montgomery-leasing-what-is-municipal-leasing

What Are Municipal Leases?

Municipal Leases are agreements entered into by state, county, city, town, and other local governments to acquire essential equipment by paying for it over time. The payments include both principal and interest. For investors, the most distinctive feature of municipal leases is that the interest received is exempt from federal income taxes.

Municipal Leases can take several forms depending on state and local laws. They come in widely varying amounts, from a few thousand dollars to several million. And they are usually short term, from three to eight years.

From a strict legal standpoint, a municipal lease is not really a “lease”. The equipment is not rented and used for a time and then returned to the owner, but actually is bought by the municipality and paid for over time. The municipality owns the equipment, subject to a lien. The municipality only borrows the money used to acquire it.
The principal and the tax-free interest on the remaining balance are then repaid periodically, usually in equal amounts over a fixed period of time. Payments are made in advance or arrears, often on a monthly basis, but sometimes quarterly, semi-annually or annually.

State and local governments use municipal leases to acquire everything from cars, trucks and emergency vehicles to computers, other office equipment and even buildings. Virtually any piece of equipment that is needed by a municipality can be purchased using a municipal lease.

TYPES OF MUNICIPAL LEASES

Municipal Leases are usually written as installment purchase contracts, conditional sales contracts, or lease purchase agreements. The municipality takes immediate possession of the equipment and either acquires title with a lien (installment purchase), or takes title at the end of the lease period (conditional sale, or has the right to
purchase the equipment at the end of the lease period for a nominal sum, usually $1.00 (lease-purchase).

A “Certificate of Participation” is a specific type of municipal lease in which public or private investors are invited to purchase shares in a single lease, usually a large and fairly long-term one, which is offered to investors directly by the municipality. The term also is used for the sale of partial interests in a lease to a number of  investors by the lessor.

“Master Leases” are written to allow the addition of more equipment or property to a lease agreement in the future under the same terms and conditions.

WHO LEASES? A VARIETY OF U.S. MUNICIPALITIES  NOW USE LEASING

There are more than 88,000 state and local municipal governments in the United States. In addition to states, counties, and cities, municipal leases may be used by a wide range of other local government agencies, including:

• School districts
• Airport and port authorities
• Fire districts
• Sanitation and water districts
• Housing authorities
• Municipal hospitals
• Cities
• Counties
• States
• 501(c) 3 Organizationa
• Native American Tribes

montgomery-leasing-leasing-to-federal-government

Leasing To The Federal Government

OVERVIEW

The Federal Government may acquire equipment by purchasing it outright, renting it or through lease financing.
Their decision to lease is based on budgetary restrictions and the planned use of the equipment. When they
decide to lease, the responsible contracting officer will receive vendor proposals, which upon request by the
government, will include finance Terms & Conditions (T’&C). Upon award the vendor is called a Contractor.
The Contractor provides the equipment per the terms of the award and will be the party to whom the
government issues it’s Purchase Order (P.O.) with all the T&C inside. The Contractor, working with a 3rd Party
funding source such as Leasource Financial Services (Assignee), assigns it’s interest in the stream of payments
to the assignee and is able to book a cash sale.

Reciprocal Immunity Agreement. Sixty years ago, the FED and the States agreed to exempt each other’s debt
instruments from any applicable income tax liability. Municipal debt instruments, including leases, are exempt
from both federal and state income tax. Although federal leases are exempt from state income tax per the
Agreement, they are federally taxable the same as Treasury Notes and bonds and other federal debt instruments.
Federal lease finance rates are substantially higher than municipal rates because they are federally taxable.
They also bear a greater default risk.

Assignment of Claims Act. The participation of financial institutions in federal leases is allowed under the
Assignment of Claims Act of 1940. Under the Act, payments due from the Government to a vendor
(Contractor) for an equipment lease may be assigned out of the original government purchase order while
leaving warranties and other issues with the Contractor.

Federal Acquisition Regulations (FAR). Federal procurement is highly regulated. The FAR that determines
individual agency policy & procedures.

TYPES OF LEASES

A. Lease To Ownership Plan (LTOP)
Under the LTOP, the Government intends to own the equipment. The Government’s equity in the equipment
increases with each payment and fully amortizes over the term of the lease with no balloon payments due at the
end.

B. Lease with Option to Purchase (LWOP)
Under the LWOP, the Government has the option to purchase the equipment at specified times throughout the
lease and at the end of the lease term for a predetermined price. As each payment is made, credits accrue to the
Government, and the purchase option price is the cost of the equipment less any accrued credits. At the end of
the lease term, the Government may purchase the equipment for a previously agreed upon price, return it to the
Lessor or negotiate a new lease.

C. Straight Lease (Rental)
When using a Straight Lease or Rental, the Government does not have the intent to own the equipment, and
does not accrue any equity in the equipment. Payments are made over the term of the lease. At the end of the
original term, the equipment is returned to the Lessor or a new lease is negotiated.

RIGHTS OF TERMINATION

Pursuant to the FAR, the Government enjoys the right to terminate contracts for a variety of reasons. These
rights typically pass through to the Government’s contractor.

