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Tax-Exempt Lease-Purchase Financing Options for Local Governments

Terrence Murphy is program manager for California Communities, a joint powers authority sponsored by the California State Association of Counties and the League of California Cities. For more about California Communities, visit www.cacommunities.org.

In today’s uncertain economic climate, it’s important for local agencies to use the best tools available to secure needed financing. As local budgets are reduced, funding the immediate and long-term needs of local government becomes more difficult. Consequently, local agencies are seeking more flexible and efficient options for funding.

The Advantages of Lease-Purchase Financing

Tax-exempt lease-purchase financing is one solution local agencies use to leverage time and resources. It can be used for 100 percent financing of real property, land and buildings or for personal property projects, such as equipment and vehicles. The benefits of lease-purchase financing include:

  • Faster funding;
  • Lower costs of issuance; and
  • A simpler process requiring fewer finance team participants.

For example, under a lease structure, a third party acquires the property and leases it back to the local agency for payments that cover the principal and interest on the acquisition of the property. Once the terms of the lease are completely fulfilled, the local agency acquires the property free and clear of any lien or restriction and without any residual value payment.

The main finance components of the lease, such as the term length, interest rate and prepayment stipulations, are determined by agreement between the lender and the local agency. In addition, the interest rate is based on the market at the time of the financing and the local agency’s credit. While the term length of the lease is constrained by the anticipated useful life of the property being financed, the prepayment restrictions are determined by negotiation between the local agency and the lender.

CaLease Program Covers a Wide Range of Projects

To give local governments access to low-cost, tax-exempt lease financing, the League and California State Association of Counties (CSAC) established the California Communities Lease Finance Program, also known as the CaLease Program. Under this program, local agencies may bid and manage leases through California Communities staff, thereby reducing the workload for the local agency staff. The CaLease Program is ideal for equipment projects beginning at $500,000 and real property leases starting at $1 million. California Communities works with a number of lenders in the municipal marketplace that understand they are bidding in a competitive process for each financing.

The CaLease Program has assisted many local governments throughout California with their financing needs. The City
of Lincoln used the program to lease-purchase the Lincoln aircraft hanger project at the Lincoln Regional Airport. The City of Chula Vista used the program for a major financial management system acquisition. The County of Santa Clara has been a long-time participant in the CaLease Program, using it 18 times to obtain financing for items ranging from automobiles to medical equipment for the county hospital. CaLease also helped the City of Elk Grove fund its city hall construction, and Tulare County used the program for fleet purchases.

CaLease Provides Further Economies

Because the CaLease Program employs a master lease structure, documentation (including time spent drafting documents) is reduced for local agencies that utilize the program more than once. For its first project, the local agency approves a master set of lease documents, and each subsequent lease is structured as a supplement to the original lease. This structure provides the ability to have multiple projects with multiple terms through one set of documents. The savings of time and issuance costs through the CaLease Program have encouraged more than 40 local agencies
to participate.

Due to a simpler legal structure, the lease will often have fewer participants on the finance team; in such a lease transaction, the disclosure counsel, trustee and remarketing agent are not required. The CaLease Program documents are preset, providing simplicity and consistency.

Leases typically have a higher interest rate than other forms of financing, because the lender is taking the risk that at some point the city or agency’s governing body could decide not to appropriate the funds needed to make payments. To provide security for a lease-purchase, the lender receives a lien on the property being acquired. This security has less strength than the pledge of faith and credit that is part of a general obligation bond transaction --- hence the increased risk and interest cost for financing a lease.

The significantly fewer upfront costs involved in a lease transaction offset the higher interest rate. In addition, the speed at which a lease can be completed enables an agency to meet timetables without costly delays. The CaLease Program can complete funding in as little as 60 days.

For more information on the California Communities CaLease Program, contact Terrence Murphy, program manager; phone: (925) 933-9229, ext. 223; e-mail: tmurphy@cacommunities.org.