Financing Your New Fire Station

By Lynn Bartsch

You have decided to build or remodel a new or existing fire station, or other real estate. Conceptual plans are complete, and you obtained estimated construction costs. Now you face the task of coming up with the funds to pay for the project.

While it is misleading to say it is easy to arrange fire station or other real estate financing, it is not as difficult as you might think.

Your options can include grants, other external fund sources, or district or department dependent methods. Such methods might include a voter approved bond requiring a corresponding tax increase, or a form of financing that will not require voter approval – a tax exempt lease purchase.

A lease purchase, or where permitted a financing agreement, is similar to a home mortgage, with a schedule of payments and clear title passing to the lessee when the lease term ends. Because you, the lessee, are a municipal entity, the interest income is exempt from federal income tax, and lease interest rates are considerably less than standard mortgage rates, saving you considerable money.

For example, assuming an interest rate of 5.0% with 11 annual in advance lease payments for a new $500,000 fire station, payments would be $57,328 each for the term of the 10 year lease.

To estimate payments on a specific transaction you can go to our Lease Calculators on this site, and input assumed costs, terms, and interest rates to produce estimates of annual or other periodic payment amounts.

Lease purchases can be underwritten with public market monies, using Certificates of Participation (COP’s), or arranged using a single investor lease purchase, typically a more flexible and less expensive alternative in terms of origination/underwriting fees, with normally no ongoing yearly fees for servicing.

A single investor lease purchase works well on leases with terms up to 10-15 years. Very large leases may require a longer lease term if department or district revenues will not allow a shorter lease amortization period. In that event using a public issue type lease where the financing term can run sometimes 20 years may be more advantageous, although the Costs of Issuance will be higher.

Single investor lease purchases can allow lease payments to be structured based on a district’s cash flow and tax receipt revenues, perhaps allowing lease payments to increase incrementally for projected annual revenue growth resulting from assessed value increases, new construction, and improvements.

When determining the structure of your lease financing, FMLC will use information as to current and projected budget cash flow, preferred lease term, funds available for a down payment, etc., to tailor the lease to fit your specific needs.Often a district or department will own the building site free and clear, permitting the financing to cover just the cost of the structure, and site improvements.

When acquiring fire station lease purchase financing, there are certain requirements that will have to be met:

1. The district or department will have to demonstrate the capacity to repay the lease.
2. District legal counsel will need to attest that the lease agreement is proper and has been duly approved by the governing board.
3. An EPA Phase I report will be needed to ensure the site is free of pollution risks, protecting both the district and lessor against potential cleanup costs.
4. Prior to construction, an appraisal based on the station design and land value will be necessary to substantiate the financed total.
5. Title (and perhaps flood) insurance protecting the lessee and the lessor will need to be purchased.
6. A land survey may be required to substantiate the title policy.
7. if the lease is to provide progress or completion payments to contractors a performance bond may be required to both protect the lessor’s and lessee’s interests in the funds advanced, and insure building completion in event of unforeseen problems or complications (disasters, bankruptcy, etc.).

Costs of these reports, policies, etc., can normally be financed under the lease, avoiding district expense in a current budget year.

As indicated earlier, a lease financing can be structured to make payments to vendors and contractors during construction, thereby providing the district an opportunity to take advantage of progress payment discounts to reduce the cost of the project. Such discounts should be greater than the corresponding lease interest cost, since you are acting as the contractor’s banker.

Finally, fire station lease payments will usually begin after the project’s completion, can be paid on a monthly, quarterly, semiannual, or annual basis at the lessee’s choosing, and as indicated may be tailored to specific budget cash flow needs of the district or department.

As you can see, a lease purchase agreement can be a successful way to provide financing for your new station, or new fire apparatus.

By working with a creative and experienced lessor you can easily:

1. determine what you can afford,
2. work to maximize your options,
3. develop a lease structure that best fits your budget, and
4. provide your firefighters needed facilities and your taxpaying constituents improved response time and safety.

We would be pleased to hear from you as to your needs, and to preparing a financing proposal for your new station.