Posts
Functionally municipal leases are like installment sales agreements. But, there are distinctive conditions which set the governmental contracts apart. Local governments use such contracts to fund their acquisition of various types of equipment. Payment in both commercial and noncommercial arrangements is made over a term of several years.
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.
Choosing this option has certain advantageous benefits. Municipalities have more financial flexibility when they utilize such funding. Using a lease is a thriftier alternative. The equipment is acquired on favorable terms. Documentation is less cumbersome. Cash management is easier. Typically payment terms extend over two and ten years. Both principal and interest are paid off within the prescribed payment periods. Each payment builds ownership equity.
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.
Due to a non-appropriation clause, payments are usually classified as expense rather than debt. Unlike most bonds, a reserve or contingency fund is not required. This makes a lease purchase highly competitive with bonds. With no need for voter approval costly professional fees are eliminated and the purchase cycle is shortened. Leasing is also an attractive option for local governments needing to spread the cost of capital acquisition over several fiscal periods. There is often a need to spread the cost to match the revenue available from user fees or other funding sources.
Facing stressed budgets local governments put off needed improvements. This leaves them with backlogs. Backlogs mean fewer dollars are attached to a greater number of demands. They restrict the freedom to make significant acquisitions. With scarce cash available, lease programs are a feasible choice. They enable governments to do more with less. They allow equipment to also be used while it is being paid for.
Variations in contracts can be structured to enhance the desirability of leases. The timing of payments can be easily designed to correspond to municipal funding availability. Arrangements may be advance funded or match funded according to lessee preferences. Normally, financing is structured on a fixed rate. To provide flexible options, deferred payment plans, graduated payment options and variable rates may be offered.
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.
Choosing this option has certain advantageous benefits. Municipalities have more financial flexibility when they utilize such funding. Using a lease is a thriftier alternative. The equipment is acquired on favorable terms. Documentation is less cumbersome. Cash management is easier. Typically payment terms extend over two and ten years. Both principal and interest are paid off within the prescribed payment periods. Each payment builds ownership equity.
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.
Due to a non-appropriation clause, payments are usually classified as expense rather than debt. Unlike most bonds, a reserve or contingency fund is not required. This makes a lease purchase highly competitive with bonds. With no need for voter approval costly professional fees are eliminated and the purchase cycle is shortened. Leasing is also an attractive option for local governments needing to spread the cost of capital acquisition over several fiscal periods. There is often a need to spread the cost to match the revenue available from user fees or other funding sources.
Facing stressed budgets local governments put off needed improvements. This leaves them with backlogs. Backlogs mean fewer dollars are attached to a greater number of demands. They restrict the freedom to make significant acquisitions. With scarce cash available, lease programs are a feasible choice. They enable governments to do more with less. They allow equipment to also be used while it is being paid for.
Variations in contracts can be structured to enhance the desirability of leases. The timing of payments can be easily designed to correspond to municipal funding availability. Arrangements may be advance funded or match funded according to lessee preferences. Normally, financing is structured on a fixed rate. To provide flexible options, deferred payment plans, graduated payment options and variable rates may be offered.
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:
You can visit the website spartamunicipal.com for more helpful information about Municipal Leases Enable More Efficient Cash Management
No comments:
Post a Comment