LEASE ADVICE YOU CAN BANK ON!
By RICHARD M. HETZER, Vice President/Manager Public Funds Division, LaSalle National Bank
LEONARD P. PONTE, President and Chief Executive Officer, LaSalle Bank of Lisle
To lease or not to lease . . . that is an increasingly frequent question among governmental units looking to acquire equipment or other property. Practically any tangible object can be leased — from data processing and office equipment, to fire engines, police cars and road repair equipment. As leasing becomes a more popular financing option, however, it is important to understand what leasing is and why it may be a beneficial option for your unit of government.
Municipal leases can take the form of conditional sales contracts or lease purchase agreements. They are generally structured as contracts obligating the governmental unit to make principal and interest payments toward the purchase price of the commodity over a period of time. When the final installment of the contract is made, ownership of the property transfers to the lessee at little or no additional cost.
The periodic payments consist of principal and interest payments. The interest portion of the payment may be exempt from federal income tax to the financier of the lease provided the transaction is properly structured according to legal and Internal Revenue Service rulings. It is also possible that the interest received may be exempt from state and/or local taxes, depending upon applicable state and local tax laws. (A tax attorney and/or the IRS should always be consulted in such matters.)
The term of the contract or lease should not be longer than the useful life of the equipment and generally is of significantly shorter duration. Therefore, leases often run from two to ten years, with the average lease running from five to seven years.
Why Use Lease Financing?
There are a number of advantages to lease financing:
• A lease enables your government to spread the cost of your equipment and/or capital assets over several financial periods throughout the course of its useful life.
• It can be an economical method of financing capital assets that are too expensive to purchase during a single finance period, or that have useful lives which are too short to justify the use of long-term bonds.
• Traditional bond financing is subject to insurance and issuance costs, and such costs are not usually associated with the structuring of leases. Leases are usually privately placed and require private placement memoranda in lieu of official statements and more expensive disclosures which are necessary for bond issues.
• Leasing can save valuable time since the process is not as complex as many other methods of financing.
Your banker or leasing agent can guide you through
January 1991 / Illinois Municipal Review / Page 17
the leasing process. It is generally not complicated and involves the completion of documents with which most government finance managers are familiar. Some of the documentation necessary for executing a lease includes:
1. Municipal lease and option agreement
2. Resolution of governmental unit
3. Opinion of lessee's legal counsel
4. Certificate as to arbitrage
5. Equipment description
6. Schedule of payments
7. Acceptance certificate
8. Insurance requirements
9. 8038-G IRS filing
10. Bank eligibility certificate
11. Small issuer exemption certificate
To Lease or Not To Lease: You Decide
A key factor in your decision to lease or purchase equipment is your governmental unit's financial position. In other words, try to choose the option that is fiscally favorable while also considering the potential tax advantages. According to Pritchard and Hindelang in their book Making the Lease/Buy Decision, tax-exempt municipal leases contain a tax-exempt interest component as well as a nonappropriation (fiscal funding) clause. This combination enables state and local government lessees to bypass their debt limits and allows lessors to offer tax-exempt interest rates.
There are several excellent private companies that can counsel and assist you in developing the proper lease documents. Simply contact the 800-member American Association of Equipment Lessors, 1700 North Moore Street, Arlington, VA 22209. Or, ask your banker. •
Richard M. Hetzer has been a professional hanker for more than 25 years. He is Vice President and Manager of the Public Funds Division and Government Relations for LaSalle National Bank. Mr. Hetzer is a member of the Board - of Governors of the City dub of Chicago and an elected official of Schaurnburg Township, Cook County, Illinois.
Leonard P. Ponte has been a banker for more than 18 years and has been active in municipal lease financing for the past 15 years. He is President and Chief Execute of Officer of LaSalle Bank of Lisle. He serves as President and Director of The Community Banker Association, and is a member of numerous civic organizations. For more information on lease financing, call Len at 708-969-8100.
Page 18 / Illinois Municipal Review / January 1991
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