Municipal Leases – About the Process
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Many state and local governments are faced with the pressure that occurs when demands for their services outpace their financial resources. To cope with this problem, a growing number of governmental agencies have turned to a financing alternative that has long been recognized as a source of funding for large capital expenditures.
Unlike ‘traditional leasing’ or ‘rentals,’ Lease Purchase Financing allows municipal agencies to build equity with every payment and gives them immediate title to the equipment. When the agreement expires, the municipality executes what is called a ‘dollar buyout’ and now owns the equipment free and clear. This is in contrast to other leasing programs where there is a large balloon payment or residual to satisfy at the end of the lease.
Developing a lease purchase plan is attractive because it offers municipal agencies a number of advantages, such as:
- Maximizes limited budget funds, since only the current year’s lease payments are included in the operating budget.
- Frees up additional capital for other pressing needs of the municipality.
- Allows for greater budget flexibility because these plans can be tailor-fit to meet the cash flow requirements of each individual organization.
- Eliminates the need for up-front cash outlays.
- Enables state and local governments to take advantage of low interest rates available to qualified agencies. These rates are lower then conventional commercial rates, and in some cases, lower than the interest earned with a CD or other short-term investment.
- Permits organizations to standardize new equipment at one time, instead of phasing in new equipment over a number of years.
- Allows an organization to purchase equipment at today’s price and not next year’s increase.
Under a typical tax-exempt Lease Purchase Agreement, the government agency and the finance company form an agreement for a given number of years, structured to meet the agency’s individual budgeting situation. Payments can be made annually, semiannually, quarterly, or monthly.
Lease Purchase plans make the most sense for any state or local agency in need of new equipment.
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Financial Process – Basic Steps
- Obtain quote for equipment from qualified vendor
- Credit process (submission of credit application and financial information)
Legal contract specific to transaction issued
- Lessee executes contract and returns to Sparta with any additional items required
- Sparta obtains vendor invoices and MSOs (where applicable), and verifies insurance coverage
- At equipment delivery, lessee ‘accepts’ equipment and authorizes Sparta to pay vendor on their behalf
- Lessee makes payments directly to Sparta or its assigns in accordance with payment schedule through contract maturity
Cost Analysis – Lease Purchase Financing vs. Other Procurement Options
- Reduces funds available for other expenditures
- Opportunity cost of choosing between competing essential needs
- Availability of funds
- Budget inconsistencies vs. level payments/budgeting
- Rising cost of materials can increase future purchase price of acquisition
- Financial and operating challenges of maintaining worn out or obsolete equipment
- Safety/Federal requirements may not be met
- Not specialized in municipal lending
- Contract issued may not be in compliance with legal tax exempt requirements
- Limited knowledge about federal filing of required documents
- Repayment schedule may not match useful life of acquisition
- Limited financing terms and options available
- Lengthy voter approval process
- Bond issuance requires a designated revenue source and count as debt of the lessee
- Lengthy documentation with varied maturities, call provisions, and multiple investors
- Ongoing credit review by potential investors
- Compounding of interest results in higher overall interest costs
- Additional costs: tax opinion, bond counsel, trustee fees, and rate risk from floating interest rate
Evaluating Competing Proposals: What to watch out for when comparing Lease Purchase Proposals
Interest rate by itself is not always the most accurate guide for selecting the best proposal…. Consider the following:
- Capped Fees—Lender fees included as part of the financed amount increase the payments. This situation results in a low interest rate shown, with higher overall cost incurred by the department
- Closing Costs or Doc Fees—Disclosed or undisclosed
- Structure—Review payment due dates, down payment requirements, disbursement schedule and payment frequency. A difference in any one component can have an impact on the true interest rate
Sparta provides Lease Purchase Financing for:
- Police Departments & Sheriff’s Offices
- Correctional Institutions
- Public Safety Offices
- And all other municipal agencies as well
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