The lease purchase financing market is estimated at over $20 Billion annually and growing. School districts across the country are focusing on tax-exempt lease purchase financing as an alternative funding tool to traditional bonds. Transaction sizes range from $100,000.00 to $100 Million to accommodate large and small projects. Tax-exempt capital leases offer simplicity, flexibility, speed, and attractive rates.
- Single Investor
- Transactions up to $100 Mil.
- Payment Flexibility
- Minimal Transaction Fees
- Competitive Rates
- Financing Terms up to 20 Yr.
- Low Interest Rate Risk
- Quick Funding
- Multiple Investors
- Transactions $10 Mil. plus
- Less Payment Flexibility
- High Transactional Fees
- Competitive Rates
- Financing Terms up to 30 Yr.
- Higher Interest Rate Risk
- Longer Funding Cycle
Private Placement Options
Lease Purchase Financing
Lease purchase financing allows the Borrower to acquire essential purchase assets or refinance existing obligations and spread the payments over their economic useful life. This strategy preserves valuable cash and enables the school district to do more with its resources.
There are two (2) types of lease purchase financing structures:
- Non-Appropriation Lease
- The school district governing body appropriates the payment due to the Investor each fiscal year. In the event of non-appropriation, the Lessee must return the asset back to the Investor and pay any remaining funds that have been appropriated, but have not been paid for the current fiscal year. b. Risk is mitigated through funding projects with high essentiality and good underlying financial fundamentals.
- Abatement Lease
- The school district has an unconditional obligation to make the scheduled payment(s) to the Investor during the financing period as long as it has use of the asset. This structure is primarily used for real property The lease purchase financing market is estimated at over $20 Billion annually and growing. School districts across the country are focusing on tax-exempt lease purchase financing as an alternative funding tool to traditional bonds. Transaction sizes range from $100,000.00 to $100 Million to accommodate large and small projects. Tax-exempt capital leases offer simplicity, flexibility, speed, and attractive rates.
- The lease payments are abated provided the school district has substantial interference or loss of use of the asset.
- The investor reduces the abatement risk by requiring the school district to maintain rental interruption insurance during the term of the financing, which will require the insurance carrier to make payments during the asset rehabilitation period. Once the building is rehabilitated or the equipment is operational again, the school district must resume making the remaining payments. Most importantly, the payment stream is not interrupted.
- Abatement Leases are used in California and Indiana only.
The financing can be structured with monthly, quarterly, semi-annual, or annual payments to match the seasonal fluctuation of revenues. Through making more frequent payments, such as quarterly, the municipality can lower its overall interest cost, which flows directly to the bottom line.
Title to the equipment, facilities, or infrastructure is typically held by the borrower. The Investor is secured by a UCC filing or leasehold interest in the asset. Upon completion of the scheduled payments, the lien is released and the school district owns the asset free and clear.
Both Non-Appropriation and Abatement Leases have extremely low national default rates due to the underlying financial strength of the borrower, high asset essentiality, good documentation, and the integrity and strong financial discipline of management. On a macro level, federal and state policymakers place a high priority on education and back it with billions of dollars in tax receipts, grants and people to create an educated workforce, civil order, and a productive economy. Providing an efficient flow of capital to school districts is a national priority.
Banks, insurance companies and funds are the primary investors. Each institution has their own unique investment criteria with some focusing on specific assets while others may emphasize longer financing terms, or a specific region of the country. Interest rates are determined by the asset type, financing term, and underlying financial strength of the school district.
Lower Tax Exempt Rates Improve Municipality Purchasing Power
Section 103 of the Internal Revenue Code allows the interest expense to the investor to become exempt from federal taxation. Overall, school districts are able to reduce their interest expense by approximately 1/3 while providing the investor with an attractive after-tax return.
Additionally, most states exempt the interest income on debt and capital leases originated by municipalities within their states. This translates into even lower borrowing rates, which enables the school district to have more purchasing power
Optimizing Your Budget
Municipalities can optimize their project funding options by combining their federal & state grants and cash reserves with lease purchase financing to acquire more essential purpose assets such as vehicles, computers, energy conservation projects etc. This strategy improves organization productivity, preserves vital reserves, expands the bottom line, and maximizes human capital. Crafting the right solution is key to a winning strategy and improving overall success.
Issue: School district USA would like to acquire 5 school buses and does not want to deplete its reserves.
Solution: The school district can finance the school bus acquisition with a tax-exempt lease purchase financing, while funding personnel, maintenance, and insurance expenses from its cash reserves. Effectively, the school district has matched the buses economic useful life with and equivalent financing term of 10-15 years to lower its payment and still have ample funds for its operating expenses. The rainy day fund is safe and sound, while employee productivity and morale remain high.
Transaction Process Management
Streamlining the process is essential to delivering capital quickly and efficiently.
- Project Discovery
- Credit Review
- Escrow Disbursement
Selecting the Right Financing Partner
Management will benefit from selecting a firm with the public sector expertise, scale, capital, and process to deliver a streamline solution. Complete your due diligence and pick the right partner.
School District are uniquely positioned to take advantage of lease purchase financing to acquire their essential purpose assets. Lease purchase financing allows the borrower to fund new acquisitions and refinance existing assets. Transaction size range from $100,000.00 to $100 Million to meet the needs of large and small projects. It offers competitive rates, payment flexibility, low cost of issuance, and quick funding. Overall, lease purchase financing serves as a valuable tool for school districts to expand their resources and meet its strategic objectives with more ease and simplicity.
Download this white paper: Holman Capital – Creative School District Funding Solutions.
- School Buses
- Energy Conservation Projects
- Central Plants
- Solar Facilities
- Fueling Depots
- Phone System
- Admin Facilities
- Central Kitchens