Factoring 101

Other Equipment Leasing Types

Other Equipment Leasing Types

An equipment lease is the lease agreement for equipment like plant and machinery, vehicles, and other accessories like computers, furniture, etc., used in business or production to avoid the heavy investment in the machinery and effectively utilize the money to earn the maximum returns on investment.  For running the business organization and producing goods, lots of investment in plant, machinery, and other assets are required, which block the money for a long time. Hence, some organizations take the machinery and other equipment on a lease basis to avoid heavy investments and prevent the organization from taking debt for investing in machinery. For the leasing of equipment, only lease rent is to be paid, which saves the organization from heavy investment and blockage of money; the money can be invested in some other way to earn the maximum returns. The ownership in case of equipment leasing will remain with the leasing company. Maintenance charges are borne per the leasing company’s and the lessee’s agreement, i.e., business organization.

Other Equipment Leasing Types

First Amendment Leases…. a specific type of true tax lease which gives the lessee a purchase option at one or more defined points during the life of the lease.  This type of lease is typically used for equipment with a shorter useful life.  A first amendment lease has the same characteristics of a true tax lease in terms of tax ownership.  Unlike typical true tax leases, however, they have two components:  the base lease term and the renewal term

First Amendment Leases differ from true tax leases in that:

  • first amendment lease automatically renews (usually for a period of 12-18 months) if the lessee does not exercise its purchase option
  • at the end of the base lease term, the lessee has the option to purchase the leased equipment at its fair market value (base lease purchase option price)
  • the lessee does not have the option to return the equipment to the lessor at the end of the base term.

Municipal / Tax Exempt Leases is a lease structure specifically utilized by municipalities and governmental entities and is structured as a lease / purchase agreement.  The ‘tax-exempt’ or ‘municipal lease’ qualification to this financing method is associated with the federal income tax exemption recognized by the lessor on the interest earnings they receive through the repayment schedule. This is similar to tax laws which enable a municipal bonds to be tax-exempt.

Only municipalities or qualified political subdivisions can qualify for this type of financing arrangement and because the lessor does not pay federal income tax on the interest earned, tax-exempt leases charge a much lower interest rate than other types of leases. This significantly lowers the cost of financing to the municipality.

Payments made on Municipal / Tax Exempt Leases are exempt from federal and state tax so long as the lessee’s tax-exempt status can be verified.  Typical equipment leased utilizing Municipal / Tax exempt leases includes fire and rescue equipment, street repair and road construction equipment, and sanitation equipment