Vendors may offer seemingly simple financing packages to assist school districts in acquiring buses, copiers, technology, or other school equipment. We recommend that our clients not use the financing packages presented by equipment vendors.
The financing package typically utilizes a lease purchase agreement (“LPA”), or other form of financing lease, with a third-party financing company. Under an LPA, a school district avoids creating a debt obligation by pledging general fund dollars to make lease payments, subject to the district’s right to appropriate funds to support a current “operating” obligation. While title to the financed equipment usually passes to the district upon delivery, the financing company retains a security interest in the equipment and may reclaim it if the district fails to appropriate money to make the lease payments.
The financing package proposed by the vendor and financing company generally includes the financing contract (usually an LPA); a request for insurance certificates; an equipment acceptance certificate; and, if issued as a tax-exempt obligation, IRS Form 8038-G or 8038-GC. Some packages also include a sample board resolution or an “authorization certificate,” where the signing individual represents that he or she has full board authority to enter into the financing contract.
The financing documents regularly contain unfavorable or unlawful provisions. A typical financing contract contains at least some of the following problematic provisions:
Financing companies often do not understand or fail to appreciate the laws applicable to Michigan school districts. The proposed transaction structure may violate federal tax law or result in a lack of proper board authorization under state law. It is only after the financing package is provided to legal counsel for review, which frequently is late in the process, when such issues are identified, often causing significant delays. To exacerbate the problem, most financing companies are reluctant to change the terms of their financing documents to fully resolve the issues discussed above, leaving districts with a difficult choice: find alternative financing, but delay equipment delivery well beyond the expected delivery date, or sign an unfavorable, and perhaps unlawful, agreement.
To avoid the common pitfalls associated with equipment financing, we recommend consulting with legal counsel at least two months in advance of the anticipated equipment delivery date. Thrun Law Firm’s finance attorneys frequently assist school districts with soliciting bids from local banks to finance equipment using an installment purchase agreement. The documents for such arrangements are prepared by our office, contain favorable terms, and are widely accepted without modification by local financial institutions.