Frequently Asked Questions

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).

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 state or possession of the U.S., the District of Columbia, or a political subdivision thereof. This may include state entities such as school districts, special purpose districts (fire, parks, utility, water, etc.), hospitals, agencies, authorities, boards and commissions. To be qualified, a governmental entity must possess one of three characteristics of a government, the power of eminent domain, police power, or the power to levy taxes.

The fact that an agency is financially supported by government funds or is "tax-exempt" does not always ensure qualification. Additionally, some provisions within the tax code allow organizations that provide essential services on behalf of political subdivisions, such as Volunteer Fire Departments, rescue squads, EMS, etc., to issue tax-exempt debt with limitations.

Nonprofit organizations created under Section 501(c)(3) of the Internal Revenue Code do not qualify directly as issuers of tax-exempt obligations but may be eligible with a sponsoring governmental unit. Nonprofit organizations that may benefit from tax-exempt leasing include:

• Health Care (Hospitals, Clinics, Nursing Homes, Life Care Centers)
• Education (Colleges and Universities, Preparatory Schools)
• Museums
• Research Centers

Does a Volunteer Fire Department qualify for the same rate as a City, County or District?

Yes, on trucks and stations. Per Section 150 (e) of the IRS Code, independent fire companies qualify for tax-exempt rates on their purchase of fire trucks or fire station construction (new or remodel). However, equipment such as SCBAs, turnout gear, rescue tools, compressors, ambulances, and buildings not used for fire fighting purposes, would not qualify. They do qualify for our nonprofit rates, which are lower than standard commercial rates.

Why lease the equipment?

Tax-exempt leasing is one of the simplest and most successful ways to purchase essential equipment and facilities. In addition to qualifying for low interest rates, municipalities can conserve their cash while acquiring the equipment and facilities necessary for their day-to-day operation. Entering into a municipal lease may also be more cost effective because political subdivisions can purchase equipment or facilities at today’s prices, not next year’s price increase. This is in addition to the annual savings realized through decreased maintenance costs.

There are laws in all 50 states that restrict the ability of municipalities to borrow money. There are, however, very few restrictions on the ability of municipalities to enter into a lease. Leases represent a year-to-year commitment on the part of a municipality to make lease payments, not a commitment to pay debt service. In other words, leases are not considered debt and, therefore not subject to the limitations placed on debt by state and local laws.

Is leasing easy?

We take great pride in ensuring your leasing experience with Baystone Financial Group is the ‘simplest’ in the country! With our 20 years of experience, specialized programs, low interest rates and five-star service, there is no program in the country simpler.

Lease purchasing is much easier and quicker than bonding. A lease agreement can be completed in a matter of days, whereas a bond may require months or years of planning and execution; and still may be more expensive.

What is the difference between a municipal lease purchase and a commercial/rental lease?

To a governmental lessee, the difference between a municipal lease and a commercial or rental lease is who owns or will own the asset. Most commercial leases are rental agreements allowing the lessee to use the lessors’ property, charging them for the use of the equipment. The lessee makes payments but does not build equity in the equipment and may or may not have an option to purchase the equipment/property. There may be a high residual value set at the end of the lease with a term much shorter than the useful life of the asset.

With a municipal lease, the lessor provides money to the lessee to purchase property and charges the lessee interest for the use of that money. The term of a municipal lease generally can be as long as the lessee desires, up to the equipment’s approximate useful life. The lessee takes title to the property and the lessor takes a security interest in the property as collateral. The lessee builds equity with each payment and has the option to purchase the property throughout the lease. Additionally, a municipal lease is normally subject to the annual appropriations of the lessee and is financed at a low tax-exempt rate.

Who owns the equipment under a tax-exempt lease and who is responsible for maintenance, insurance and taxes?

The lessee takes title to the equipment or deed to the property at the beginning of the lease. The lessor takes a security interest in the equipment or property as collateral. The lessee is responsible for the use, maintenance and insuring of the equipment or property.

