Municipality - What is a Municipal Lease?

A Municipal Lease is a tax-exempt financing vehicle designed to meet the special needs of state and local municipalities. These entities include School Districts, Police and Fire Departments, State and County Governments, Water Districts, Transit Authorities, Hospitals, and any other organization that can incur debt where the interest paid is exempt from federal income taxes.
  • Tax-exempt Leasing is an economical method of financing that allows qualifying government entities to acquire capital equipment under extremely attractive terms, favorable interest rates, and very streamlined documentation.
  • Through a Municipal Lease, the governing body acquires equipment and obtains full ownership of capital assets on an installment basis. Lease payments are usually made over a period of 2 to 10 years.
  • The IRS does not charge income taxes to the Lessor for interest charged on a Municipal Lease. Section 103 of the Internal Revenue Code states that interest on “obligations of a State, Territory or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia” are exempt from federal income taxation. The Lessor is able to pass this savings onto the Lessee.
  • In a Municipal Lease, the equipment is sold directly to the tax-exempt entity (as opposed to the leasing company), and title to the equipment passes to the Lessee upfront, which means the governmental entity becomes the owner of the equipment the day it is delivered.
  • A Municipal Lease contains a non-appropriation of funds clause that states the entity may be released from its payment obligation under the condition that the legislature/funding authority fails to appropriate funds. Voter referendum is often not necessary.