Today’s fire department administrators face a diverse array of budgetary and operating challenges. As budgets and resources are reduced at the local level, funding the immediate and long term needs of your community becomes more difficult. The need for financing to purchase new equipment and facilities is growing. Lease financing is the most widely used method to purchase fire trucks, ambulances, equipment and stations while improving the management of cash flow.
When available, the tax-exempt interest feature of lease financing has tremendous value to fire and EMS departments across the country. The interest earnings under a properly structured and documented lease is exempt from federal income tax to the lender under the same tax laws that enable a municipal bond to carry a tax-exempt rate. Because the lender does not pay federal tax on the interest earned, the tax-exempt lease carries a much lower interest rate than other kinds of leases and installment loans thus significantly lowering the cost of financing for the borrower.
Local governments including cities, counties and fire districts qualify for this benefit on nearly all essential equipment. Volunteer fire corporations qualify for this benefit when financing fire trucks and stations, but not ambulances and equipment. This type of financial instrument is also referred to as a “government lease-purchase”, a “municipal lease” or a “tax-exempt lease”. While they are documented as a lease, they have characteristics similar to a loan in that there is a principal component in each payment, and the lease can be paid off early if desired. Once the department makes all payments, the department owns the asset free and clear.
Because local government agencies are restricted from committing funds beyond one year without voter approval, lease financing for them includes an annual non-appropriation clause which provides necessary options. In most cases, their obligation terminates if the governing body fails to appropriate funds to make the renewal year’s lease payment. Because of this provision, neither the lease nor the lease payments are considered debt. Non-appropriation is not an event of default but the fire department returns the asset.
Lease financing makes the acquisition of fire trucks, ambulances and equipment affordable to fire and EMS departments.
Structure and Terms
|Fire Trucks||Up to 15 years|
|Ambulances||Up to 7 years|
|Equipment||Up to 5 years (7 years at times)|
|Stations||Up to 20 years (30 years for some projects)|
|Payment Frequency||Annual, Semi-Annual, Quarterly, Monthly or Custom|
|First Payment Due Date||Deferrals up to one year after lease starts for annual payments|
|What can be Lease Financed?|
|Personal Property||Fire Trucks (new, used and refurbished), Fire Boats, Rescue Trucks, Staff Vehicles, SCBA and Compressors, Turnout Gear, Communications, Computers, Rescue Tools, Thermal Cameras, In-Car Computer and Video, Generators|
|Real Property||Fire Stations, EMS Stations, Training Facilities and Administrative Offices (New, Renovations, and Additions)|
Why do fire and EMS departments use lease financing?
- Leasing helps departments overcome budget challenges.
- Leasing allows departments to acquire the equipment they urgently need.
- Leasing enables them to save money by replacing maintenance intensive older equipment.
- Leasing provides level capital budgets each year.
- Leasing offers the opportunity to preserve cash for other projects that are either harder to finance or cannot be financed.
- Leasing allows departments to maintain and build cash reserves for future or unexpected needs.
- Leasing allows departments to spread the cost of their truck or equipment over its useful life rather than charge one fiscal period (group of tax payers) with the entire cost.
- Leasing is relatively simple to complete and allows fire and EMS departments to implement buying decisions quickly. In comparison, bonds take longer to implement, could require a vote, and are too expensive (attorney and issuance cost) for smaller acquisitions.