Can’t Find the Cash? There are Alternatives
December, 2014
By David J. Clamage
In the world of institutional parking, states and local governments make up a significant proportion of owned facilities and spaces. Cities and counties, airports, hospitals, colleges and universities own or control a massive number of facilities and inventory in garages, surface parking and on-street metered parking.
And in the “new economy,” each of these institutions is striving to do more with less, by adding technology to improve operational and economic efficiency to this crucial part of business in serving their communities.
Add to the core business of parking the demands for energy efficiency – including new energy efficient lighting, solar and alternative power generation, improved ventilation, and the general “green” mission of government – and you have enormous pressure on the finite dollars in state and local governments today.
I’m not here to provide a set of statistics about this inventory – the sources of these data are available to you already because you live in these markets. I am here to help demystify solutions to enable these customers to acquire the products that let them improve the economics of parking by making affordable and efficient purchases.
State and local governments have a finite toolbox to fund purchases.
►Bonds require a vote of the community. Citizens of city, county, state or special districts, these voters agree to both levy taxes for identified projects and allocate sources of repayment.
Bonds typically are earmarked to specific projects, often making it difficult to add unbudgeted equipment and projects to be paid for from these dollars. They are generally issued in lockstep with an election cycle, adding to the complexity of taking an important equipment acquisition outside this cycle.
Bonds also are structured for repayment more by the financial markets – i.e., interest rates, bond maturity and market demand – making it difficult to match the repayment for many of the projects, discussed in Parking Today magazine and here in Parking Today Technology, that are revenue-generating or reduce expenses.
►With surplus revenues becoming increasingly scarce, the governing bodies that oversee budgets also allocate Capital Expenditure (CapEx) funds as an attempt to match the forecasts of their management teams for new equipment, repair and replacements.
As an example, in the 2014 City of Denver Budget of some $2.3 billion, $105 million was allocated for Capital Expenditures – some 4.5% of the total budget, and with that largely already earmarked for specific projects. And to put that number in even more perspective, of the $8.5 billion in the City of San Francisco 2014 budget, Capital and Equipment was $166.5 million, or just under 4%, and again, virtually all these funds were set aside for specific purchases.
As you can see, there is a finite amount of dollars available to make purchases outside the Bond and Budget cycles.
►In the 1950s, the TELP (Tax Exempt Lease Purchase) model was developed for use in all 50 states as a tool to provide financing outside the bond cycle and legal restrictions by implementing non-appropriation as the legal mechanism to overcome a state’s or municipality’s requirement for bonded or voter-approved debt.
The key is, as defined by the Municipal Securities Rulemaking Board, non-appropriation becomes the driver in this structure, i.e., “A provision of a bond contract that allows the lessee or borrower to terminate certain obligations under a long-term certificate of participation or other revenue obligation financing if the appropriating body does not appropriate funds for the lease payments.”
If the budget of a municipal lessee or borrower should contract, they have the right to terminate the financing, with the lessor or lender being entitled solely to the equipment, asset or project financed.
While on the face of it this sounds like high-risk finance for the lender, the Association for Governmental Leasing and Finance reported in its 2013 survey of members that of some $5.7 billion in leases originated that year and more than $111 billion in leases traded in the financial markets, only some 0.0009% actually non-appropriated in the portfolios of reporting members.
►By focusing on the credit worthiness of their borrowers and the importance of the underlying equipment and projects, the Muni(cipal) Lease remains an often-used tool for state and local governments to acquire the kinds of equipment discussed in PT and this issue of PTT. In fact, virtually all 50 states reported significant volumes of financing in this form in 2013, with California leading the market with more than $543 million financed in this way.
The basics of a TELP or muni lease are fairly straight forward – with nuances and fine-tuning available per state and local laws and policy, as well as the goals of your project:
• Fully Amortizing
- $1 end-of-term purchase option.
• Pre-Payable
- This is important, as many leases are used to provide a bridge from an important and urgently needed project today to bonds that may be issued later.
• No Voter Requirement
- This makes the acquisition a business decision made by the department head and its financial managers vs. the process and political efforts of bonds.
• Tailored Repayment
- Unlike bonds, lease payments can be sculpted to the project:
• Seasonally adjusted.
• Matching savings or revenue.
• Timed to fiscal year restrictions.
