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
• 501(c) 3 Organizationa
• Native American Tribes