LEASES IN CALIFORNIA: THEIR FORM AND FUNCTION

[Pages:208]ALIFORNIA

C EBT D DVISORY ACOMMISSION

LEASES IN CALIFORNIA: THEIR FORM AND FUNCTION

Consultant Transocean Funding

Cole & Associates Gastor & Snow

Public Resources, Inc.

STATE OF CALIFORNIA

CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION

915 CAPITOL MALL, ROOM 400 P.O. BOX 942809 SACRAMENTO, CA 94209-0001 TELEPHONE: (916) 653-3269 FAX: (916) 654-7440

March 1, 1991

MEMBERS

Kathleen Browns State Treasurer

Pete Wilson Governor

Gray Davis State Controller

Robert G. Beverly State Senator

Newton R. Russell State Senator

Jim Costa State Assemblyman

Patrick J. Nolan State Assemblyman

Thomas C. Rupert Treasurer, City of Torrance

Richard B. Dixon Chief Administrative Officer Los Angeles County

As part of an ongoing effort to provide state and local governments with the latest information on debt issuance and management, the California Debt Advisory Commission is pleased to issue Leases in California: Their Form and Function. The report focuses on the use of tax-exempt leasing to meet the real property and equipment needs of public entities.

While the use of tax-exempt leasing in California represents a recognized alternative to more traditional forms of financing such as pay-as-you-go and bonded indebtedness, little has been written about the form and function of public leasing arrangements. This report attempts to fill that void by providing some insight as to why public agencies employ leases, the types of leases which are entered into, and the purposes for which leases are used. The report also discusses the legal, regulatory, and tax considerations associated with tax-exempt leasing.

It should be noted that the overriding purpose of this report is to serve the informational and educational needs of state and local agencies which utilize taxexempt leasing to meet their capital and equipment needs and for those agencies which may be considering such arrangements. The report does not attempt to evaluate the appropriateness or cost-effectiveness of various types of lease arrangements, nor does it advocate leasing over other forms of financing.

Recognizing the importance, however, of providing policy direction on this issue, the Commission will make available a companion piece, Leases in California: Summary and Recommendations, to provide recommendations regarding further research and policy development that may be appropriate with regard to tax-exempt leasing in this state.

Leases in California March 1, 1991 Page 2

In closing, I would like to acknowledge the efforts of the many fine individuals and firms who worked on this report, including Russell Lombard and James Dudick of Transocean Funding, Inc.; Lisa Cole of Cole & Associates; Joshua Cooperman of Gaston & Snow; Robert Butler of Public Resources, Inc.; and Eileen Park, Martha Riley, and Janae Root of the Commission's staff.

Sincerely,

KATHLEEN BROWN California State Treasurer Chairperson, California Debt Advisory Commission

California Debt Advisory Commission

The California Debt Advisory Commission is the state's clearinghouse for public debt issuance information. The Commission was created by the California Legislature in 1981 to assist state and local government agencies with the monitoring, issuance, and management of public debt.

The California Debt Advisory Commission members include:

Kathleen Brown California State Treasurer and Chairman

Pete Wilson Governor or

Thomas W. Hayes Director

Department of Finance

Gray Davis State Controller

Robert G. Beverly State Senator

Newton R. Russell State Senator

Jim Costa State Assemblyman

Patrick J. Nolan State Assemblyman

Richard B. Dixon Chief Administrative Officer

Los Angeles County

Thomas C. Rupert Treasurer

City of Torrance

Additional information concerning this report or the program of the California Debt Advisory Commission may be obtained by contacting:

Steve Juarez Executive Secretary

California Debt Advisory Commission (916)324-2585

LEASES IN CALIFORNIA: THEIR FORM AND FUNCTION

A Study Prepared for the California Debt Advisory Commission

September 1990 Transocean Funding, Inc.

Cole & Associates Gaston & Snow

Public Resources, Inc.

TABLE OF CONTENTS

FOREWORD

i

ACKNOWLEDGMENTS

ii

INTRODUCTION

iv

PART ONE

Chapter One

1-1

Types and Purposes of Leases

Chapter Two

2-1

Debt Restrictions and California Case Law

Chapter Three

3-1

Federal and State Legislative and Regulatory Issues

Chapter Four

4-1

The Lease Document

Chapter Five

5-1

Accounting for Leases

Chapter Six

6-1

Marketing Leases

Chapter Seven

7-1

Credit Analysis and Credit Enhancements

PART TWO

Case Studies

No. 1: A Third-Party Financed Lease

No. 2: A Privately Placed Third-Party Financed Lease with Assignment by Lease Broker

No. 3: A Third-Party Lease that is Advance Funded

No. 4: A Third-Party Financed Lease Line of Credit

No. 5: Certificates of Participation through a Lease Pool Program

No. 6: Certificates of Participation for Real Property (Enhanced)

No. 7: Certificates of Participation with SubleasePurchase Agreement to Facility Operator

No. 8: An Agreement to Finance Ten Years of Telecommunications Service

No. 9:

A Tax-Exempt Lease Financing Acquired with Equipment Procurement with Provision for Public Distribution of Certificates of Participation

No. 10: A Lease Financed by a Captive Credit Corporation

PART THREE

The Future of Tax-Exempt Leasing in California

APPENDICES

Glossary

Resources

II-1

III-1 A-1 B-1

FOREWORD

Lease financing is a popular way that governments around the country obtain real property and equipment. Whether the lease leads to ownership or just use of the asset by the government, it provides an alternative to traditional pay-as-you-go and debt financing approaches.

The following report on tax-exempt leasing resulted from a Request for Proposal by the California Debt Advisory Commission (CDAC) as part of its continuing role to serve as the State's statistical center for state and local debt issues, to provide technical assistance to state and local governments in the areas of debt issuance and management, and to research and provide policy guidance on debt-related topics.

The Commission collects information on types of debt instruments used by public agencies to fund their public projects. Lease issuance information is important to the Commission since lease financing is often used by local agencies as part of their capital expenditure programs, and is generally included in any review of creditworthiness or rating evaluation.

As the report details, there are many variations on the theme of tax-exempt leasing. Regardless of which form is used, governments use tax-exempt leases to finance essential assets at reasonable costs and match their capital needs with cash flow realities.

The report is intended as an educational aid for local and state government officials interested in public lease financing.

i

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