Municipal Lease Purchase
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.
A Municipal Lease is a contract that has many of the characteristics of a standard commercial lease, with three primary differences:
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 $2,000,000 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 requires neither the bond election nor 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 and are similar to conditional sales contracts or installment purchases subject to termination in the event of non-appropriation.
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.
Alliance Funding Group (AFG) 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 AFG makes every reasonable effort to accommodate these requirements. In all cases, as a Municipal Lease specialist, AFG provides appropriate documentation to support the transaction.
WHAT CAN BE LEASED?
Virtually any type of personal property:
WHY CHOOSE A MUNICIPAL LEASE?
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.
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