A Municipal Lease is a contract that has many of the characteristics of a standard commercial lease, with three primary differences:
- In a Municipal Lease, the intent of the lessee is to purchase and take title to the equipment. The financing is a full payout contract with no significant residual or balloon payments at the end of the lease term.
- The Municipal Lease provides for termination for non-appropriation of funds by the Government Agency.
- The Municipal Lease provides for termination for non-appropriation of funds by the Government Agency.
Termination for non-appropriation distinguishes a Municipal Lease from all other types of leases. The clause normally is required so that the lease does not constitute a long-term debt instrument (which would require a lengthy process for issuance). The obligation to pay is subject to appropriations being made annually over the term set forth in the lease. To justify non-appropriation, the municipality generally must certify that it does not have funds to continue payments and has made its best efforts to procure funds by requesting the funds in its budget.
A Municipal Lease offers several advantages over alternative methods of financing. First and foremost is simplicity. Under most state statutes, municipal contracts with terms of over one year require significant investments in time and money in order to comply with municipal debt restrictions. Since a Municipal Lease is, in effect, a year-to-year obligation, many of these requirements do not apply. The ease of executing a Municipal Lease minimizes the elapsed time and the expenses associated with issuing any kind of certificate of indebtedness or bond.
Another major advantage is economy. A Municipal Lease is most often the least expensive method of financing equipment that costs from $5,000 to $20,000,000 or more. The very slight interest rate advantage offered by a municipal bond is offset by the legal and administrative costs incurred in generating the bond issue. The Municipal Lease does not require a bond election, or the long-term administration of the bond. The Municipal Lease exerts no impact on the organization's credit availability and provides greater flexibility in allocating available resources. Additionally, a Municipal Lease does not require the separate legal or underwriting fees that the municipality would incur with a bond issue. Leasing provides a rapid solution to the municipality. Other than accrued interest, there is no penalty for early buyout of the lease. Municipal Leases are not true leases but are firm purchase agreements. They are similar to conditional sales contracts or installment purchases subject to termination in the event of non-appropriation.
Municipal Lease transactions are governed by the Internal Revenue Code. Under these requirements, a qualified state or local Government Agency or governmental subdivision can finance property acquisitions under contracts in which the interest income the leasing company derives will be exempt from Federal income tax. A tax-exempt interest transaction typically is financed at an interest rate below equivalent commercial financing. The IRS requires these transactions be a) a lease to ownership plan (installment purchase); b) for equipment that is essential to the government function; and c) have no significant residual or balloon payment at the end of the contract term.
Who qualifies for municipal leases?
Municipal Lease transactions can be provided for states and their political subdivisions such as counties and cities. Departments or agencies such as state universities, fire and police departments, school districts, sanitation, hospitals, or special districts may also be eligible. To be qualified, a governmental entity must possess one of three characteristics of a government; they must possess the power of eminent domain, police powers, or the power to levy taxes. The fact that an agency is supported by government funds or is not subject to sales tax does not always ensure qualification. Non-profit corporations do not qualify for Municipal Leasing.
RNO Financial/CNG Leasing provides all documentation for the transaction. On occasion, the lessee will be required by law to employ local jurisdiction lease documents and supporting legal instruments. When this occurs RNO Financial/CNG Leasing makes every reasonable effort to accommodate these requirements. In all cases, as a Municipal Lease specialist, Government Leasing, provides appropriate documentation to support the transaction.
What can be leased?
Virtually any type of personal property:
- • Computers and Software
- • Office Equipment
- • Furniture
- • Vehicles and Accessories
- • Heavy Equipment
- • Refuse Equipment
- • Telephone and Communications Equipment
- • Modular Structures
- • Heat/Air Conditioning Equipment
- • Energy Management Equipment
Why choose a municipal lease?
Quick Delivery: Lease financing allows a government entity to obtain needed equipment immediately without waiting for voter approval through a bond issue. This means increased productivity for the government entity.
Non-Appropriation: In most jurisdictions, the authority of an administrator to enter into debt or obligation of future funds is severely limited. For this reason, a Municipal Lease is characterized by a non-appropriation clause that specifies that the lease can be terminated in the event funds are not made available in subsequent fiscal years. Title to the equipment usually resides with the lessee so that the Government Agency's sales and property tax exemptions apply.
$1 Buyout: The Lessee owns the equipment at the end of the lease term.
Early Purchase Option: If funds become available, the Government Agency has the option to buy out the lease at any time after the completion of the first fiscal year. A detailed amortization schedule is provided for each transaction.
Flexible Terms: The payment can be tailored to suit the needs of each Government Agency. Annual, semi-annual, quarterly and monthly payment intervals are available with terms extending to the useful life of the equipment. Deferrals, down payments and advance payments can also be arranged. Terms reflective of the useful life of the equipment have a lower interest expense as compared to long-term bond issues. Lessees can choose payment schedules most suited to their needs, including length of contract, payment interval and advance or arrears payments. Up to 100% of the equipment cost can be financed as well as training and maintenance.
