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Benefits of Financing
Frequently Asked Questions
What is a tax-exempt lease?
A municipal lease or lease-purchase agreement is an installment purchase, conditional sale, or lease with an option to purchase for nominal value. It may also be referred to as a municipal lease.
What are some of the benefits of tax-exempt leasing?
- Preservation of capital dollars for other projects for which leasing is not an option
- Enables improvement of cash flow
- Incorporates flexible structuring to meet budget needs
- Low rates resulting from tax-exempt basis
- Spreads out the cost of an asset over the useful life of that asset or project
- No voter approval or tax increase to constituents in most jurisdictions
What does Bank Qualified (BQ) mean?
A “Bank Qualified Issuer” is an issuer that issues less than ten million ($10,000,000) dollars of tax-exempt obligations other than “private activity bonds” as defined in Section 141 of the Code, excluding certain “qualified 501(c)(3) bonds” as defined in Section 145 of the Code, during the calendar year.
Can additional equipment be financed under an existing contract after funding?
The majority of our finance contracts are master leases, so adding an additional piece of equipment or schedule for the lessee generally doesn’t require full underwriting.
What information is needed to apply for tax-exempt lease purchase financing?
Generally, all that is needed is a signed credit application, quote(s) for the equipment, and the two most recent years of audited financials.
Who holds title to the equipment?
The lessee holds title to the equipment unless prohibited by state law. Vehicles are titled in the lessee’s name with the lessor listed as lienholder. On equipment, a UCC is filed with the lessor listed as the secured party.
Is there a minimum dollar amount for the transaction?
We can finance a transaction as low as $5,000.00.
Can a municipality enter into a true lease contract whereby they do not own the equipment, but rather, would merely be renting it for the term?
Yes, a state or local entity may enter into a rental type agreement, however:
- Since there is no intent of ownership, it cannot be priced as a tax-exempt issuance under the guidelines of IRS Section 103.
- Depending on the type of collateral, there may be concerns about who holds title, and whether there are liability concerns. This is usually the case for any rolling stock or machinery.
- In this type of agreement, our parent bank, KS StateBank, would generally only be interested in taking assignment of the payment stream and would not hold any FMV position at the end of the rental term.
What type of entity qualifies to issue a tax-exempt obligation?
A state or political subdivision qualifies for tax-exempt leasing. Political subdivisions include cities, towns, counties, and other municipalities. They may include other state entities such as school districts, special purpose districts (fire, parks, utility, water, etc.), hospitals, agencies, authorities, boards, and commissions.
According to the IRS Section 103, an entity must possess one of these three “powers” in order to issue tax-exempt obligations:
- The power to tax
- Police power
- The power of eminent domain
Can the lease be paid off early?
Yes - As part of the Government Obligations Contract, Purchase Option Price amounts are listed at each payment due date. The Purchase Option Price is provided so the contract can be terminated early to save on future interest costs and is not a pre-payment penalty.
If a non-profit is tax exempt from sales tax, does that mean they qualify to issue tax-exempt obligations?
Not necessarily. Although many qualified issuers are exempt from sales tax, with regards to lease purchase financing, the term “tax-exempt” is referring to the fact that, if the transaction is structured properly, the lessor is exempt from paying income tax on the interest income from the transaction which allows the lessor to offer lower interest rates to their customers.
Can a Volunteer Fire Department qualify for tax-exempt leasing?
Yes, a VFD purchasing fire apparatus, building, or remodeling a fire station qualifies for lower, tax-exempt rates. But the VFD must first complete IRS requirements in order to qualify for a tax-exempt rate. Equipment such as SCBAs, turnout gear, rescue tools and ambulances do not qualify for the same rate.
What does non-appropriation mean?
A non-appropriation clause enables the lessee to terminate the lease agreement at the end of the current appropriation period without further obligation or penalty. This may be done only in cases where the lessee was unable to obtain funding for future payment obligations on the lease. The non-appropriation clause enables the lessee to account for the lease obligation as a current expense instead of debt.
What type of equipment or asset can be purchased under a municipal lease?
Municipal leases are for equipment used for essential, traditional government purposes, and the type of equipment allowed varies by state law and entity type. Equipment commonly financed under municipal leases includes fire apparatuses, ambulances, police vehicles, school buses, sewer trucks, snow plows, computers, construction equipment, and energy efficient projects.
Are all non-profits eligible for tax-exempt leasing?
Not-for-profit organizations created under Section 501 (c) (3) of the Internal Revenue Code do not qualify directly as issuers of tax-exempt obligations but may be eligible with a sponsoring governmental unit. Not-for-profit organizations benefiting from tax-exempt leasing include:
- Health care (hospitals, clinics, nursing homes, life care centers)
- Education (colleges and universities, preparatory schools)
- Research centers
Who is responsible for maintenance, insurance, property tax and other operating expenses in a tax-exempt lease?
A tax-exempt lease is a “net lease,” which means that the lessee is responsible for these types of expenses. However, the lessee may contract with the equipment supplier to provide maintenance and other services. These costs may be included in the financing.
Why does your documentation refer to KS StateBank?
Baystone Government Finance is the government and non-profit lending division of KS StateBank.