WHAT IS MUNICIPAL "TAX-EXEMPT" LEASING?

Due to recent reductions in revenue sharing and the many revisions to the tax code, financing of equipment acquisitions is becoming a real problem for governmental units. Traditional methods of financing in the public sector - appropriations or bond issues - are not always desirable and sometimes not possible.

Section 103 of the Internal Revenue Code of 1954, as revised in the Tax Reform Act Of 1986 specifies that any state, territory, or possession of the United States, or any of their political subdivisions, can qualify to take advantage of tax-exempt financing.

This includes:

State governments and agencies
County governments and agencies
City governments and agencies
Other public entities funded by state or local taxes

A municipality or other governmental body often needs to purchase equipment which costs too much to be paid for from the annual budget or which is to small too justify a bond issue. Often the useful life of specific equipment does not justify the long term of bond financing. There are also situations when equipment is needed and due to timing or debts limitations, it is not feasible to fund the purchase with a bond issue. When these circumstances occur, a deferred payment plan is necessary in order to allow the municipality to acquire the equipment.

Also, the interest earned on the obligations of any U.S. state, territory, possession or any of their political subdivisions, is exempt from federal income taxes. This means non-taxable or tax free income opportunities for lessors who, in turn, can pass the savings directly to governmental agencies in the form of lower lease rates.     Back to the top

WHY LEASE PURCHASE?

The typical method of funding municipal capital purchases is bonds. To establish the real cost to the taxpayer, it is necessary to add the issuance costs and underwriting discounts to the bonding rate. In addition, "Proposition 13" type legislation has made the taxpayers sensitive to new capital expenditures and more reluctant to pass bond issues.

More and more finance and purchasing officers are learning about the lease/purchase method and are recognizing the unique benefits.       Back to the top

WHAT ARE THE BENEFITS TO THE MUNICIPALITY?

The obligation may be treated as a true lease for balance sheet purposes, necessitating the recording as an encumbrance only those payments to be made for one fiscal period. The obvious benefit is reducing the overall debt picture for the municipality by showing only a portion of the total obligation.

No lump sum appropriation is required which facilitates the acquisition of more costly items that would normally require a bond issue.

Lease/purchase contracts eliminate the need for voter approval, in most cases.

The municipality as "Lessee" receives part of the benefit of investor tax free income in a lower lease rate and subsequently a lower monthly payment.      Back to the top

WHAT ABOUT DEBT LIMITATIONS?

Generally speaking, state, county and city governments can not appropriate and commit funds beyond the end of their fiscal period.

To handle this problem, most lease agreements include a "Non-Appropriation" clause. This clause allows the government entity, under certain circumstances, to terminate the lease in the event funds are not appropriated for an ensuing fiscal period.

Normally when the governmental entity uses commercial bank financing, the entire cost of the funding must be held in escrow to cover any non-appropriation situation. When this happens, the governmental entity is in effect paying interest on interest.      Back to the top

WHY IS A MUNICIPAL LEASE/PURCHASE TAX-EXEMPT?

The lessor or investor in a municipal lease/purchase is tax-exempt on the interest income received because one or more of the following conditions always appear in the municipal lease/purchase agreement:

1. Portions of periodic payments are made specifically applicable to an equity to be acquired by the municipality.

2. The equipment may be acquired at a price which is nominal in relation to its' value at the time when the option may be exercised.

3. Some portion of the periodic payment is specifically designated as interest.

4. Agreed "rental" payments materially exceed the current fair rental value.

5. The municipality will normally have the obligation to pay all insurance premiums and bear the loss of the equipment; to maintain or pay for the maintenance of the equipment; and pay, if applicable, all personal property or use taxes.

6. The total rental payments, plus any option price, bears some relationship to the price at which the equipment could have been purchased at the time the lease was commenced - plus interest and or carrying charges.       Back to the top

Lease/purchase can provide the kind of economical financing that eases annual cash flow difficulties for a municipality on a tight budget. Instead of having to make a large capital outlay, the acquisition of equipment can be made over an extended period of time. No additional payment is required at the end of the term to purchase the equipment.

