Municipal Leasing, Ambulance Financing, Fire Truck Financing

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Comparing lease purchase financing proposals involving escrow funding accounts from the Lessee's point of view.

In response to your request for lease purchase financing proposals, perhaps you received responses that vary considerably in terms of payments, commencement dates, and other assumptions.

In trying to determine the best alternative that fits your needs, it is important that you, the Lessee, be able to compare the proposals presented to you on an ' apples to apples ' basis.

1. Are lease interest rate commencement dates are the same in all proposals.

If competing proposals do not use the same interest rate accrual commencement date, their actual effective costs will differ, making it difficult to compare alternatives on an equal basis.

Also, if a proposal uses an 'assumed date', or the date of the proposal, to begin the interest accrual, the rate presented in the proposal can be lower than others that do not use this methodology, however the true interest cost will be a higher and unknown rate to you since it will depend on when the lease is funded, or the equipment vendor paid.

Interest accrual commencement and the booking date ( the escrow funding) are the same:
Escrow funding amount is $500,000:
Lessor and escrow fees of $4,000 are incorporated in the financing; and the
Lease term is for 5 annual in arrears payments beginning on the vendor payment funding date.

In this scenario, using a stated interest rate of 5.50% in the proposal to amortize the lease, annual payments would be $118,024.92.

Lease # 2

Interest accrual starts on the date of the proposal, and the lease will book or be funded 30 days later:
Equipment cost, payment amounts and dates, and lease term are the same as in Lease # 1:
Due to the earlier interest accrual date, the proposal could indicate an interest rate of 5.33% ( 0.17% less than Lease # 1 ) due to the longer interest accrual period, which would seem less expensive, but the true interest cost would still be the 5.50% based on the escrow funding date.

By pushing the assumptions a bit further, and using the proposal date as an interest commencement date (as in Lease # 2) plus delaying the escrow funding for an additional 30 days, an interest rate of 5.18% ( 0.32% less than Lease # 1 ) could be used in a proposal to win the business, but the 5.50% true interest cost would still apply to the financing, again based on the escrow funding date.

Consequently, the longer the time period between the interest accrual commencement date and the true funding of the lease, the higher the actual interest rate will be over an interest rate indicated in a proposal.

Also purchase option values in such a lease will be higher than a true amortization due to the differential between a stated proposal rate and the actual effective rate in the financing.

By accelerating lease payment dates in a proposal, whereby the first payment starts earlier in the contract period, the payments will amortize the outstanding principal faster, resulting in lower lease payments ( assuming equal interest rates ) over a proposal that does not use that technique or assumption.

As a result, a higher effective interest rate can be used versus a competing proposal using later payment dates that may in fact be based on what was requested in your RFP.

3. Are termination values for the lease, or purchase options, presented on a straight amortization basis, and not subject to a hidden lease interest rate differential which will increase the buy out values over a simple amortization.

FMLC leases capitalize its lessor and other fees, and amortize that cost and the funding amount over the life of the lease on a no prepayment penalty basis, unless we indicate otherwise.

4. Are all fees associated with the various proposals and financing alternatives included in the lease proposal numbers provided to you.

FMLC proposal Exhibits incorporate all required lessor fees, and there are no additional charges payable to the lessor, or the funding bank unless specifically set forth.

A Lessee's own legal counsel expenses in completing the lease would not be incorporated, since those are ordinarily not paid out of the financing proceeds unless specifically requested by the Lessee and approved by the lessor.

5. Is applicable sales tax left out, or included, uniformly in all proposals.

This is of particular importance if you are comparing proposals provided as part of a vendor's equipment pricing proposal, versus a third party proposal, such as one from FMLC.

If one vendor leaves tax out, and another includes tax in the equipment price, and a third party financing proposal is not presented on the same basis, the equipment value used in the various financing proposals will not be comparable. Also the lease payments presented on those differing figures will not reflect the true costs that will develop as the lease is completed and funded.

This will be important when the lease contemplates an escrow funding to accommodate delayed delivery times for the financed equipment, and to ' lock ' an interest rate and put the required funds in place.

In all FMLC proposals escrow earnings are for the Lessee's benefit, unless we specifically state terms to the contrary.

This issue of escrow earnings can sometimes be left out of a proposal, and what happens to those earnings can mean a considerable difference in the net cost of the lease to you, particularly if the equipment being financed has a long delivery time frame, and/or a high cost.

7. Are assumed payment dates for equipment or chassis prepayments the same in all proposals if an escrow is involved.

FMLC proposals will state the assumed dates and amounts based on data you or a vendor has provided to us. If the dates for payments to vendors and others are not the same between competing proposals, the assumed escrow earnings can vary considerably and the true net cost presented to you in the various proposals will be similarly extremely difficult to compare.

Also, in "net funding" escrows (where earnings will be used to make vendor payments) if deliveries and related escrow earnings do not materialize as proposed and if incorrect assumptions are not corrected before the lease is funded, completing the required payments to vendors upon equipment acceptance may require a ' make up ' payment from the Lessee to provide funds necessary for the vendor payment due to any escrow funding or earnings shortfall.

8. Are discounts for equipment / project progress payments, or chassis prepayments, incorporated in your vendor contracts and the lease pricing.

Proposals with escrow accounts need to be constructed to account for equipment or progress payments, both as to amount and due dates, and to reflect any discounts that may be provided to you in the equipment pricing in exchange for those prepayments.

When prepayments to the vendor are made, the Lessee is in effect financing the vendor and should be compensated at a price discount rate at least equal to, or more than, your borrowing cost or escrow investment rate. If discounts do not equal your interest cost in the financing they will not be advantageous to you.

All of these issues will directly relate to the true cost of the lease used to finance your equipment purchase.

While it may seem difficult to reconcile differing proposal alternatives, it is in your interest to have financing proposals detail the various assumptions incorporated in them, or for you to request proposal revisions, to make the desired comparison easier for you.

After all, it is your budget that will feel the effect of these structuring differences for several years to come.

Please call if we can be of assistance to you in understanding any of these issues that directly relate to your making an informed decision.

We would also appreciate your feedback on whether this explanation was of use to you, and what other information you would find helpful in the presentation.

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