Termination for Default
Under the FAR, the Government may, at its sole discretion, terminate a contract for any default of the
contractor (FAR 52.249-8). This clause is mandatory in all federal contracts. Default includes, but not limited
to, non-performance of either the equipment or the Contractor. By exercising this right, the Government is not
obligated to make any additional payments to the contractor or its Assignee/Lessor. The defaulted contractor
may also be liable to the Government for any costs incurred by the Government in acquiring the defaulted
products from a more expensive source.

Financing between the Contractor and Assignee/Lessor is usually on a non-recourse basis. Assignment
documents between the Contractor and Assignee/Lessor contains language which clearly indemnifies the
assignee against any loss due to performance deficiencies. In this event, the Contractor is obligated to make the
Assignee/Lessor whole, including payment for loss profits. The Contractor is then free to pursue further
negotiations with the Government.

Termination for Convenience
Under FAR 52-249-2, Termination for Convenience (T for C) is mandatory in all fixed-price contracts over
$100,000.00. Unlike Termination for Default, it is customary for the leasing company to assume the risk of
Termination for Convenience. Under this termination right, the Government has the right to terminate the lease
at any time it is determined to be in the best interest of the Government. They may not, however, exercise this
right in order to avoid contractual obligations. In the event of a T for C, the Contractor is required to assist the
Assignee/Lessor in re-marketing the returned equipment.

The best protection for all parties is to insure that the equipment is essential and that its useful life exceeds the
lease term.

Termination for Non-appropriation.
As with municipal leases, most leases to the Government are subject to annual appropriations. The Government
may terminate the lease without liability at the end of each year if funds are non-appropriated.
Non-appropriation is a risk that is assumed by the Assignee/Lessor.

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Things Your Mother Never Told You About Federal Government Leasing

The United States federal government leases an enormous amount of equipment every year – and
it’s appetite for leasing continues to grow. Over the past decade, hundreds of federal agencies and
departments have discovered and embraced leasing as a way to acquire needed equipment.

Under the Assignment of Claims Act of 1940, as amended, 41 U.S.C. 15, 31 UI.S.C. 3727, as
implemented by the Federal Acquisition Regulations (FAR), 48 C.F.R. subpart 32.8., a
government contractor may release their interest in lease (LTOP or LWOP) payments to a 3rd
party by executing an Instrument of Assignment of Claims. The 3rd party assignee forwards this
with a Notice of Assignment to the government and is entitled to receive all future lease
payments due under the contract or government purchase order. Payment made by the
government and/or the contractor will not discharge their mutual obligations under the contract.

Federal contracting officers don’t normally sign a lease. They incorporate terms & conditions of
the Federal Acquisition Requirements (“FAR”), inside the purchase order issued to the contractor
for goods and services. The Contractor, in turn, executes a Federal Lease Financing Agreement
with a Lessor/Assignee that permit the assignment of payments, but none of the other
obligations, to a 3rd party under the Assignment of Claims Act of 1940, and is paid the full
invoice price at the time the government accepts the equipment. By accepting a Purchase Order,
the contractor acknowledges responsibility for understanding what all the little numbers mean –
numbers that take on significant meaning if certain events take place, such as:

Cancellation for Non-Appropriation. The Government may cancel a contract if funds for
subsequent years are not approved. They actually issue a new purchase order every year for the
payments due in that fiscal year (October 1 thru September 30) no matter the term of an
installment agreement. If a Prime Contract is terminated early, for example, the Government
would simply not issue a new Purchase Order for next year’s payments and the installment
agreement ends on September 30 of the current year irrespective of the remaining number of
payments.

Cancellation for Convenience (FAR 52-249.2). Under this FAR, the Government has the right
to terminate the Order at any time it determines to be in the best interest of the Government. They
may not, however, do so to avoid contractual obligations.

Cancellation For Default (FAR 52.249.8). The Government may, at its sole discretion, terminate
a contract for any default of the contractor including, but not limited to, non-performance of the
equipment or by the contractor – even if the contractor is not the original manufacturer.

Cancellation for Non-Appropriations and Cancellation for Convenience are investor risks.
Cancellation for Default is a different matter. In the event of a performance or equipment related
default the Lessor has the right to be made whole under terms of the Federal Lease Financing
Agreement. It always remains the obligation of the contractor to perform during the contract
period. Again, the contractor is merely selling the payment stream due under the government P.O.
but none of the other obligations, thus making him responsible over the full term of the lease.
Normally the three parties work together to best resolve issues well before an actual default takes
place and there are certain limitations placed on the government in this context.

Who buys Federal leases?
Federal leases have a thin investor pool due to inherent risks already discussed. Although
government financial statements are not normally an issue, a perspective Lessor will, at a
minimum, want to know the following information prior to purchasing:
- Name of Agency
- Collateral description and cost
- Lease term
- Why the equipment is essential.
- What the equipment is replacing (if any) and how old is the equipment being replaced.
- Source of funds to make the payments.
- Copy of the completed government P.O.

Red Flags!
a) Prime Contract whose termination date is shorter than the desired term of a new lease.
b) Non-essential equipment

Paper Flow
1) Contractor/Vendor solicits payment terms from Broker subject to credit.
2) Contractor responds to government Bid including a lease payment quote.
3) Government makes award to Contractor and issues them a P.O.
4) Contractor provides Lessor a copy of the Government P.O.
5) Lessor prepares the necessary documentation for signature.
6) Executed documents are returned to Lessor.
7) Transaction is funded upon final Acceptance. Funds are wired to the Contractor.