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What Is Tax-Exempt Financing?

Tax-exempt lease financing has become a popular and cost-effective financing tool used by developers and government entities for the acquisition and construction of public use real estate projects. It's fast, it’s simple, and it makes economic sense.

A tax-exempt lease is basically an installment sales contract. During the lease term, the lessor retains ownership of the property. Each lease payment is comprised of principal and interest components, providing equity benefits to the government user and tax-exempt income to the investor. Title to the real estate transfers to the governmental tenant at the end of the lease term.


  • • 100% of the project cost is financed. No equity is required when properly structured.

  • • Tax-exempt interest rates are substantially lower than conventional interest rates resulting in lower lease payments.

  • • Governmental users build equity in project with each lease payment, resulting in ownership of project at end of lease term.

  • • Lease payments, subject to annual appropriations by the governmental tenant, are designated as current expense and not as long-term debt for accounting purposes.

  • • Tax-exempt leases are not subjected to voter approval allowing us to move more quickly and avoid escalating construction costs.

  • • Tax-exempt leasing provides governmental entities with ownership benefits without the use of cash or bond dollars, which can be redirected to other much-needed capital projects.


  • • State, County and City Governments

  • • Educational Institutions, (K-12 School Districts, Junior/Community College
    Districts and Four-Year Colleges/Universities)

  • • Not-for-Profit Organizations

  • • Agencies

  • • Authorities

  • • Districts


Essentiality: Each project is evaluated based on how essential the project is to the operations of the governmental user.

Public Use: The project must be occupied by governmental agencies that provide public services. No more than 5% of the building can be occupied with private use tenants.


Following are some examples of situations that may exist where a proposal to undertake a lease/purchase transaction might make sense.

  • • As a result of expansion of state or local governmental responsibilities, an agency has been put into a facility under an operating lease on a "temporary" basis. No solution has been found for permanent housing and the governmental user has made improvements to the facility and is beginning to view the arrangement as permanent.

  • • A governmental agency is occupying a facility that it would like to acquire and, due to changed circumstances, the owner has now decided it would like to sell the building.

  • • A governmental agency needs a new facility, either for existing services or to expand services. It is considering its options, but, for some budgetary, legal or political reason, it cannot issue bonds to finance a facility and is considering an operating lease for an existing facility or would like to build a
    new facility.