3.7.2 Direct Leases

3.7.2 Direct Leases

The direct lease (or lease purchase) structure is most often used to finance the acquisition of equipment such as fire trucks. In the usual transaction, the public agency leases the property from the lender, which may be the vendor of the property, a leasing company, or a bank. Under the financing lease, title to the property is transferred to the public agency upon expiration of the lease term. A portion of each lease payment made by the public agency is designated as interest, which may qualify as tax exempt income to the lender. The lender may then transfer its interest in the lease to another party. The basic document is a financing lease (between the lessor and the public agency), and rental payments are made by the public agency directly to the lessor or to a party to whom the lessor has assigned its right to receive the payments. An alternative to a direct lease is an installment sale agreement in which the lessor is instead a seller and the public agency lessee is a buyer, and the public agency makes installment payments rather than lease payments. See Figure 3-2 for a cash flow diagram of a direct lease (private placement).