Texas Fire Chief - Fall/Winter 2007 - (Page 21)

Tax-Exempt By Don Grimes Senior Vice President Wells Fargo Public Finance Financing 101 FIRE STATIONS, FIRE TRUCKS AND EQUIPMENT I ©iStockphoto.com/Murat Baysan n today’s economy, the need for public services often exceeds funding resources, and alternative forms of financing may offer effective solutions. One such solution is to employ tax-exempt funding through lease-purchase agreements. Low-cost, tax-exempt fi nancing is available to emergency service districts, volunteer fire departments, cities and counties for all of their capital projects. Whether the need is for fire stations, fi re trucks or miscellaneous equipment and protective gear, the repayment period can be tailored to match the useful lives of the assets being acquired. Payments can be structured on an annual, semiannual, quarterly or monthly basis, with interest accruing only during the construction or order period. As a result of the tax-exempt financing status, it is not uncommon to save about one-third of the interest cost normally paid on a taxable loan. The most common way to obtain tax-exempt financing is to enter into a lease-purchase agreement with a “subject to annual appropriations” clause. This complies with state laws prohibiting issuers from entering into contracts beyond their current fiscal year, without going through steps normally associated with issuing bonds – such as an election. Lease-purchase financing generally does not include a required down payment, and the advantages of ownership are retained because all payments are treated as having interest and principal components with purchase options. After all payments are made, the purchase option price is $1, and title is passed on to the borrower. When rates are quoted on an interest rate, all expenses are generally built into that rate. Lenders often accept a legal opinion on the validity and enforceability of the agreement by the regularly employed legal firm or house counsel of the borrower, instead of requiring one from a bond counsel firm. Interest rates for lease-purchase financings are normally competitive with comparable-length bond issues, especially considering the lack of front-end borrowing costs. Most often, rates are quoted that are binding if accepted within seven days and closed within approximately 30 days. When the borrower is not ready to purchase the equipment but wants to lock in a rate, an escrow account can be established, with the interest earnings accruing to the borrower. The funds can be taken down over a period of time if various pieces of equipment are included in the agreement. Fire stations and other real estate Fire stations and other real estate can be financed using a deed of 21 TEXAS FIRE CHIEF Fall/Winter 2007

Table of Contents Feed for the Digital Edition of Texas Fire Chief - Fall/Winter 2007

Contents Executive Director’s Report Fire Chief of the Year What is an Emergency Service District (ESD)? Tax-Exempt Financing 101 The Benefits of Vehicle Infrastructure Integration (VII) Southwest Fire Rescue 2008 Preview Membership Application ‘Courage to be Safe’ Program Aims to Save Lives Red Truck, Green Building Index to Advertisers

Texas Fire Chief - Fall/Winter 2007

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