Functionally municipal leases are like installment sales agreements. But, there are distinctive conditions which set the governmental contracts apart. Local governments use such contracts to fund their acquisition of various types of equipment. Payment in both commercial and noncommercial arrangements is made over a term of several years.
There are several factors that make such arrangements different. One of them is the tax exempt nature of interest payments. Another distinction is that full ownership in the equipment is transferred at the end of the financial term. It is not the loan of an item. A third difference is that each contract has a non-appropriation clause. This clause relieves lessees from an obligation to pay, for any legally acceptable reason, should the funds not be appropriated in a subsequent budget. This condition distinguishes this mechanism from bonds. Bonds are subject to prior voter approval. This condition permits a local governmental entity to legally treat a lease obligation as a current expense.
It is an advantageous solution for several reasons. Leasing is an economical financing method for government entities. With this option they are able to obtain capital equipment on attractive terms and with less burdensome documentation. It provides municipalities with an option providing greater financial flexibility and efficient cash management. Lease payments typically extend over a period between 2 and 10 years. Payments consist of principal and interest. Every payment builds equity towards ownership.
This funding resource is a logical choice. Payments remain within typical budget cycles. Procedures governing approval are less onerous and speedier than the requirements for bond financings. Credit lines remain unaffected. Expense coverage is spread out over a briefer period of time than typical bond financings. The useful life of equipment is more closely followed when payment is made over a shorter period.
The non-appropriation clause makes the payments an expense rather than a debt classification. Since this arrangement is not financed through bonds, a contingency or reserve fund is not necessary. The result makes the use of a lease more attractive than a bond option. Since voter approval is not required, the purchase cycle is shorter and expensive professional fees are not needed. This is an attractive choice for local governments that need to spread the payment cycle over several fiscal terms. Often, there is a need to lengthen the cost over some years. This allows for greater payment flexibility. It becomes easier to match revenue streams with expenses.
Local governments often face a backlog of capital replacement needs. The backlog is something to live with, but it makes necessary purchases too large to finance in one year. As many governments do not have the revenue to make the purchase, an installment arrangement allows them to use an asset without a full purchase.
Variations in contracts can be structured to enhance the desirability of leases. The timing of payments can be easily designed to correspond to municipal funding availability. Arrangements may be advance funded or match funded according to lessee preferences. Normally, financing is structured on a fixed rate. To provide flexible options, deferred payment plans, graduated payment options and variable rates may be offered.
It is important to be mindful of the fact that municipal leases are governed by own set of laws. These laws are unlike those applicable to commercial arrangements. Lessors must accommodate the difference or suffer its consequences.
There are several factors that make such arrangements different. One of them is the tax exempt nature of interest payments. Another distinction is that full ownership in the equipment is transferred at the end of the financial term. It is not the loan of an item. A third difference is that each contract has a non-appropriation clause. This clause relieves lessees from an obligation to pay, for any legally acceptable reason, should the funds not be appropriated in a subsequent budget. This condition distinguishes this mechanism from bonds. Bonds are subject to prior voter approval. This condition permits a local governmental entity to legally treat a lease obligation as a current expense.
It is an advantageous solution for several reasons. Leasing is an economical financing method for government entities. With this option they are able to obtain capital equipment on attractive terms and with less burdensome documentation. It provides municipalities with an option providing greater financial flexibility and efficient cash management. Lease payments typically extend over a period between 2 and 10 years. Payments consist of principal and interest. Every payment builds equity towards ownership.
This funding resource is a logical choice. Payments remain within typical budget cycles. Procedures governing approval are less onerous and speedier than the requirements for bond financings. Credit lines remain unaffected. Expense coverage is spread out over a briefer period of time than typical bond financings. The useful life of equipment is more closely followed when payment is made over a shorter period.
The non-appropriation clause makes the payments an expense rather than a debt classification. Since this arrangement is not financed through bonds, a contingency or reserve fund is not necessary. The result makes the use of a lease more attractive than a bond option. Since voter approval is not required, the purchase cycle is shorter and expensive professional fees are not needed. This is an attractive choice for local governments that need to spread the payment cycle over several fiscal terms. Often, there is a need to lengthen the cost over some years. This allows for greater payment flexibility. It becomes easier to match revenue streams with expenses.
Local governments often face a backlog of capital replacement needs. The backlog is something to live with, but it makes necessary purchases too large to finance in one year. As many governments do not have the revenue to make the purchase, an installment arrangement allows them to use an asset without a full purchase.
Variations in contracts can be structured to enhance the desirability of leases. The timing of payments can be easily designed to correspond to municipal funding availability. Arrangements may be advance funded or match funded according to lessee preferences. Normally, financing is structured on a fixed rate. To provide flexible options, deferred payment plans, graduated payment options and variable rates may be offered.
It is important to be mindful of the fact that municipal leases are governed by own set of laws. These laws are unlike those applicable to commercial arrangements. Lessors must accommodate the difference or suffer its consequences.
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