• Administratively Efficient
- Muni leases are generally approved within (a) the purchasing or contracting authority of the agency; and/or (b) reviewed and approved by governing body resolution, e.g., City Council, County Commission, etc.
- Once the business terms are agreed to, most leases can be closed and funded within 30 days.
• Low Cost
- Most TELP financings allow the interest portion of the payment to be exempt from the federal and state income taxes of the lessor or lender, with rates approximating bonds. Recent examples include:
• 1.570% 5 years or $17.34 per thousand dollars of equipment cost per month.
• 4.072% 19 years or $6.10 per thousand dollars of equipment cost per month.
• 3.00% 7 years or $13.21 per thousand dollars of equipment cost per month.
- Generally, there are no additional fees or costs to implement a muni lease.
• Non-Recourse
- There is no recourse to the seller of equipment in these financings and, as a practical matter, a commercial business cannot guaranty the debt of a tax-exempt borrower.
• These are 100% “true sale” for the vendor.
- There is typically no recourse to the tax revenues of the borrower/lessee where their pledge is limited to “available funds” vs. bonds pledging the “full faith and credit” of the borrower – including the promise to levy new fees and taxes as needed to repay bond debt.
The Process
Each time you, as a seller or a government agency, evaluate a new project or piece of equipment, many resources are available to secure a lease finance quote from companies like ours; members of the Association for Governmental Leasing and Finance; or your local bank. This gives you options not only in selecting the project or equipment, but also in adding financial solutions to your process that allow you to:
• Acquire important equipment and projects now vs. waiting for new budgets or bonds.
• Expand your solution to be more comprehensive, addressing more of the current need and scope of your project.
• Tailor repayment to available and future funds and the economics of
the project.
- Payments can often be delayed until the next fiscal year.
- Payments can be structured to match the savings that new systems and equipment will provide, and adjusted for the budget, seasonality and more.
It’s well-documented that some 30% of all equipment and project purchases made by state and local governments are financed through the TELP/muni-lease process. It’s efficient, affordable and supported by statute across the U.S.
This article was designed to prime your thinking about alternatives to bonds and CapEx, and begin the process of sharing concepts about finance as they apply to the mission critical business of parking.
Contact David J. Clamage, Founder and Managing Director of Saulsbury Hill Financial, at davidc@saulhill.com.
And in the “new economy,” each of these institutions is striving to do more with less, by adding technology to improve operational and economic efficiency to this crucial part of business in serving their communities.
Add to the core business of parking the demands for energy efficiency – including new energy efficient lighting, solar and alternative power generation, improved ventilation, and the general “green” mission of government – and you have enormous pressure on the finite dollars in state and local governments today.
I’m not here to provide a set of statistics about this inventory – the sources of these data are available to you already because you live in these markets. I am here to help demystify solutions to enable these customers to acquire the products that let them improve the economics of parking by making affordable and efficient purchases.
State and local governments have a finite toolbox to fund purchases.
►Bonds require a vote of the community. Citizens of city, county, state or special districts, these voters agree to both levy taxes for identified projects and allocate sources of repayment.
Bonds typically are earmarked to specific projects, often making it difficult to add unbudgeted equipment and projects to be paid for from these dollars. They are generally issued in lockstep with an election cycle, adding to the complexity of taking an important equipment acquisition outside this cycle.
Bonds also are structured for repayment more by the financial markets – i.e., interest rates, bond maturity and market demand – making it difficult to match the repayment for many of the projects, discussed in Parking Today magazine and here in Parking Today Technology, that are revenue-generating or reduce expenses.
►With surplus revenues becoming increasingly scarce, the governing bodies that oversee budgets also allocate Capital Expenditure (CapEx) funds as an attempt to match the forecasts of their management teams for new equipment, repair and replacements.
As an example, in the 2014 City of Denver Budget of some $2.3 billion, $105 million was allocated for Capital Expenditures – some 4.5% of the total budget, and with that largely already earmarked for specific projects. And to put that number in even more perspective, of the $8.5 billion in the City of San Francisco 2014 budget, Capital and Equipment was $166.5 million, or just under 4%, and again, virtually all these funds were set aside for specific purchases.
As you can see, there is a finite amount of dollars available to make purchases outside the Bond and Budget cycles.
