Lease-Purchase Agreements for the Wastewater

and Water Sectors

July 17, 2019

Click to edit Master title styleLeasing History and Overview

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One of the Oldest Forms of Business Contracts

• Dates to the Sumerians & Phoenicians ~2000BC

• Critical contribution to the growth of the US railroads in the

1800s

• Today commonly used to finance energy efficiency and

renewable energy projects

Two categories

• Commercial Leases (taxable)

• Capital or Finance (Type A), Operating (Type B), True

• Tax Exempt Leases

• AKA Municipal Lease or Lease-Purchase Agreements

• Interest to investor is tax exempt, resulting in lower

borrowing cost

Click to edit Master title styleCreative Financing

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• Leasing referred to as “creative financing”

• Allows for great flexibility

• Step Leases

• Repayment schedule can be based on projected energy

savings

• Skip Leases

• High – low payments based on seasonal activity

• Master Leases

• Mix different assets and terms (based on useful

economic lives)

Click to edit Master title styleHow do State and Local Gov’ts Traditionally Raise Capital?

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• Cash from Fees or User Charges

• Cash from Property Taxes or Other Taxes

• Borrow Money (Bonds, Notes, & Other

Obligations)

• General Obligations

• Full Faith and Credit

• Secured by Property Taxes

• Revenue Backed

• Water & Sewer

• Sales Tax

• Project Specific Revenues

Click to edit Master title styleState & Local Govts Ability to Issue Debt may be Limited

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• What is Debt?

• Firm Obligations (no Set-Off Rights)

• Multi-Year (Binding on Future Governing Bodies & Budgets)

• Potential Tax Impact (Rate Increase may be Required)

• Debt Issuance may be Limited

• By State Constitution

• By Statue

• Examples of Limitations

• Term Restrictions

• Maximum Rate Caps

• Maximum Debt Caps

• Voter Approval may be Required

Click to edit Master title styleThe Other Alternative – Municipal Lease-Purchase

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• Hybrid structure similar to both a Loan and Lease

• Like a Loan – Lessee owns the asset subject to Lessor’s security

Interest, and has lien-free ownership at end of term after making all

payments

• Like a Lease – Lease payment are subject to annual renewal,

and lease may be terminated at the option of the Lessee

• Not a “Debt” from a constitutional perspective

• Why: Annual Appropriations Clause at Lessee’s Option

• Not an absolute obligation – can be terminated

• Not a multi-year obligation – can be terminated

• An event of non-appropriation is viewed negatively by the credit rating

agencies and may impact ability to access credit markets

• Terms and conditions are state specific

Click to edit Master title styleWhat is a Municipal Lease?

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A Lease/Purchase Agreement in which:

• A state or local government as the Lessee (a/k/a the “borrower”)

• Purchases specific real or personal property from the Lessor (a/k/a

the “lender”)

• Is the titled owner of the property (subject to the Lessor’s security

interest) and maintains & insures the property

• Makes periodic rental payments over an agreed-upon term;

• Has rental payments that are subject to annual appropriation (or

abatement in CA and IND)

• Receives lien-free ownership at the end of term after making all rental

payments (i.e., conditional sale of installment sales financing)

• The interest portion of the rental payment is typically tax-exempt

• Section 103 of the IRS code

Click to edit Master title styleWhat can be Lease-Purchased?

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• Energy Equipment

• HVAC, Lighting, Building Controls, Solar Panels, Pumps, etc.

• Can include maintenance, design engineering, and technical

assistance

• Telecommunications Equipment

• Computers & Software

• Copiers and Other Office Equipment

• Safety Equipment (911 Systems)

• Medical Equipment

• Modular Buildings

• Real Property

• Vehicles

Click to edit Master title styleWho are Eligible Lessees?

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• Direct Issuers• States & State Agencies

• Local Governments & Political Subdivisions including

• Cities, Counties, Public School Districts, Public Utility Districts, Fire

Protection Districts, Public Water/Waste Water Districts, Public

Housing Authorities, etc.

• Native American Tribal Governments

• Conduit (On-Behalf of) Issuers • 501(c)(3) Organizations

• Charitable Organizations, Religious Organizations, Non-Profit

Colleges and Hospitals, Private Schools, Non-Profit Water and

Waste-water Organizations

• Certain Other Private Parties

• Economic Development, Manufacturers and Other Exempt Facilities

• https://muninetguide.com/municipal-finance-resources-2/state-municipal-

bond-conduits/

Click to edit Master title styleWhy are Municipal Leases Attractive to Investors?

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• Yield Considerations

• Example:

3.75% (Municipal Lease Coupon Rate)

÷ .79 (One minus 21% Corporate Tax Rate)

4.75% Taxable Equivalent Yield

• Credit Considerations

• Governments face less competition

• Governments may have better credit profiles, and

• Governments may have better risk ratings

• Essential Use

• Equipment essential to the service provided

Click to edit Master title styleWhy Use Lease-Purchase Financing?

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• Avoid liquidity-drain caused by lump sum capital payments

• Tie payments to the equipment’s useful life, savings and

increased revenues (i.e., gallons/day)

• Not classified as “Debt”, therefore typically:• No voter approval required

• Not subject to legal debt limitations

• Typically no encumbrance of tax or other revenues• Revenues available to secure future bonded debt

• More structuring flexibility than with a bond• Match lease terms to asset’s expected useful life

• Match repayment to projected energy savings

• Benefits of a lease vs. public bond offering• Lower transaction costs

• Faster closing timeline – less complicated documents

• No rating or bond insurance, reserve account, printing costs, etc.

• True Interest Cost (TIC) often lower than a bond

Click to edit Master title stylePresented by:

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With contributions from:

Association for Governmental Leasing and Finance

and

Nancy MiddenMcDowell, Rice, Smith & Buchanan, PCnmidden@mcdowellrice.com

816-960-7311

Neil Zobler, President

Catalyst Financial Group, Inc.

nzobler@catalyst-financial.com

www.catalyst-financial.com

203-790-4177