Municipal Lease/Purchase financing is designed to compliment, rather than replace bond
financing. As governmental units have become cognizant of the advantages of Municipal
Lease/Purchase Agreements over bonds, they have increased their utilization of this
unique financing vehicle to satisfy many of their equipment and facility financing needs.
The advantages of Municipal Lease/Purchase Agreements are as follows:
A) No Cash Down Payment – These financings may provide for 100% of the
equipment purchase price or facility construction cost plus related expenses. The
governmental lessee only makes periodic lease payments. Substantial down
payments may reduce interest rates charged.
B) Tax-Exempt Interest – Properly structured, these transactions result in each
payment representing some principal and some interest. The Internal Revenue
Service has determined that interest paid in this manner is exempt from federal
income tax. The interest may also be exempt from state and local income tax.
Charter schools do not directly qualify for tax exempt financing.
C) No Public Debt Created – Since the lease payments due in the transaction are
subject to annual appropriation, the obligation created by the lease is not subject
to constitutional or statutory debt limitations in most states. Since public debt
is not created, voter approval for a Municipal Lease/Purchase transaction is not
usually required.
D) Matching Cost with Revenue – Payment obligations correspond more closely
to the useful life of the asset(s) financed by the lessee. A full cash purchase
charges one year’s operating budget with the cost of an asset, which will be in use
for several years. Lease/Purchase transactions can and should be designed to
match the finance terms with the expected useful life of the asset, thereby
spreading the cost over the budgets for all the years benefiting from the use of the
asset. Amortization can be designed on a monthly, quarterly, semi-annual, or
annual basis or even on a SKIP payment basis.
E) Flexibility – Shorter lead time to arrange a financing, as the procedural aspects
of traditional bond financing may be complicated by rigid constitutional
requirements which serve capital project financing control, but are inflexible for
asset acquisitions and future refinancings.