►In the 1950s, the TELP (Tax Exempt Lease Purchase) model was developed for use in all 50 states as a tool to provide financing outside the bond cycle and legal restrictions by implementing non-appropriation as the legal mechanism to overcome a state’s or municipality’s requirement for bonded or voter-approved debt.
The key is, as defined by the Municipal Securities Rulemaking Board, non-appropriation becomes the driver in this structure, i.e., “A provision of a bond contract that allows the lessee or borrower to terminate certain obligations under a long-term certificate of participation or other revenue obligation financing if the appropriating body does not appropriate funds for the lease payments.”
If the budget of a municipal lessee or borrower should contract, they have the right to terminate the financing, with the lessor or lender being entitled solely to the equipment, asset or project financed.
While on the face of it this sounds like high-risk finance for the lender, the Association for Governmental Leasing and Finance reported in its 2013 survey of members that of some $5.7 billion in leases originated that year and more than $111 billion in leases traded in the financial markets, only some 0.0009% actually non-appropriated in the portfolios of reporting members.
►By focusing on the credit worthiness of their borrowers and the importance of the underlying equipment and projects, the Muni(cipal) Lease remains an often-used tool for state and local governments to acquire the kinds of equipment discussed in PT and this issue of PTT. In fact, virtually all 50 states reported significant volumes of financing in this form in 2013, with California leading the market with more than $543 million financed in this way.
The basics of a TELP or muni lease are fairly straight forward – with nuances and fine-tuning available per state and local laws and policy, as well as the goals of your project:
• Fully Amortizing
- $1 end-of-term purchase option.
• Pre-Payable
- This is important, as many leases are used to provide a bridge from an important and urgently needed project today to bonds that may be issued later.
• No Voter Requirement
- This makes the acquisition a business decision made by the department head and its financial managers vs. the process and political efforts of bonds.
• Tailored Repayment
- Unlike bonds, lease payments can be sculpted to the project:
• Seasonally adjusted.
• Matching savings or revenue.
• Timed to fiscal year restrictions.
• Administratively Efficient
- Muni leases are generally approved within (a) the purchasing or contracting authority of the agency; and/or (b) reviewed and approved by governing body resolution, e.g., City Council, County Commission, etc.
- Once the business terms are agreed to, most leases can be closed and funded within 30 days.
• Low Cost
- Most TELP financings allow the interest portion of the payment to be exempt from the federal and state income taxes of the lessor or lender, with rates approximating bonds. Recent examples include:
• 1.570% 5 years or $17.34 per thousand dollars of equipment cost per month.
• 4.072% 19 years or $6.10 per thousand dollars of equipment cost per month.
• 3.00% 7 years or $13.21 per thousand dollars of equipment cost per month.
- Generally, there are no additional fees or costs to implement a muni lease.
• Non-Recourse
- There is no recourse to the seller of equipment in these financings and, as a practical matter, a commercial business cannot guaranty the debt of a tax-exempt borrower.
• These are 100% “true sale” for the vendor.
- There is typically no recourse to the tax revenues of the borrower/lessee where their pledge is limited to “available funds” vs. bonds pledging the “full faith and credit” of the borrower – including the promise to levy new fees and taxes as needed to repay bond debt.
The Process
Each time you, as a seller or a government agency, evaluate a new project or piece of equipment, many resources are available to secure a lease finance quote from companies like ours; members of the Association for Governmental Leasing and Finance; or your local bank. This gives you options not only in selecting the project or equipment, but also in adding financial solutions to your process that allow you to:
• Acquire important equipment and projects now vs. waiting for new budgets or bonds.
• Expand your solution to be more comprehensive, addressing more of the current need and scope of your project.
• Tailor repayment to available and future funds and the economics of
the project.
- Payments can often be delayed until the next fiscal year.
- Payments can be structured to match the savings that new systems and equipment will provide, and adjusted for the budget, seasonality and more.
It’s well-documented that some 30% of all equipment and project purchases made by state and local governments are financed through the TELP/muni-lease process. It’s efficient, affordable and supported by statute across the U.S.
This article was designed to prime your thinking about alternatives to bonds and CapEx, and begin the process of sharing concepts about finance as they apply to the mission critical business of parking.
Contact David J. Clamage, Founder and Managing Director of Saulsbury Hill Financial, at davidc@saulhill.com.
