MOST COMMONLY ASKED QUESTIONS

 

1. What is a tax-exempt municipal lease?

A tax-exempt municipal lease is a financing transaction of the installment sale type in which the lessee is a body of state or local government, the payments are structured to consist of principal and interest, and at the end of the financing term the lessee retains full ownership pf the property financed for a $1 purchase option.

2. What is tax-exempt?

The interest portion of the payments due under a properly structured municipal lease is free from federal income taxes in the same fashion as the interest payments on a municipal bond.

3. Why do municipalities lease?

The overriding reason is to spread the costs of capital acquisitions over several fiscal periods. This need can arise for several reasons.

1. Many governments lack the revenues to make outright cash purchases.
2. The governmental entity may face a backlog of capital replacement needs that is too large to finance from a single year's budget.
3. The approval process for a lease is often simpler and quicker than for alternatives means of financing. Funding for each yearly payment is accomplished through the normal budget process and is often simpler to obtain through a capital budget.
4. There is often a need to spread the cost of expensive equipment over several years to match the revenue available from user fees or other funding sources.
5. Tax-exempt municipal leasing is less expensive than other forms of leasing, allows municipalities to build up equity in the equipment, and provides full ownership at the end of the lease term.

4. Do I need a specialist in tax-exempt municipal leasing?

Tax-exempt municipal leasing is a highly specialized form of financing that involves legal issues and funding methods that are totally different from those found in traditional commercial leasing. Because the interest charges on the installment type payment of a municipal lease are exempt from federal, and sometimes even state and local taxes, a municipal leasing company offers attractive terms at rates below those found with traditional commercial financings. In addition to having a resource to specifically purchase tax-exempt municipal lease arrangements, a leasing company specializing in municipal lease arrangements can provide the necessary financial expertise to see that the lease agreement is properly structured, contain the necessary non-appropriation provisions, and comply fully with local, state and federal laws.

5. What should I look for in a municipal leasing company?

You should look for three things: experience in tax-exempt municipal leasing, flexibility and solid funding capability.

• Experience. Look for a company with direct, proven skills in implementing and closing tax-exempt municipal leases for a variety of equipment and deal sizes with lessees in various states in your marketplace.

• Flexibility. Flexibility if the key to the quality of service. No two municipal lease transactions are alike. Contracts range from the thousands to the millions of dollars and from simple one-time leases to master lease programs. Look for demonstrated ability to respond to particular leasing situations in a flexible fashion and in a timely manner.

• Funding Capability. Look for the ability to fund transactions of any size promptly. Most importantly, look for the ability to fix and hold committed rates from the time of proposal to the time of equipment delivery/installation and acceptance.