Financing Sustainability Projects on Campus

Tax Exempt Lease Purchase Agreements (TELP)

A lease is a contract between two parties wherein the lessee agrees to pay the lessor for use of an asset. Leases can be structured in a variety of ways which impact the fee schedule, term of the lease, renewal conditions, termination options, asset maintenance and a number of other factors. Lease rates often are lower than loan rates. Leases are divided into two categories: operating leases and capital leases.

In an operating lease, the lessor transfers equipment usage rights to the lessee for the term of the lease. There is no transfer of ownership or option to purchase the asset at a reduced rate, at the end of the lease. This does not affect the balance sheet because the lease is treated as an operating expense. However, operating leases are expected to be phased out in the near term as U.S. GAAP accounting rules converge with International Financial Reporting Standards (IFRS).

A capital lease is an on-balance sheet expense treated as a capital expense. There is flexibility in assigning payments, which often can be scheduled to coincide with savings from energy efficiency projects. The lessee often also has the option of purchasing the equipment at the conclusion of the lease for a price below market value.

A Tax exempt lease purchase agreement (TELP) is a unique lease structure available only to tax-exempt organizations, such as government, education and not-for-profit entities. Leases are structured so that the full cost of the project assets is amortized over the lease period. Contracts typically include a nominal purchase option (e.g. $1) which is the lessee is expected to exercise at the end of the lease period. Given these structural elements, lessees may actually take title to the assets upon execution of the lease agreement, while the lessor retains a security interest in the assets during the contract. For energy efficiency projects, lease payments are generally structured so that energy savings resulting from the equipment are sufficient to cover principal and interest payments. Lease rates are lower than financing for commercial entities because interest paid to the lessor is not subject to federal taxes.

Benefits

• Clearly defined payment schedule
• Accounting advantages for operating leases (subject to change in the near future)
• Relatively low transaction costs and low financing rate
• Relatively long terms available for organizations with good credit
• Accelerated schedule for structuring and financial close

Challenges

• Capital leases are on-balance sheet
• Leases are largely credit-based transactions favoring building owners with stable credit - limited options for organizations with less than investment grade credit
• Pricing and length of lease depend on market conditions
• Relatively limited universe of capital providers (e.g. commercial banks)
• Strict lender requirements around choice of contractor and project size

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Resources

FAQs About Tax-Exempt Municipal Leasing
Association for Governmental Leasing & Finance