Municipal Financing Frequently Asked Questions

What is a municipal or tax exempt lease?


A municipal or tax-exempt lease agreement allows a political subdivision to use its annual revenues to make payments for any type of essential use equipment or facilities. This structure is an alternative to purchasing an asset with cash, acquiring its use for a period of time through a true lease, or issuing bonds.

The term ‘tax-exempt’ or ‘municipal lease’ refers to the interest earnings paid to the lessor of a properly structured and documented lease, being exempt from federal income tax. The same tax laws that enable a municipal bond to carry a tax-exempt rate apply to a municipal lease. Only municipalities or qualified political subdivisions can qualify for this type of agreement. Because the lessor does not pay federal income tax on the interest earned, the tax-exempt lease carries a much lower interest rate than other types of leases and installment loans. This significantly lowers the cost of financing to the borrower.

While municipal leases are documented as a lease, they have characteristics similar to a loan. The lessee owns the equipment at the end of the lease, and the lease can be paid-off early. These financing agreements are structured as a lease to accommodate the fiscal funding restrictions of political subdivisions. In most cases, the obligation terminates if the lessee fails to appropriate funds to make the renewal year's lease payments. Because of this provision, neither the lease nor the lease payments are considered debt (in most states).


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Questions List

  1. What is a municipal or tax exempt lease?
  2. What types of entities qualify for a municipal or tax-exempt lease?
  3. Does a Volunteer Fire Department qualify for the same rate as a City, County or District?
  4. Why lease the equipment?
  5. What is the difference between a municipal lease purchase and a commercial/rental lease?
  6. Who owns the equipment under a tax-exempt lease and who is responsible for maintenance, insurance and taxes?
  7. What is a non-appropriation or funding out clause?
  8. What can be financed on a tax-exempt basis?
  9. Am I limited to certain types of equipment?
  10. Can used equipment be financed?
  11. Is there a minimum amount that can be financed with Municipal Financing LLC?
  12. Can I include my service or maintenance contract in the financing?
  13. Can I include money for future equipment purchases in today’s lease?
  14. Can I make payments via ‘auto draft’ or ACH?
  15. What are the terms available to municipal entities for financing?
  16. How does lease-purchase financing differ from bond financing?
  17. We’ve already paid for the equipment, can we still finance it?
  18. We are planning to order a truck that will take a year to build, when should we consider financing?
  19. We have other debt such as bank notes, mortgages or leases, can they be refinanced at the lower tax-exempt rates?
  20. When the city issued bonds, there were fees involved for underwriting, legal, printing, rating and insurance. Are there fees involved with a lease purchase?
  21. Can I finance equipment purchased from a variety of manufacturers/distributors?
  22. When reviewing proposals, what should I do to make sure I am comparing apples to apples?
  23. What do you mean by tax-exempt financing, our organization is already tax-exempt?
  24. Does the lessee have the option to pay off a lease prior to the last payment when financing with Municipal Financing LLC?
  25. If I am a vendor or a broker, can I work with Municipal Financing LLC to establish a ‘private label’ program for my company?

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