The use of portable classrooms by public school systems continues to grow at
more than 20% every year.
As the modular industry moves towards offering
more permanent classrooms, there seems to be a greater desire for public school
systems to acquire modular classrooms through financing. This may be the result
of better planning by the school systems, realizing at the beginning that
ownership is more cost effective than a long-term rental, or lease. It may be
that the schools want eventual ownership since the modular industry is building
a better product, which is less prone to defects, which can be better used as a
"permanent" solution. Or it may be that there is a better understanding of the
benefits of this low-interest method of financing that has gained over other
methods of financing. Here's a quick overview, incorporating the most often
"What is a tax-exempt lease?"
This is a financing transaction also known as a conditional sales contract
where the interest earned by the lessor is not subject to federal taxes. The
lessor, since they do not pay federal taxes on the interest income can offer a
lower interest rate to the lessee. The exclusion from federal taxes is where
the "tax-exempt lease" name comes from.
"Who is eligible?"
The lessee must be a state or possession of the US, or a political subdivision
thereof. Political subdivisions include cities, towns, counties, as well as
other entities, which have sovereign powers that include taxation, eminent
domain, and police power. These entities include school districts, water
districts, hospitals and others.
"Who isn't eligible?"
Most charter schools
(excluding Ohio, Colorado, and some other states), "not-for-profit" entities
also known as 501(c) 3, federal agencies, and public "affiliate" (not run by)
Modular building dealers and manufacturers may offer tax-exempt lease/purchase
financing to qualified customers even if financing is not part of the bid
request. This can streamline the documentation process. Often, municipal
customers are already bidding the financing separately. It varies from customer
to customer. If you do choose this type of financing, make sure to note that
the appropriate documentation will be necessary. A set of sample tax-exempt
documents may be included with your bid response, as you would be surprised how
many purchasing agents still aren't familiar with this type of financing.
"Is it always a Dollar ($1.00) Purchase Option?"
The IRS Code requires a nominal purchase option at the end of the lease term.
This small amount is typically one dollar, but can be slightly higher.
"OK, I'm getting there, just how cumbersome are municipal documents?"
The IRS Code requires a few very basic provisions be included to qualify the
lease as tax-exempt. This document has been standardized by the industry and
using the document from a financing source will have a favorable effect the
interest rate. These documents include but aren't limited to:
Master Lease/Purchase Agreement
This spells out the terms of the financing. This also includes a
"non-appropriations clause," which states the lessee can terminate the lease at
the end of the current fiscal year, and return the equipment if they are unable
to obtain sufficient funds to meet future lease payments.
This comes from the lessee's counsel, and states proper procedures were
followed in executing the documents.
Essential Use Certificate
The lessee states that the modular equipment is necessary and essential to the
on-going operations of the lessee. This is important in light of the
8038-G or GC IRS Form
This is an IRS form and requires specific information to be filed. Failure to
do so may result in the transactions loss of its tax-exempt treatment.
Represents payments due under the lease and also breaks out the interest and
principle components of the lease payment, which is required by the IRS code.
Clearly specifies the lease start date
"Who is responsible for maintenance, property taxes, insurance, and other
A tax-exempt lease is a "net lease" and the lessee is responsible for all
operating expenses. The lessee may contract with a modular dealer/manufacturer
to provide such services as maintenance, but these are paid outside the scope
of the tax-exempt financing.
"Why would I enter into a tax-exempt lease?"
There are a few obvious benefits to this type of financing which include:
A lower interest rate than a taxable finance lease resulting in lower lease
The school district only carries the current operating expense of the lease on
its books. In most states a tax-exempt lease subject to annual appropriations
is not included in the debt calculations and will not affect the debt ceiling.
Traditional means of tax-exempt debt, or the issuance of bonds, are not
economically feasible for individual projects. Bond issues start to make sense
for more than $5,000,000 for small issuers and $10,000,000 for larger issuers.
Avoidance of a large capital expenditure, where the lessee may not have
available funds. Allows the user to pay for the buildings through their use,
over time. This is common in a fast growing school district, which may need
"emergency" modular classrooms.
Flexible terms, with equity building in the buildings with each payment
Simple, quick, inexpensive means of financing for qualified Lessees.
"Should the dealer/manufacturer act as the lessor in the lease? How does this
affect the lessee?"
Most financing sources will let the modular dealer/manufacturer act as the
lessor in the lease and take a non-recourse assignment of that lease to others.
The lessor and lessee both retain any obligations they have in the lease and do
provide warrants and representations of such to the financing source.
"Can they finance modular equipment/furniture?"
Other equipment can be added to the tax-exempt financing in addition to the
modular equipment. This may include furniture and fixtures for new modular
classrooms, computers, or HVAC equipment. The list is almost endless. The
important thing is that this equipment must be "essential" to the operations of
the lessee. A classroom desk and chair is obviously essential to teaching a
child in your modular classroom.
"How does credit approval work?"
Most lessors like to see three years of audited financial statements for credit
consideration. Obviously, the risk of a school district going away is minimal,
but if they are having budget problems the lease needs to be priced
accordingly. There are financing sources for all types of credits and
circumstances. If the lessor knows the circumstances and has the information,
the proper lease can be tailored, with the proper rate.
"Who owns the equipment?"
In most cases the title, or MSO, is passed to the lessee, with the lessor
holding a security interest in the equipment.
That's the quick overview. A good quote to a qualified customer should include
this type of offering whether tax-exempt lease/purchase financing is requested
The prospective buyer may decide that the quote, with its tax-exempt offering,
is more cost effective than other financing options.