Lease/purchase involves no expenses to the city, county or state other than amortization of the equipment cost plus the carrying interest. On the other hand, bonding means substantial legal fees, underwriting costs and the expense of an election.      Back to the top

All essential use equipment can be considered for lease purchase. Examples of this type of equipment are as follows:

MUNICIPAL GOLF CENTERS AND COURSE EQUIPMENT

COMPUTERS, TYPEWRITERS & WORD PROCESSORS

FIRE & SAFETY

ATHLETIC, FURNITURE & PRINTING

MEDICAL

PRINTING

VEHICLES

WATER & SEWER

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Bond Election Not Required

The need for a bond election, thus involving taxpayers in the decision, is eliminated. Because of the annual appropriation feature, tax-exempt municipal leases are normally not counted against the political subdivision's debt limit.

Flexible Terms

Lease terms generally are matched to the useful life of the equipment to be financed. Monthly payments provide for easy budgeting and in most cases only a minimum security deposit is required. Prepayment arrangements can also be made.

Builds Equity

Unlike rentals, a lease/purchase program permits the political subdivision to build equity with each payment. At the end of the lease term, the municipality owns the equipment at no extra cost.

Avoids Inflation Delay Costs

A lease/purchase program permits acquisition of needed equipment today! There is no need to build up capital improvement funds until an outright purchase is possible. No need to watch inflation staying one or two steps ahead of real purchasing power.

Quick Response

Funds for equipment purchases can usually be made available in a matter of days after the municipality has entered into a municipal lease contract. This is particularly important in times of emergency when bonds proceeds might not be available for weeks or even months and when the municipality needs the equipment now.

Emergency Purchase

Most state laws allow a governing body to purchase equipment without going . through the bid process whenever an emergency is declared. A lease/purchase program can be very useful in this situation.

Progress Payments

Partial payment with order or work in progress payments can often be set up on a lease/purchase program. The total amount of the equipment cost can be set aside upon commencement of the lease. The municipality begins payment on the lease contract and the progress payments are made by the lessor as they become due.      Back to the top

TAX-EXEMPT LEASING PROGRAM

Tax-exempt leasing is a unique and economical financing method that allows government entities to obtain FULL OWNERSHIP of capital assets on an installment basis, at favorable interest rates.

HERE'S HOW IT WORKS: A lease/purchase plan for the desired equipment is structured by Lehigh Capital Access, Inc.. At the end of the lease period the lessee will own the equipment by exercising an option to buy. The option price is typically $1.00. In addition, lease payments remain within your current budget year.

HERE'S WHY IT WORKS: Lehigh Capital Access, Inc. able to provide most municipal and state governmental entities with virtually any form of personal property under a lease/purchase plan, primarily because of the favorable tax consequences contained in Section 103 of the Internal Revenue Code and amended in the 1986 Tax Reform Act. This has the positive effect of creating non-taxable income to the lessor. The savings is passed directly to the municipality, the lessee, in the form of lower interest rates.

TAX-EXEMPT LEASING ALSO PROVIDES THESE BENEFITS: Obligations incurred by a governmental entity under a lease/purchase plan may be treated as a lease for debt limitation purposes. Consequently, your obligation will appear as an encumbrance only in, the amount due during one fiscal period. It will not be long term debt.

In most cases where date debt limitations laws apply, the lease may be terminated by the governmental entity if funds are not appropriated for the ensuing fiscal period. With this "non-appropriation" clause the governmental entity does not obligate itself, for debt limitation purposes, for more than one fiscal period even though the contract may be for a longer term.

Under tax-exempt leasing, down payments on equipment and lump sum appropriations are not necessary.

WHAT MUNICIPALITIES ARE ELIGIBLE? State agencies, state and city governments, school districts, port authorities, hospitals funded by governmental entities, fire and water districts, volunteer fire companies or an entity which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of a state or local government.

WHAT TYPE OF EQUIPMENT MAY BE LEASED? The list is almost endless. Almost any type of capital equipment essential to the functions of a governmental entity may be acquired through this program.

IF ONE OF THE MOST DIFFICULT TASKS AS A PUBLIC OFFICIAL IS OBTAINING MORE EQUIPMENT AND PROVIDING MORE SERVICES IN A MORE ECONOMICAL MANNER, CONSIDER TAX-EXEMPT LEASING.

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