Ins & Outs of Lease Financing Missouri School Boards’ Association Annual Conference in Cooperation with Missouri Association of School Administrators Erick Creach (314) Jason Terry (314)

Lease-Purchase Obligations What Are They? Annual appropriation obligations of a District used to acquire property (real or personal), a portion of the payments of which are designated as interest, over a term of years with the option to purchase the property at the end of the term. 2

Lease-Purchase Obligations Types of Lease-Purchase Obligations Direct Lease (Real and Personal Property) Lease Certificates What type of projects? Acquisition, construction or improvement of land, buildings or personal property 3

Section RSMo. Authorizes Lease Purchase Transactions for Personal Property No Publication Requirement Option to Terminate 4

Section RSMo. Notice –Once a week for 2 consecutive weeks, second publication at least 7 days prior to meeting Duration –Not longer than 25 years Recent Changes –No requirement for Non-Profit Corporation intermediary 5

Lease-Purchase Obligations No voter-approval required Not considered “indebtedness” under the Missouri Constitution. Why? –Because the district is not obligated to make payments beyond any current year. 6

Lease-Purchase Obligations Source of Funds for Repayment? Cannot levy taxes without voter approval. Any legally available current year funds. 7

A Closer Look at the Types of Lease- Purchase Obligations Direct Lease Option 1: Lease Certificates –Old way –Still works Option 2: Lease Certificates –New way 8

9 Other Documents: Escrow Agreement Federal Tax Certificate Closing Certificates Approving Opinion and Tax Opinion IRS Form 8038-G or IRS Form 8038-GC Illustration of Typical Equipment Direct Lease District Equipment Lease-Purchase Agreement Vendor/Lessor Rental payments (subject to annual appropriation) Lease of Equipment

Initial Lessor Investor Bank District Lease- Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund held by Investor Bank, as Escrow Agent, to be used for Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund Illustration of Typical Direct Lease with Real Property 10

Initial Lessor District Base Lease of real property Base Lease Rent = Amount deposited in Project Fund held by Investor Bank, as Escrow Agent, to be used for Project Costs Base Lease Agreement 11

Initial Lessor District Lease- Purchase Agreement Sublease of real property Rental payments (subject to annual appropriation) Lease-Purchase Agreement 12

Initial Lessor Investor Bank Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund Assignment Agreement 13

Initial Lessor Investor Bank District Lease- Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund held by Investor Bank, as Escrow Agent, to be used for Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund Illustration of Typical Direct Lease with Real Property Other Documents: Escrow Agreement Federal Tax Certificate Title Insurance Closing Certificates Approving Opinion and Tax Opinion IRS Form 8038-G or IRS Form 8038-GC 14

Non-Profit Corporation Investors/Owners of Certificates District Lease-Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund Illustration of Typical Lease Certificates (Option 1) 15 Trust Indenture (All rights of Non-Profit Corporation held in trust for Investors/Owners of Certificates

Non-Profit Corporation District Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement Base Lease 16

Non-Profit Corporation District Lease-Purchase Agreement Sublease of real property Rental payments (subject to annual appropriation) Lease-Purchase Agreement 17

Non-Profit Corporation Investors/Owners of Certificates Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund Trust Indenture 18 Trust Indenture (All rights of Non-Profit Corporation held in trust for Investors/Owners of Certificates

Non-Profit Corporation Investors/Owners of Certificates District Lease-Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund 19 Trust Indenture (All rights of Non-Profit Corporation held in trust for Investors/Owners of Certificates Other Documents Federal Tax Certificate Title Insurance Closing Certificates Approving Opinion and Tax Opinion IRS Form 8038-G or IRS Form 8038-GC

Trustee Owners of Certificates District Lease-Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund 20 Declaration of Trust (All rights of Trustee held in trust for Owners of Certificates) Illustration of Typical Lease Certificates (Option 2)

Trustee District Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement 21 Base Lease

Trustee District Lease-Purchase Agreement Sublease of real property Rental payments (subject to annual appropriation) 22 Lease-Purchase Agreement

Trustee Owners of Certificates Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund 23 Declaration of Trust (All rights of Trustee held in trust for Owners of Certificates)

Trustee Owners of Certificates District Lease-Purchase Agreement Base Lease of real property Base Lease Rent = Amount deposited in Project Fund under the Trust Indenture for payment of Project Costs Base Lease Agreement Sublease of real property Rental payments (subject to annual appropriation) Rental payments distributed To Investor Bank pursuant to an Assignment Agreement Deposit to Project Fund 24 Declaration of Trust (All rights of Trustee held in trust for Owners of Certificates) Other Documents Federal Tax Certificate Title Insurance Closing Certificates Approving Opinion and Tax Opinion IRS Form 8038-G or IRS Form 8038-GC

Miscellaneous Matters Title Insurance Additional Certificates Refunding Budget Requisition Process 25

Pros and Cons of Lease-Purchase Obligations Pros: No voter approval required Does not count toward debt limit District’s general fund and taxing authority are not on the line Cons: Interest rates may be higher Costs of issuance may be higher Ties up property serving as leased property 26