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).

Related FAQs

• What can be financed on a tax-exempt basis?

  Any personal property equipment or real property essential to the operations of the...

• Who owns the equipment under a tax-exempt municipal lease and how is the equipment titled?

  Title may either be retained by the lessor until all payments have been received or may be granted to the...

• What Are The Financial Process – Basic Steps?

  The Basic Steps of the Financial Process are: Obtain quote for equipment from qualified vendor Credit...

• What is a municipal or tax-exempt lease?

  A municipal or tax-exempt lease agreement allows a political subdivision to use its annual...

• What types of entities qualify for a municipal or tax-exempt lease?

  For the lease to qualify for the interest exclusion, a lessee under a tax-exempt lease must be a...

• How Do I Obtain a Quote?

  For a detailed quote, please call Sparta Commercial Services, Inc. on our toll-free line: +1 (800)...

• Why lease the equipment?

  Tax-exempt leasing is one of the simplest and most successful ways to purchase essential equipment and...

• Is leasing easy?

  We take great pride in ensuring your leasing experience is easy.  Lease purchasing is much easier...

• What is a non-appropriation clause and why is it needed?

  With a lease-purchase Agreement, a non-appropriation clause enables the lessee to account for the...

• What factors should be considered in deciding whether or not to use a tax-exempt lease?

  When acquiring financing for any asset acquisition decision, the principal financial objective is...

• Prev
• Next