Heavy
equipment and machinery, significant expenditures for design,
engineering, permits and other soft costs related to the
project, and long lead times and construction cycles are
just a few of the characteristics of large scale energy generation
projects. In some instances, it may take
up to 24 months before a plant is made fully operational,
and another 30 to 60 days before energy production reaches
levels sufficient to sustain project operations. Many
components and numerous expenditures made through a capital
budget which requires stringent protocols in order to track
expenses and control disbursements.
In the context of energy-generation projects, lease-financing
enables a municipal organization to secure a funding commitment
at fixed rate pricing well in advance of a project’s
start date.
The lease-financing product commonly utilized in large scale
energy generation projects is the lease-purchase agreement;
functioning as a conditional sales contract which can drawn
upon to:
|
One
Lease-Finance Product; Two Funding Approaches
The primary difference between the funding methods utilized
is based on: (1) the economics of the project; (2) the
amount and timing of funding disbursements needed; and
(3) the objectives of the municipal organization.
Disbursements Against Invoice(s)
Individual disbursements against invoices made for supplier
progress payment requirements, or the acquisition and installation
cost of a single asset, (or group of assets), are accommodated
through a series of draws against the total amount of financing
capital committed to a project. Interest begins to accrue
when funds are expended through the lease-finance vehicle,
and only upon the amount drawn. This serves to keep financing
costs low relative to a project’s overall development.
Full Disbursement Into Escrow
With an advance funded equipment acquisition lease, funding
occurs once when the total amount of committed financing capital
is deposited into an escrow account. Interest begins
to accrue upon funding and upon the total amount of capital
advanced. However, the municipal organization is entitled
to receive the benefit of any earnings resulting from the investment
of the moneys deposited into escrow which may offset any accumulating
interest expense; but only to the extent the investment earnings
do not create an arbitrage rebate liability. Advance
funded leases facilitate the flow of funds to be expended for
equipment acquisition and installation costs in capital intensive
projects that are scheduled to be developed in concurrent or
overlapping phases.
Regardless of the funding methodology employed, the organization
controls the timing and amount of funds disbursed, and payment
of the periodic lease obligation can be structured to minimize
capital outlays until sufficient cost savings have been realized,
or in the case of income producing energy-generation projects,
until sufficient revenue is built-up.
Tax-Exempt or Taxable
A critical question underlying the use of lease-finance proceeds
to capitalize an energy-generation project is whether the financing
will be structured utilizing tax-exempt or taxable (non-tax-exempt)
interest rates. From a taxation standpoint, Section
141 of the Internal Revenue Code sets forth a series of tests
aimed at providing guidance in the determination as to whether
an issuance falls under the auspices of a governmental bond
(for broader purposes, this also includes lease finance arrangements),
which allows the interest component of the periodic payments
to be computed at tax-exempt interest rates, or whether a financing
is deemed to accommodate a private business activity, which
requires the interest component to be computed at taxable interest
rates.
If the lease-finance proceeds are used to pay for the construction
and acquisition costs of equipment and machinery that will
ultimately generate electricity that is used within a municipal
organization’s operation, and if the funds used to make
payments of principal and interest on the underlying lease-finance
obligation are derived from an organization’s internal
resources with the ultimate intention being to own the asset
in due course, then the financing will more than likely qualify
for tax-exempt status.
Conversely, if assets acquired
with proceeds from a lease-financing are principally used by
a non-governmental entity in a trade or for-profit business
activity and, if more than 10 percent of the payments made
to principal and interest on the underlying financing are:
(a) secured by property operated in a private business use,
or (b) derived from payments received for use of the asset
by a non-governmental entity, then the financing would more
than likely be deemed to be a private activity issue and fail
to gain tax-exempt status. |
