What is a Tax-Exempt Lease?

Today's local government 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.

Tax-exempt lease financing is one of the most successful methods used to purchase equipment and facilities while improving the management of cash flow. The tax-exempt feature of lease-purchase financing is proven to be beneficial to local governments across the country.

A tax-exempt lease is the most common financing method used in the purchasing of equipment and facilities. This type of financial instrument is also referred to as "government lease-purchase" and/or a "municipal lease". While they are documented as a lease, they have characteristics similar to a loan in that you own the asset at the end and they can be paid-off early if desired.

The interest earnings under a properly structured and documented lease is exempt from federal income tax under the same tax laws that enable a municipal bond to carry a tax-exempt rate. Because the lessor 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.

These financing vehicles are structured as a lease to accommodate the fiscal funding restrictions of political subdivisions. In most cases, their obligation terminates if the leesee fails to appropriate funds to make the renewal year's lease payments. Because of this provision, neither the lease nor the lease payments are considered debt. Non-appropriation is not an event of default but the Lessee may lose the asset.

Tax-exempt leases make the acquisition of capital equipment and facilities affordable to all local governments.

Structure and Terms

Lease Terms:
	Equipment:	Up to 15 years (Depending on asset type)
	Facilities:	Up to 20 years (30 years for some projects)

Payment Structure:
	Payment Frequency:	Annual, Semi-Annual, Quarterly, or Monthly
	First Payment due Date:	Up to one year after delivery

Who Qualifies?

Under Section 103 of the Internal Revenue Code, the following types of government agencies are eligible for tax-exempt financing with some exceptions:

Cities, Towns, Boroughs and Villages
Counties
States
Schools and Universities
Volunteer Fire Departments (trucks and stations only)
Districts and Authorities
Hospitals
501C3 Corporations
Indian Nations

What can be Leased?

Personal Property Including:

Modular buildings, hardware, software, telecommunication, road equipment, copiers, health care, medical aircraft, 911 systems, fire trucks, ambulances, garbage trucks, street sweepers, sewer vacuum trucks, snow plows, school and transit buses, energy related equipment - lighting and HVAC, police cars, computer and radio, cafeteria, librarys, and more.

Real Property Including:

Fire stations, police stations, jail/detention facilties, city halls, school buildings, athletic fields, water and waste treatment plants, improvements, add-ons.

Why do Government Agencies use Tax-Exempt Leases?

1. They do not have funds to pay for the project.
2. Leasing will help them overcome current budget restrictions.
3. Leasing allows them to acquire equipment they urgently need.
4. Leasing enables them to save money by replacing maintenance intensive older equipment.
5. Local Governments have funds but want to keep their funds for future or unexpected needs.
6. The interest on a tax-exempt lease is approximately the same as the interest that can be earned on funds properly invested, so the cost of keeping their funds "in the bank" is minimal. A lease can offer the opportunity to preserve cash for other projects for which leasing is not an alternative.
7. They want to spread the cost of their asset over its useful life rather than charge one fiscal period with the entire cost.
8. Tax-Exempt leases are relatively simple to complete and allow the local governments to implement the buying decisions quickly. In comparison, bonds take longer to implement, could require a vote, and are too expensive for smaller acquisitions.
9. Tax-exempt leases have no obligation costs.
10. Because equipment inflation is outpacing the cost of tax-exempt leases, you can actually save money by leasing equipment now rather than waiting until you have enough cash to buy it. In other words, the interest cost you may be trying to avoid will be more than replaced by the inflation in the cost of fire trucks - and, if you lease your equipment now, your community will benefit immediately from the added service of the new equipment.