equipment, and provides the ability to obtain additional units.