What is a Tax-Exempt Lease?

Today's public works administrators face a diverse array of budgetary and operating challenges. With increased demands for updated equipment, budgets are rarely up to the task. As budgetary challenges increase at the local level, funding the immediate and long term needs of your community become more difficult.

The need for financing to purchase new equipment and facilities is growing.

Tax-exempt lease financing is on of the most successful methods used to purchase refuse trucks, containers, sweepers, vacuum trucks, recycling, solid/liquid waste disposal and other equipment while improving the management of cash flow. The tax-exempt feature of lease-purchase financing is proven to be beneficial to government agencies across the country.

A tax-exempt lease is the best solution. 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 they own it at the end and they can be paid-off early if desired.

The interest earnings under a properly structured and documented lease are 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 department 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 leesee will lose the asset.

Tax-exempt leases make the acquisition of equipment and facilities affordable to all departments.

Structure and Terms

Lease Terms:
	Equipment:	Up to 10 years
	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 and Towns
Counties
States

What can be Leased?

Personal Property Including:

Refuse collection and removal including compactors and containers
Street Maintenance, including sweeper and vacuum trucks
Dump Trucks and all road construction and maintenance equipment
Snow Removal
Building Security
Solid waste treatment/disposal and recycling equipment
Water treatment and storage
Any essential use personal property you might consider

Real Property Including:

Administrative offices
Equipment storage and maintenance facilities
Renovations and add-on projects

Why do Government Agencies use Tax-Exempt Leases?

1. They do not have funds to pay cash.
2. Leasing will help them overcome budget restrictions.
3. It allows them to acquire equipment they urgently need.
4. Leasing enables them to save money by replacing maintenance intensive older equipment.
5. They 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 equipment over its useful life rather than charge one fiscal period with the entire cost.
8. Fire truck leases are relatively simple to complete and allow the departments 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 origination costs.
10. Because most equipment categories incur regular inflation that outpaces the cost of tax-exempt leases, your department can actually save money by leasing 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 equipment - and, if you lease now, your community will benefit immediately from the added protection your equipment provides.