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.
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:
1.) Non-Appropriation Lease
2.) Abatement Lease
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.
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
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.
Streamlining the process is essential to delivering capital quickly and efficiently.
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.
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