Don’t Drive It Like You Stole It: A Layperson’s Guide to Municipal Equipment Leases

What’s the first thing that comes to mind when you hear “car lease”?

Exactly! Car leases often have a bad rep. They deserve it! Hard to understand terms, lease factors, large down payment, unreasonable buy-out conditions, mileage caps, no ownership – and that’s just a short list!

So, it is very easy to discard municipal vehicle or equipment leases by association. But a muni lease is not your regular car lease!

Municipal leases are leases pretty much in name only. In practice, they function very much like regular loans. Here is how municipal leases work:

• Financing for up to 100% of purchase price and financing costs – you often don’t need to do a down payment unless you want to.
• Low tax-exempt interest rates – the actual rate depends on equipment type, financing term, borrowing amount, and your agency’s credit profile.
• ~ Are you wondering what a tax-exempt rate is? It just means that the lender does not have to pay income taxes on the interest that they charge you. This way they can pass on most of the savings to you. That’s how the U.S. tax code encourages investment into municipal infrastructure.
• Payments fully amortize the equipment purchase price over the financing term – exactly what you would expect when you get a loan.
• No buy-out at the end of the lease term – the agency gets to keep the vehicle or equipment after the lease is fully paid.
• And, most importantly, your agency owns the equipment from day one – the lender only has a lien on it. That’s why you should never drive a leased police vehicle or fire engine like you stole it!

Most municipal leases also include a “non-appropriation” clause, meaning payments are made only if funds are appropriated each year. If the governing body does not appropriate funds in a future budget, the lease can be terminated and the equipment returned, with no further obligation.

This is why municipal leases typically do not require voter approval and are commonly used for essential equipment purchases.

In other words, municipal leases offer the benefits of a loan without the downside of a car lease.

Municipal equipment lease financing can be a valuable tool that helps finance major vehicle purchases without depleting reserves. That said, as with all debt, you must evaluate borrowing risks carefully, so talk to your municipal advisor before taking on financing.

It is common for equipment manufacturers to offer you financing as a part of the quote – but most of the time you can get much better terms (surprise!) when you get several banks that specialize in municipal equipment financing.

Interested in exploring how municipal leases can help your agency finance essential equipment?

Ridgeline Municipal Strategies, LLC can help you with the preparation of lease RFPs, evaluation of financing terms, and debt issuance compliance. Contact us to discuss your financing needs