HOW DO YIELDS ON MUNICIPAL LEASE/PURCHASE OBLIGATIONS COMPARE WITH THOSE AVAILABLE ON MUNICIPAL BONDS FOR INVESTORS?
Yield relationships vary over time, presently five-year Municipal Leases are yielding about the same as 10-20-year general obligation municipal bonds of "A" rated quality. A majority of Municipal Leases have 2-5 year maturities, although 6-15 years is not uncommon when the equipment's useful life justifies the longer term. In the case of maturities that exceed 10 years sometimes rates are adjustable after a certain period. The average life of an offering is much shorter due to the principal and interest return during the term.
ALONG WITH BEING EXEMPT AT THE FEDERAL LEVEL, IS THE INTEREST ALSO EXEMPT FROM STATE INCOME TAX?
Yes or no, depending on the state. If the state exempts the interest on general obligation municipal bonds originated within the state, the same will apply to Municipal Leases for residents of the issuing state. Puerto Rico Municipal Lease issues are exempt for most states and triple exempt for New York City residents Also, Municipal Leases are rarely if ever subject to the alternative minimum tax. These are private placements and there are no 1099s because these are not registered investments. The investor will receive a payment schedule stating how much principal and interest they will receive in each payment during the term.
WHO ARE THE INVESTORS IN THESE FINANCINGS?
Individual and institutional investors who are looking for a sound alternative to municipal bonds. These fixed income investments/loans are placed with individual and institutional investors who want the added benefit of earning a high tax-exempt yield, while receiving principal and interest back during the term, allowing them the ability to reinvest the principal and interest as rates rise. The return of principal and interest is a unique characteristic of municipal leases that distinguishes them from municipal bonds.
WHAT DOLLAR AMOUNT IS INVOLVED IN EACH INVESTMENT?
Municipal Lease/Purchase agreements are written in all sizes from $5,000 into the millions of dollars. The typical transaction Dominique PLC places with our investors is between $5,000 and $1,000,000 with some being larger.
FOR WHOM IS THIS TYPE OF INVESTMENT SUITABLE AND FOR WHOM IS IT NOT?
As a result of the limited secondary market they should only be purchased when the individual or institutional investor's portfolio already has the proper amount of liquid holdings. Given their self liquidating nature, most investors can utilize municipal lease obligations in their portfolios.
HOW LONG HAS THIS BUSINESS BEEN IN EXISTENCE?
Banks have been financing equipment for their local communities through installment purchase contracts for over 100 years. Transactions independently originated by sources other than banks did not become significant until around 1969. The growth of the Municipal Lease business since then has been very rapid and consistent with individual and institutional investors facilitating it.
ARE THESE LIQUID?
Municipal Lease/Purchase Obligations can be sold to another party but they are not as liquid like municipal bonds or listed stocks. Dominique PLC would work on a best efforts basis to find another investor for a Municipal Lease/Purchase Obligation.
IF THESE ARE NOT REALLY LEASES, WHY ARE THEY CALLED MUNICIPAL LEASE/PURCHASE OBLIGATIONS?
The early lease/purchase documents were titled "Lease with Option to Renew." These contracts had to be renewed each year and for this reason were called "leases." Current documentation stays in place for the life of the agreement since these are an expense and not true debt, only the funding is appropriated annually.
WHAT KIND OF STATE AND LOCAL GOVERNMENTS USE THIS TYPE OF FINANCING?
This type of financing has been used by almost all types of municipal government entities. These include state governments, counties, cities, schools, fire districts to name a few.
WHY WOULDN'T THE STATE OR LOCAL GOVERNMENT ISSUE BONDS?
Most equipment purchased does not cost enough or have a long useful life to justify the expense of issuing long-term municipal bonds. Municipal Lease/Purchase Obligations are written taking into consideration the useful life of the equipment. Additionally, the generation of a Municipal Lease/Purchase Obligation is much less time consuming that the creation of a municipal bond issue.
ARE MUNICIPAL LEASE/PURCHASE OBLIGATIONS EVER RATED BY THE RATING SERVICES?
Due to the cost involved, ratings are not often requested unless the financing is multi-million in size.
DO THESE FINANCINGS EVER PAYOFF EARLY AND ARE THERE ANY PREPAYMENT PENALTIES ASSESSED THE INVESTOR?
There is no penalty to the investor if a prepayment took place, like some investment vehicles. Due to the short-term nature of Municipal Lease/Purchase Obligations prepayments are rare. Although the municipality does have the option to pay off the investor early at the end of each fiscal year. If this does occur, the investor would be paid the principal and interest due up to the point of the pay off. Occasionally the municipality will be assessed a prepayment penalty, creating a situation where the investor will receive more than they are due in principal and interest at the point of an early buyout.
ARE THESE FINANCINGS EVER ORIGINATED IN BANK ELIGIBLE FORM?
Many do qualify as a "small issuer" financing allowing them to be treated favorably under "TEFRA" for bank investors.
IS A SPECIFIC TAX PLEDGED TO THE PAYMENT OF THESE SECURITIES?
Not usually. Funds are appropriated from the general fund of the municipality, the same fund that pays the municipalities employees. Rarely will a special tax be levied to underwrite the payments. Rarely are these financings structured with a pledge of revenue.
FOR BANK INVESTORS, HOW ARE THESE REVIEWED BY EXAMINERS?
They are reviewed favorably. The fact that this is a very basic type of financing that has been around for approximately 100 years, allows them to be reviewed favorably. Overall they view a loan to a municipality that has existed for decades to be sound investing. Over ninety-five percent of the tax-exempt or taxable Municipal Leases Obligations we place are not in the state where our bank client is located. This overwhelming testimony to the favorable bank examiner review. Also, one hundred percent of Dominique PLC bank clients are community institutions.
ARE THESE EVER STRUCTURED AS TAXABLE YIELDING FINANCINGS?
Yes, occasionally they can be set up that way. This usually happens when a municipality is not sure that they want to own the equipment at the end of the term. Under this scenario, Dominique PLC investor is still paid off in full after receiving all their principal and interest payments.
WHAT IS THE ANNUAL VOLUME ON A NATIONAL BASIS?
Estimates of current volume are over $10 billion per year and rising. Continued citizen demand for services will lead to an increase in the volume of equipment financed in this manner.
WHAT TYPES OF EQUIPMENT ARE USUALLY FINANCED? Equipment most often financed involves the basics such as computers, fire trucks, photocopiers and telephone systems. Although financings can be done for anything from water towers to water meters. In addition, many real estate financings have been handled in this manner.
