Municipal Lease Agreements

Municipal leases are available only to tax-exempt entities such as school districts or municipalities (Section 265(b)(3) of the Internal Revenue Code). Under this type of lease, the lessor does not have to pay taxes on the interest portion of the lessee’s payments, and can offer an interest rate that is lower than the usual rate for financing leases. Because of restrictions against multi-year liabilities, the municipality specifies in the contract that the lease will be renewed each year. This places a higher risk on the lessor, who must be prepared for the possibility that funding for the lease may not be appropriated. Therefore, the lessor may charge an interest rate as much as 2% above the tax-exempt bond rate, but still lower than rates for regular financing leases. Even so, municipal leases are generally faster and more flexible financing tools than tax-exempt bonds.

Guaranteed Savings Leases are the same as financing or operating leases, but with an additional guaranteed savings clause. Under this type of lease, the lessee is guaranteed that the annual payments for leasing the energy efficiency improvements will not exceed the energy savings generated by them. The building owner pays the contractor a fixed payment per month. However, if the actual energy savings are less than the fixed payment, the owner pays only the amount saved and receives a credit for the difference.

Operating leases are usually for a short term and occasionally, for periods of less than 1 year. At the end of the lease period, the lessee may renegotiate the lease, buy the equipment for its fair market value, or acquire other equipment. The lessor is considered the owner of the leased equipment and can claim tax benefits for its depreciation. Financing leases are agreements in which the lessee essentially pays for the equipment in monthly installments. Although payments are generally higher than for an operating lease, the lessee may purchase the equipment at the end of the lease for a nominal amount (commonly $1.00). The lessee is considered the owner of the equipment and may claim certain tax benefits for its depreciation.

 

“Municipal Leases for Forensic Crime Labs and Training Facilities are a narrow use method for funding.”

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