What Is a Municipal Lease Agreement?
Municipal lease agreements provide funding for the purchase of equipment and property. This is a type of conditional sales contract that allows a variety of payment options, including monthly, quarterly, semi-annual or annual payments. A municipal lease agreement is also referred to as a tax-exempt lease agreement, and is extended only to state and local branches of the government and their subdivisions.
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Alternative to Cash Acquisition
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A municipal lease agreement is a type of financial agreement in which annual business revenues are used to make payments on certain items, equipment, or property that are essential to the operation of the business. This is an alternative method to cash acquisition and traditional commercial leases.
Municipal Lease Purchase
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A municipal lease agreement is not a cash purchase, nor is it a traditional lease. This type of lease is classified as a lease purchase. If the entire contract is fulfilled and each payment is made as agreed, the lessor will own the property at the conclusion of the municipal lease. While the municipal lease agreement is in effect, the lessor will hold the security interest and the municipality will hold the title to the property. At the conclusion of the contract, the property title will be passed to the lessor.
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Non-Appropriation Clause
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The typical municipal lease agreement includes a non-appropriation clause that is designed to protect lessees who cannot meet payment obligations on the lease. The lessee has the right to end the municipal lease agreement without the assessment of penalties and with no further obligations.
Tax Exempt Interest Income
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A municipal lease is classified as a tax-exempt lease since the interest income from the lease will be tax exempt to the lessor. The lessor will then be able to retain the funds that would have been spent on taxes for use within the municipality, which can be a town, city, or any clearly defined area within a state. A municipal lease will typically allow the city to budget less money for equipment rentals and use the money in other areas that need increased funding.
Future Equity
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Payments made on a municipal lease will build future equity. Anytime during the lease, the lessee may choose to pay off the equipment and obtain full ownership. At any point during the lease a specific purchase amount, comprised of the remaining principle and accrued interest, can be calculated.
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References
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