Nothing Down: Under most payment plans there is no down payment or security deposit required. However, structuring the lease with advance payments may lower the net cost of financing to the Lessee. RNO Financial/CNG Leasing can also defer the first payment up to one (1) year; however, a down payment is required with the delayed payment option.
Because the acquisition costs are spread over multiple fiscal years, a Municipal Lease removes budgetary constraints, permits the purchase of needed equipment, allows an upgrade of the equipment, and provides the ability to obtain additional units.
How does it work?
RNO Financial/CNG Leasing is flexible in regard to rate, term, payment structure and documentation. Prior to making a product presentation or submitting a bid to a Government Agency, please call us at + 1 (503) 901-5566 for a current rate quote and a discussion of lease contract options. When the agency agrees to the lease, RNO Financial/CNG Leasing will prepare and forward documents the same day.
In many instances, a Municipal Rental contract can be more appropriate than a Municipal Lease Purchase contract. When a decision is being made between a Rental or Lease Purchase contract, it is essential that the administrator have a clear understanding of the differences between these two alternatives.
Often a government purchase entity is constrained by local legislation from entering into lease contracts without bidding or voter referenda. In some instances an agency may have a limited lifespan, therefore there is no desire to own the property after a fixed period. In still other situations, rapidly changing technology may lead to the conclusion that long-term ownership is not a beneficial outcome. In these situations, a Municipal Rental may be the appropriate financing answer. A Municipal Rental is not a month-to-month contract. A Municipal Rental is fixed length financing in which the leasing company purchases the property and where possession reverts to the leasing company at the completion of the contract term. Additionally, the Municipal Rental is not income tax exempt financing. A Rental will frequently have higher payments than a Municipal Lease Purchase due to the higher interest rates.
A Municipal Rental possesses the same non-appropriation provisions as a Municipal Lease. In most jurisdictions, an administrator may not enter into a contract that obligates funds beyond the current fiscal year. With few exceptions, the courts have held that a non-appropriation clause, which allows for termination of the contract should funds not be appropriated in subsequent fiscal years, is a legal means to avoid an unauthorized assumption of debt. A valid non-appropriation is the only cause for premature termination of either a Municipal Lease or Municipal Rental. Further, the lessee may obtain an option to purchase - with the option purchase price set forth in the Municipal Rental Agreement.
The Municipal Rental does provide some options to the Lessee. At the completion of the original lease contract, the lease may be extended in one-year increments at the same terms and conditions of payment as the original contract. Whenever the option to extend is not exercised, the leased property must be surrendered to the lessor or the lessor's designated agent. In the event the lessee determines that ownership of the property would be advantageous a Municipal Rental can be bought out or converted at any time to a lease contract.
When appropriate, a Municipal Rental may serve the needs of the Lessee. For a quote, for information on particular situations, or for comparison of lease and rental alternatives, please call +1 (503) 901-5566.
Leasing vs. Bond Issues
Characteristics of lease purchase financing
- 1. Voter approval not needed.
- oFunding comes from annual operating budget
- o Non-appropriation clause provides cancellation provision if future funds are not available.
- 2. A lease APR compares favorably with Bond issues when issuance costs and staff time are taken into consideration.
- 3. Proves effective for terms under 10 years and less than $10 million.
- 4. Lease documentation is sampler and the process moves faster. Staff time and soft costs are minimized.
- 5. No additional fees or reporting requirements.
- 6. Leases renew on a year-to-year basis and are dependent on annual operating budget for funding thus are not considered debt. Keeps future bond alternatives open.
- 7. Early buyout options are available.
- 8. Finance only what is needed.
- 9. Provides ability to terminate without penalty if funding is not available.
- 10. Matches expected useful life of leased property to the term of lease.
Characteristics of bond issues
- 1. Need voter approval
• Risk loss of referendum
• Cost of election and advertising
- 2. Issuance cost will be high and measurably affects true borrowing rates.
- 3. Appropriate for large issues and for long terms to lock in low rates.
- 4. Bond issuance process is slow, consumes staff time and incurs hidden expenses and overhead costs.
- 5. Costs continue after bonds are sold.
• Trustee fees
• Compliance reports
• Footnote disclosure and added audit fees
• Periodic rating agency reviews and fees
- 6. Restricts future bond issues because of covenant constraints.
- 7. Generally will have call provisions with prepayment penalties after a period of time.
- 8. Bond issues may not exactly match capital needs. Excess bond proceeds may end up in general fund and earn less than the borrowing rate or general funds will be used to make up balance of cash needed.
- 9. Commits the government entity to fixed payments regardless of local economy cycles.
- 10. Bond term may exceed life of equipment.
Obtain a Municipal Quote
For a detailed quote, please call RNO Financial/CNG Leasing: +1 (503) 901-5566 or click the "Contact Us" link above. Provide us with the lessee name, property description and cost, the desired term, and a desired payment amount. We will respond immediately with a customized quote. Upon acceptance of the quote and receipt of the purchase order, RNO Financail/CNG Leasing will generate the necessary documentation and forward it for signature.