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.
Several factors make noncommercial arrangements notable. The tax exempt nature of interest is one factor. Another distinctive element is transfer of full ownership at the conclusion of the contracted period. This agreement is not for a loan of certain items for use. A third factor is that each contract must have non-appropriation language. Such language frees municipalities from any obligation to pay, when no funds are appropriated in ensuing budgets. The condition sets this mechanism apart from bond obligations. Bonded debt is subject to approval by voters before any acquisition is made. This gives local government units freedom to manage a lease as an existing expense and avoid limits on bond obligations.
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.
Due to a non-appropriation clause, payments are usually classified as expense rather than debt. Unlike most bonds, a reserve or contingency fund is not required. This makes a lease purchase highly competitive with bonds. With no need for voter approval costly professional fees are eliminated and the purchase cycle is shortened. Leasing is also an attractive option for local governments needing to spread the cost of capital acquisition over several fiscal periods. There is often a need to spread the cost to match the revenue available from user fees or other funding sources.
Tight budgets often leave local governments with a backlog of asset replacement needs. This backlog is a function of typical fiscal constraints. These constraints prevent the making of large purchases in a single year. As governments have a paucity of funds on hand, an installment plan givens them needed flexibility. They can use the equipment while still paying for it.
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.
Lessors must understand the intricacies of laws governing municipal leases. There are avoidable risks that can be surpassed by understanding the law. Serious consequences arise from failure to adjust contractual documents accordingly.
Several factors make noncommercial arrangements notable. The tax exempt nature of interest is one factor. Another distinctive element is transfer of full ownership at the conclusion of the contracted period. This agreement is not for a loan of certain items for use. A third factor is that each contract must have non-appropriation language. Such language frees municipalities from any obligation to pay, when no funds are appropriated in ensuing budgets. The condition sets this mechanism apart from bond obligations. Bonded debt is subject to approval by voters before any acquisition is made. This gives local government units freedom to manage a lease as an existing expense and avoid limits on bond obligations.
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.
Due to a non-appropriation clause, payments are usually classified as expense rather than debt. Unlike most bonds, a reserve or contingency fund is not required. This makes a lease purchase highly competitive with bonds. With no need for voter approval costly professional fees are eliminated and the purchase cycle is shortened. Leasing is also an attractive option for local governments needing to spread the cost of capital acquisition over several fiscal periods. There is often a need to spread the cost to match the revenue available from user fees or other funding sources.
Tight budgets often leave local governments with a backlog of asset replacement needs. This backlog is a function of typical fiscal constraints. These constraints prevent the making of large purchases in a single year. As governments have a paucity of funds on hand, an installment plan givens them needed flexibility. They can use the equipment while still paying for it.
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.
Lessors must understand the intricacies of laws governing municipal leases. There are avoidable risks that can be surpassed by understanding the law. Serious consequences arise from failure to adjust contractual documents accordingly.
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