What is a non-appropriation or funding out clause?

The non-appropriation clause enables the lessee to account for the lease obligation as a current expense instead of debt. A non-appropriation clause enables the lessee to terminate the lease agreement at the end of the current appropriation period without further obligation or penalty. This can be done only in cases where the lessee is unable to obtain funding for future payment obligations on the lease. Typically, the clause will contain a 'best efforts' requirement whereby the lessee must use its best efforts to obtain the necessary appropriation for the lease payments.

What can be financed on a tax-exempt basis?

Any personal property equipment or real property essential to the operations of the municipality. As you may have guessed, this is quite a large list. For examples of what can be financed, please review our expanded equipment and facility list.

Am I limited to certain types of equipment?

NO! We will finance various types of "essential use" equipment from copiers to fire trucks!

Can used equipment be financed?

Yes! Used and refurbished equipment can be financed just like new equipment as long as the term of the financing is not beyond the useful life of the equipment.

Is there a minimum amount that can be financed with Baystone Financial Group?

Yes - it is $10,000. Every leasing company likes to finance the ‘big’ transactions, but it takes a special lender with a special commitment to be able to finance a broad dollar range to meet their customer’s needs. Why? Because we believe in long term relationships and we recognize everybody no matter how big or how small, should be able to finance their equipment or facility purchase. Besides, a leasing company should be interested in helping you with all your financing needs.

Can I include my service or maintenance contract in the financing?

Yes! We are able to include your maintenance or service contract within the finance contract without charging you interest. How? Because we incorporate the overall cost of the maintenance/service contract into the total payment on the equipment. This way you only make one payment for both the equipment and the service package at no additional cost to the Lessee. We will even provide you a breakout of the cost on your proposal and the finance contract.

Can I include money for future equipment purchases in today’s lease?

Yes! We understand it may be easier to allocate funds for future purchases today rather than going to your board for each new purchase. The key is in the planning. Once you have established a ‘need’ for future purchases, work closely with your Baystone sales representative to calculate the future costs of your equipment. We will then set aside a portion of your lease in a draw account for future purchases.

Can I make payments via ‘auto draft’ or ACH?

Yes, because we are part of bank, we can easily set up an auto draft option for your payment. We will send you the ‘optional’ auto draft form with our finance contract. This way, you can choose to make payments via check or auto draft – either way works for us!

We’ve already paid for the equipment, can we still finance it?

Yes! This can occur in two ways: 1) if the lessee is in the process of completing their lease application and/or contract, they can pay for the equipment/project and seek reimbursement following the completion of the lease documentation; or 2) if the lease paperwork has not been started, to receive a reimbursement of cash, the lessee must first pass a reimbursement resolution declaring official intent to reimburse expenditures with tax-exempt proceeds. Once the resolution has passed, the proceeds of the tax-exempt offering may be used to reimburse expenditures made up to 60 days prior to the declaration of official intent. In any event, the financing must be closed and the reimbursement made within 18 months after the date the expenditure was paid for or the date, on which the property was placed in service, whichever is later.

What do you mean by tax-exempt financing, our organization is already tax-exempt?

By tax-exempt, we mean the interest earnings on the financing are exempt from federal income tax per Section 103 of the Internal Revenue Code. Because we do not pay income tax on the interest earned, the savings are passed on to the lessee in the form of lower interest rates. In contrast, a ‘tax certificate’ or ‘sales tax exemption certificate’ received by many nonprofit entities, refers to a ‘sales tax exemption’ and/or exemption from paying federal income tax, not the ability to finance equipment tax-exempt.

What are some of the benefits of tax-exempt leasing?

Please see our lease purchase financing section to learn the benefits of tax-exempt leasing.

Does the lessee have the option to pay off a lease prior to the last payment?

Yes! The lessee may, on any payment due date, exercise their right to buy out the lease purchase agreement to save on future interest costs. If you are between payment dates and would like to payoff off your lease, please give us a call and we will provide you with a payoff amount.