• Low, tax-exempt interest rates that are fixed for the term of the lease
• Increasing equity with every payment, resulting in complete ownership and clear title to the equipment at the end of the term
• Lease payments that are considered an operating expense, not long-term debt, thereby providing an avenue to ownership that does not create a debt obligation
• An alternative to the high issuance cost bond market and the time and complexity of obtaining voter approval for a bond issue
• An option to prepay the contract throughout the term for a predetermined purchase price
• Payments structured to meet the lessee’s cash flow and budgetary requirements on a monthly, quarterly, semiannual or annual basis
• A master lease program that allows for simple add-on schedules
• Desirability of matching costs and benefits over time
• Prevention of technological obsolescence
• Fixed monthly payments

In order for a lease to be tax-exempt for federal (and possibly state) income taxes, the following are required:

• The lessee must be viewed as a “municipality” and have one of the following powers:
  1) taxation
  2) eminent domain
  3) police

• The interest rate or component must be itemized in some form (most funding sources prefer an amortization schedule breaking out the actual dollars of interest in each payment, as opposed to simply providing the interest percentage rate.

• The lessee must obtain an equity interest in the property being financed during the lease term. This is usually shown by a nominal purchase option of $1.00 or a small amount in relation to the actual value at the end of the lease.

• The useful life of the equipment must be equal to or longer than the lease term

• The lessee must file an IRS 8038-G or 8038-GC form within a set time frame after the lease commences, as opposed to the usual process in which the lessor files these forms.

• The property must meet the private-public use rules, in which no more than 5% (but in some cases, up to 10%) can be used for private purposes.

If any one of the above requirements is not met, the lease cannot be completed on a tax-exempt basis. If the lessee does not want “ownership” of the property, a municipal taxable lease is more appropriate.