Financing Firehouses

Financing Your New Station
By Lynn Bartsch

You have decided to build or remodel a new or existing station. 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 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 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. Also, lease interest rates are typically less than interest rates for equivalent term U.S. Treasury securities.

For example, with today’s interest rates, annual in-advance lease payments for a new $500,000 fire station would be about $95,300 for a six-payment five-year lease term, $75,500 on a eight-payment seven-year lease or $60,000 on a 11-payment 10-year lease.

To estimate payments on larger transactions for budget purposes, it would be reasonable to use a multiplier of the above numbers.

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.

A single investor lease purchase works best on leases with terms up to 10 years. Very large leases (over $1 million) 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 COP type lease where the financing term can run 15 and sometimes 20 years may be more advantageous.

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. COP lease payments are traditionally due semi-annually in June and December and tend to be less flexible in payment structure.

When determining the structure of your lease financing, information about current and projected budget cash flow, preferred lease term, funds available for a down payment, etc., can be utilized to tailor the lease to fit your specific needs.

Bank regulations and prudent lending practice will impose credit limits on the total project cost that can be financed, so you should expect a lease financing to normally finance 80 to 90 percent of the land and building cost, with the exception of COP leases which usually finance 100 percent of a project’s cost.

Often a district or department will own the fire station building site free and clear, permitting the financing to cover the cost of the structure and site improvements. The land value can be utilized in determining the total project value to meet the 80 percent requirement.

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 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 again protect both the lessor's and lessee's interests in the funds advanced, and ensure building completion in the event of unforeseen problems or complications (disasters, bankruptcy, etc.).

Costs of these reports, policies, etc., can be financed under the lease, avoiding district expense in a current budget year. Lease financing can also be structured to make payments to vendors and contractors during construction. Progress payments like this may give the district an opportunity to take advantage of progress payment discounts and reduce the project cost. Such discounts should be greater than the corresponding lease interest cost.

Fire station lease payments will usually begin after the project's completion. Payments can be made on a monthly, quarterly, semi-annual or annual basis at the lessee's choosing. The payments can generally be tailored to meet the specific budget cash flow needs of the district.

As you can see, a lease purchase agreement can be a successful way to provide financing for your new station or fire apparatus. Financing is one of many decisions you will face during a construction project.

By working with a creative and experienced lessor you can easily determine what you can afford, work to maximize your options, develop a lease structure that best fits your budget, and provide your firefighters needed facilities and your taxpaying constituents improved response time and safety.

By working with a creative and experienced team including architect, engineer, contractor and financier, you can easily determine what you can afford, work to maximize your options and develop a lease structure that best fits your budget. This allows you to provide your firefighters with needed facilities, improving response time and safety for your taxpaying constituents.

Lynn Bartsch is president of First Municipal Leasing Corporation. First Municipal Leasing Corporation provides financing for fire station construction and major equipment purchases throughout Colorado and the West.