We often encounter vendors offering seemingly simple financing packages to assist schools with acquiring buses, copiers, tablets, and other school equipment. The financing package typically utilizes a lease purchase agreement (LPA) or other form of financing lease with a third-party leasing company. We strongly recommend that our clients avoid such financing leases.
Do not confuse an LPA with a true lease (i.e., a rental agreement), which is rarely used to acquire school equipment. Unlike a true lease, an LPA transfers equipment ownership to the school. In exchange, the school pledges general fund dollars to make “lease” payments over time, including an interest component that the leasing company treats as tax-exempt. The leasing company often holds a security interest in the equipment and may reclaim the equipment if the school fails to appropriate money to make the lease payments.
The LPA documents frequently contain unfavorable or illegal provisions. In a single financing contract, we routinely encounter the following problems:
Because vendors and leasing companies often do not understand laws applicable to Michigan schools, the proposed lease may violate federal tax law or state law. Typically, those errors are not discovered until legal counsel reviews the financing package, which is often late in the process. Correcting those errors may cause significant delays. Further, most leasing companies are reluctant to change their documents, leaving school officials with a difficult choice: delay equipment delivery by finding alternative financing or sign an unfavorable — perhaps unlawful — agreement. To avoid common pitfalls associated with equipment financing, please contact your school’s finance attorney to discuss financing options at least six weeks before the anticipated equipment delivery date. We frequently assist school officials with soliciting bids from local banks to finance equipment using an installment purchase agreement. The documents are prepared by our office, contain favorable terms, often utilize local banks, and are widely accepted by financial institutions throughout Michigan.