Municipal leases are financial transactions similar in function to installment sale contracts. Through these financing mechanisms, governing bodies acquire equipment on an installment basis. But, as the lessee is a local government or agency thereof, some conditions are different from commercial leases.
Several factors make noncommercial arrangements notable. The tax exempt nature of interest is one factor. Another distinctive element is transfer of full ownership at the conclusion of the contracted period. This agreement is not for a loan of certain items for use. A third factor is that each contract must have non-appropriation language. Such language frees municipalities from any obligation to pay, when no funds are appropriated in ensuing budgets. The condition sets this mechanism apart from bond obligations. Bonded debt is subject to approval by voters before any acquisition is made. This gives local government units freedom to manage a lease as an existing expense and avoid limits on bond obligations.
Selecting this financing option has some obvious advantages. There is an increase in the flexibility of financial management. A lease is a cost effective choice made on good terms. Paperwork is less copious. Fiscal administration is simpler. Terms of payment of the principal and interest are normally spread over a couple or more years. Ownership equity is built as each payment made.
The financing method is a reasonable choice. Funding remains within the normal budget cycle. Approval procedures are simpler and faster than the bond alternative. This method does not disturb credit lines and avoids recourse to bonds. Unlike bond obligations, cost is spread over a shorter time period. A shorter time period makes the payments a closer match to the useful life of purchased material.
The non-appropriation clause makes the payments an expense rather than a debt classification. Since this arrangement is not financed through bonds, a contingency or reserve fund is not necessary. The result makes the use of a lease more attractive than a bond option. Since voter approval is not required, the purchase cycle is shorter and expensive professional fees are not needed. This is an attractive choice for local governments that need to spread the payment cycle over several fiscal terms. Often, there is a need to lengthen the cost over some years. This allows for greater payment flexibility. It becomes easier to match revenue streams with expenses.
Tight budgets often leave local governments with a backlog of asset replacement needs. This backlog is a function of typical fiscal constraints. These constraints prevent the making of large purchases in a single year. As governments have a paucity of funds on hand, an installment plan givens them needed flexibility. They can use the equipment while still paying for it.
Financing contracts can be match funded or advance funded depending on financial objectives of lessees. Payment frequency can be tailored to match the availability of municipal funding. Although the underlying financing structure typically incorporates a fixed rate, graduated payment, variable rates, and deferred payment plans could be offered as well. Flexibility can be designed to maximize possible alternatives available with such financing.
Lessors must understand the intricacies of laws governing municipal leases. There are avoidable risks that can be surpassed by understanding the law. Serious consequences arise from failure to adjust contractual documents accordingly.
Several factors make noncommercial arrangements notable. The tax exempt nature of interest is one factor. Another distinctive element is transfer of full ownership at the conclusion of the contracted period. This agreement is not for a loan of certain items for use. A third factor is that each contract must have non-appropriation language. Such language frees municipalities from any obligation to pay, when no funds are appropriated in ensuing budgets. The condition sets this mechanism apart from bond obligations. Bonded debt is subject to approval by voters before any acquisition is made. This gives local government units freedom to manage a lease as an existing expense and avoid limits on bond obligations.
Selecting this financing option has some obvious advantages. There is an increase in the flexibility of financial management. A lease is a cost effective choice made on good terms. Paperwork is less copious. Fiscal administration is simpler. Terms of payment of the principal and interest are normally spread over a couple or more years. Ownership equity is built as each payment made.
The financing method is a reasonable choice. Funding remains within the normal budget cycle. Approval procedures are simpler and faster than the bond alternative. This method does not disturb credit lines and avoids recourse to bonds. Unlike bond obligations, cost is spread over a shorter time period. A shorter time period makes the payments a closer match to the useful life of purchased material.
The non-appropriation clause makes the payments an expense rather than a debt classification. Since this arrangement is not financed through bonds, a contingency or reserve fund is not necessary. The result makes the use of a lease more attractive than a bond option. Since voter approval is not required, the purchase cycle is shorter and expensive professional fees are not needed. This is an attractive choice for local governments that need to spread the payment cycle over several fiscal terms. Often, there is a need to lengthen the cost over some years. This allows for greater payment flexibility. It becomes easier to match revenue streams with expenses.
Tight budgets often leave local governments with a backlog of asset replacement needs. This backlog is a function of typical fiscal constraints. These constraints prevent the making of large purchases in a single year. As governments have a paucity of funds on hand, an installment plan givens them needed flexibility. They can use the equipment while still paying for it.
Financing contracts can be match funded or advance funded depending on financial objectives of lessees. Payment frequency can be tailored to match the availability of municipal funding. Although the underlying financing structure typically incorporates a fixed rate, graduated payment, variable rates, and deferred payment plans could be offered as well. Flexibility can be designed to maximize possible alternatives available with such financing.
Lessors must understand the intricacies of laws governing municipal leases. There are avoidable risks that can be surpassed by understanding the law. Serious consequences arise from failure to adjust contractual documents accordingly.
About the Author:
Read more about Municipal Leases Enable More Efficient Cash Management visiting our website.
No comments:
Post a Comment