Tax-Exempt Lease Financing for Private Non-Profit (501(c)(3)) Organizations

Private placement tax-exempt lease financing may also be issued for non-profit 501(c)(3) organizations.  In order to access tax-exempt financing, an authorized governmental entity (e.g. city, county, state authority) must act as the “conduit issuer”, whereby the governmental entity enters into a lease agreement for the equipment and subleases the equipment to the 501(c)(3) organization.  Other relevant provisions for a 501(c)(3) financing are as follows:

1. A public hearing and an elected governmental official’s approval are required.
2. The governmental entity acting as the conduit issuer must be authorized to enter into the lease and sublease agreements.
3. The governmental entity’s obligations are limited obligations payable solely from the payments made by the 501(c)(3) organization to the governmental entity.
4. The governmental entity assigns its rights under the sublease agreement with the 501(c)(3) organization to the lessor as security for payment of the governmental entity’s obligations.
5. At least 95% of the property being financed must be (1) used in exempt activities of a 501(c)(3) organization and (2) not have as a principal user any entity that is not a 501(c)(3) organization or a governmental entity.
6. No more than 2% of the proceeds of the financing can be used to pay costs of issuance.
7. The lessor retains a security interest in the equipment.
8. Special covenants will apply based upon the type of 501(c)(3) organization (e.g. higher education, health care, cultural institution, etc.).

Structure for Tax-Exempt Leasing:
Private Non-Profit (501(c)(3)) Organizations

Lessee

• State or political subdivision (or one of its qualified agencies).
• Has power to lease as lessee and purchase the leased property and to lease as lessor and sell the leased property.
• Participation is in furtherance of the Lessee’s purposes.

Sub-lessee

• 501(c)(3) organization.
• Its articles or bylaws may require approval of the Sublessee’s members or stockholders.

Lease-Purchase Agreement

• Rental Payments with principal and tax-exempt interest components.
• Lessee’s obligations payable solely from the payments by the Sublessee or proceeds of the leased property.
• Non-appropriation normally not required.
• Assigns Lessee’s rights under the Sublease.

Sublease-Purchase Agreement

• Subrental Payments same as Rental Payments plus all fees and expenses of Lessee.
• Agreements respecting maintenance of property, insurance, taxes, indemnity of Lessor and Lessee, tax covenants, etc.
• Grants security interest in the equipment leased .