Longo has been approached by many of our school district clients eager renovate laboratory classrooms into modern lab space. The question of “funding” always comes up when school building/renovation plans of this magnitude are discussed. We are pleased to announce the availability of the Lease Purchase Bidding Option to New Jersey school districts and municipalities.
Below I have included a description of the “lease purchase bidding” option run by the Middlesex Regional Educational Services Commission. I have also included frequently asked questions about “lease purchase bidding” regarding how it works, what can be purchased, and why it is a financially-sound tool available for school districts and municipalities…
Lease Purchase Bidding…What Is It?
Lease Purchase Bidding is a highly specialized area of purchasing; it incorporates a thorough understanding of public purchasing, tax-exempt finance, investment and commercial banking, vendors and suppliers, and how they all fit to optimally finance the particular equipment and projects needs of government entities. Doing it right can save tens of thousands of dollars in interest over the term of a lease purchase. Doing it effectively takes practice and experience.
Heading MRESC’s Lease Purchase Bidding/Financial Advisory Service is Dennis Balodis. He brings over thirty years experience in equipment finance with the last twenty dedicated to tax-exempt lease purchase financing for New Jersey school districts and governmental entities. Dennis developed the Lease Purchase Bidding model in 1994 and has advised and successfully conducted more of these than anyone else in New Jersey. He has long believed that this bidding service should be under the public umbrella to truly optimize the use of tax dollars and has joined the MRESC to provide this service.
To contact: Dennis R. Balodis
Phone: (732) 777-9848, ext. 6622
E-mail: DBalodis@mresc.k12.nj.us
Frequently Asked Questions:
Since both bond and lease purchase are tax-exempt, what is the difference between them?
A bond and a tax-exempt lease purchase both give their investors interest income which is tax free. A bond pledges the full faith and credit of a governmental entity. The bond contractually commits the governmental body to payments that will be made beyond the fiscal year; this guarantees that payments will be made from tax dollars for the life of the issue. Lease purchase payments are made from the current expense portion of the budget. The Lease Purchase Agreement is a series of self-renewing one year contracts and contains a “funding out clause” that will allow for a government to non-appropriate funds and get out of the lease. Although on paper this is all well and good, in reality, we are dealing with tax-exempt issues. An event of non-appropriation for a lease purchase is reported to the bond rating agencies which serves as a major black mark against that entity when they try to get a decent rate for a future bond issue.
Do I need to bid on lease purchase financing?
Lease Purchase must be bid!
“N.J.A.C. 5:34-3.2 Application of Bidding Requirements
(a) All multi-year contracts, including all multi-year leases and multi-year leases with option to purchase, which are authorized under N.J.S.A. 40A:11-15(7), 40A:11-15(15) or 18A:18A-42(f), and other multi-year contracts subject to N.J.S.A. 40A:11-15 and 18A:18A-42 for the procurement of goods or services shall be subject to competitive bidding if the cumulative amount to be expended during the duration of the multi-year lease or contract exceeds the threshold for competitive bidding for the contracting unit.”
What can be lease purchased?
Any equipment or project that is essential to the operation of a governmental entity can be lease purchased. This runs the gamut from computers, technology, musical instruments, buses, vehicles, grounds keeping equipment, to textbooks and roofs.
What cannot be lease purchased?
Disposable or consumable products with a life span of less than one year should not be included.
Can different types of equipment be mixed on the same lease purchase?
Yes, different types of equipment can be put on the same lease. In fact, it is advisable to do so. When bidding for a lease purchase, the objective is to obtain the utility of money and asking a lender to “loan” money to a governmental entity for a period of time. The financial institution is going to make a credit decision on the creditworthiness of the governmental entity and the types of equipment which is considered collateral for the “loan”. The balance of strong (readily re-marketable equipment such as buses, routers and switches, etc.) and soft (less re-marketable equipment such as software licenses, band uniforms, etc.) collateral can enhance the attractiveness of a lease purchase transaction.
Many equipment vendors have financing programs. Since the equipment is purchased off Cooperative Pricing, WSCA, State Contract or other purchasing vehicle, can’t I use their programs?
First, the obvious answer is “no”, since financing is not bid as a separate item. Second, is common sense, when equipment or projects are cooperatively bid, the goal is to get the best volume pricing for the products obtainable in the market. The higher the volume, the cheaper it is to produce. Lease purchase, however, is an individualized “loan” to a governmental entity based upon creditworthiness types of collateral and the size of the individual transaction. If lease purchase was offered as a line item on a bid, the rate offered would have to reflect the weakest credit and the smallest transaction. Unlike commercial transactions, the tax-exempt lease purchase cannot legally be supported by a vendor because it would nullify the tax-exempt status.
Why use lease purchase financing?
A lease purchase is an important financial tool that can be effectively used to limit and cushion the tax impact of equipment and project acquisitions. Each governmental entity has specific and unique fiscal needs. The goal of a well written lease purchase bid is to structure a repayment plan that meets those unique needs while best portraying the entity to the bidding community.
Who is the bidding community?
When shopping for money, you go to the banks and financial institutions that are direct lenders. We believe that the banking community that wants to do business with a governmental entity is the primary target market for lease purchase bids.
Since manufacturers know their products, why can’t they give the best interest rates?
This is tax-exempt finance, the driving force behind the lower interest rates are the ability to shelter income taxes. The tax code only allows a manufacturer to deduct a small portion of the sales price of their goods when lease purchased. Most of the “captive” vendor finance programs are run by banks and finance companies that can take full advantage of the tax deduction. Since these financial companies are brought in by their vendors, there is limited competition; lack of competition equates to higher rates.
Can different equipment that will be delivered, accepted, and paid for over a period of time be put on the same lease purchase?
We are proponents of aggregating all of your financing needs of a year into one lease purchase. The vendors who sell equipment deserve to be paid when their equipment is delivered. To facilitate multiple payments over a period of time, we structure the lease purchase to be funded into an interest bearing escrow account. This permits you to release a series of payments to your vendors when the different deliveries are made and earn interest income from the escrow account.
