Maximize Acquisition Power with Municipal Leasing Programs
Maximize Acquisition Power with Municipal Leasing Programs
By Jonathan Fales
Long a staple of commercial enterprises’ equipment and technology acquisition strategies, lease financing continues to gain momentum in the public sector, as well. Like any business, municipal entities have ongoing equipment and technology requirements. However, the acquisition process for local governments can be more protracted, as budgets are arrived upon only after considerable deliberation and committee involvement. New expenditures or emergency needs can’t always be addressed through available, approved funds—or without extensive budget renegotiating.
Outright purchases may drain available allocations, limiting overall buying power. For many types of transactions, bond offerings and the use of revenue from an existing offering may be impractical. The use of leasing as an equipment acquisition tool can provide a better way to serve citizens, enhance internal productivity, and conserve valuable capital. Whether the issue is a backlog of replacement needs, a lack of resources to purchase outright, or the need to retain substantial cash revenues, leasing provides a flexible funding alternative. In many instances, the strategic use of leasing programs can enable departments to hold steady—or even reduce—their equipment and HR budgets.
What Makes Equipment Leasing Such an Attractive Alternative?
Depending on the type of lease plan selected, significant cash flow and administrative and operational advantages can be realized. These may include: 100 percent financing of equipment and related items, speedy acquisition and installment, ease of adding upgrades to equipment, and flexible payment structures to meet budgets or revenues. More public-sector benefits:
- A lease is considered an operating expense and is not treated as debt. Therefore, debt ceilings and referenda do not come into consideration
- Leasing can supplement other sources of capital such as grants, taxes, and revenue bonds.
- Financing is usually matched to the useful life of the asset.
- Financing rates are competitive with bonds.
Gregory Bohan of Key Government Finance, Superior, CO, explains that for many public-sector customers, “the main advantage of leasing over bonds is the absence of or very low cost of issuance. When this is taken into account, leasing is usually more cost-effective than bonds on structures of 10 years or less. Another advantage of tax-exempt leasing is its fast turnaround time. There is limited commitment from staff, and the approval process is simple. This simplicity allows financing of projects that might otherwise be out of the question.”
A master lease agreement, which allows an entity to make multiple acquisitions under one contract, is one mechanism to help streamline equipment acquisition, especially when multiple vendors or multiple projects are involved. This agreement also can include beneficial provisions such as escrow funding to allow up-front financing and payment for equipment as delivered, as well as equipment substitution features to meet changing circumstances.
“A master lease’s standardized documentation may help reduce costs, and the simple structure will facilitate board approval,” Bohan says. “Plus, you will minimize time commitment from your staff.”
Who Offers Municipal Leasing Programs?
Leasing companies and banks are two sources of municipal leasing programs. Manufacturer “captive” programs are another.
For Sandy Queen, manager of golf course operations for the City of Overland Park, KS, (population 140,000) leasing makes sense from several critical perspectives: financial, administrative, and operational. In addition to making sure that Overland Park’s 54 holes are impeccably maintained, Queen also has procurement responsibility for the city’s entire fleet of maintenance equipment.
Queen’s first foray into leasing involved golf carts. Her department found leasing to be “a neat, clean way to operate.” When the time came to make substantial upgrades to the department’s turf maintenance fleet, leasing appeared to be a smart solution.
Presently, close to 90 percent of the department’s $2 million turf maintenance equipment fleet is leased through financing with Toro Equipment Finance, Toro’s captive finance organization.
“We have an aggressive four- to six-year equipment replacement program,” Queen says. “Leasing makes this seamless in terms of managing the equipment, tracking the need for upgrades, justifying the expenditure, and then putting the equipment to work without delay.”
Toro set up and financed ongoing maintenance for the equipment, eliminating the need to hire dedicated workers or add to the workload of existing staff.
Queen describes the financial advantages of leasing, which makes sense even for cash-rich entities like Overland Park.
“[Because] the golf operations are enterprise-funded, it would be cost-prohibitive for us to borrow at revenue bond rates,” Queen says.
Although the financial health of the city allows Queen’s group to make thrice-yearly payments without significantly compromising cash flow, Queen says, “it’s nice to know that options such as seasonal payments exist, which can be matched to revenue stream.
“[Leasing] helps level the playing field when we’re soliciting bids,” Queen says. “When it’s time to make the case for an upgrade to our governing body, the availability of lease financing minimizes resistance from a financial perspective.”
Editor’s Note: Jonathan Fales is a principal with The Alta Group, www.govinfo.bz/
5196-151, a management consulting service for the global equipment and technology leasing industries. A member of the Equipment Leasing Association (ELA) board of directors and executive committee, Jon frequently speaks at global leasing conferences and writes for leading industry magazines. Contact Jon at [email protected].
