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:
- A public hearing and an elected governmental official’s approval are required.
- The governmental entity acting as the conduit issuer must be authorized to enter into the lease and sublease agreements.
- The governmental entity’s obligations are limited obligations payable solely from the payments made by the 501(c)(3) organization to the governmental entity.
- 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.
- 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.
- No more than 2% of the proceeds of the financing can be used to pay costs of issuance.
- The lessor retains a security interest in the equipment.
- 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
- 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.
- 501(c)(3) organization.
- Its articles or bylaws may require approval of the Sublessee’s members or stockholders.
- 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.
- 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 .