Fire Truck Lease Purchase – How They Work

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What you should know before signing a fire truck lease purchase agreement

A fire truck lease purchase agreement is a common and useful financial tool to finance your new fire truck. However, don’t just sign without knowing exactly what to expect from the bank who is offering it to you.

A brief (I promise, real brief) history of fire truck lease purchase agreements

In 1980, many states passed laws limiting how much a municipality can borrow. With these limits, any debt higher than the limit had to be voted upon.

Financial wizards at the time created a “fire truck lease purchase agreement” to get around the borrowing limits.

It works just like a loan with 1 important difference – the municipality has the option of canceling the lease each year with no penalty. However, the municipality has to give the fire truck back if they cancel the lease purchase agreement.

With this financial arrangement, states have decided over the years that fire truck lease purchase agreements are not debt and therefore are not limited by the debt limits.

So, what’s in a “fire truck lease purchase agreement”

A fire truck lease purchase agreement should be like a loan for these 9 reasons:

  1. It qualifies for a low tax-exempt interest rate
  2. You decide if you want to make a down payment or not
  3. You have a financing term of 3-15 years to repay the lease
  4. You can make payments monthly, quarterly, semi-annually, or annually
  5. You own the fire truck during the financing term
  6. The bank will place a lien on the fire truck title during the financing term
  7. You are responsible for insurance, maintenance, and repairs for the fire truck
  8. You should be able to pay off and make extra payments during the financing term
  9. After you have made all the payments, you should not owe anything else (called a “residual”) to own your fire truck free and clear

As you can see, most of the terms for a fire truck lease purchase are the same as you would expect from a loan.

The one difference is that you have an option to cancel the lease each year before you’ve paid off the truck. However, you must return the fire truck to the bank if you choose to do this. By getting this option, your financing will not require voter approval or be limited by state law (be sure to verify all state law requirements with your attorney).

What should I expect in a fire truck lease purchase

You’ll receive a set of documents that are from 6- 12 pages long with a lot of legal language. Let’s look at what to expect:

First, you’ll see the main body of the document (sometimes called “boilerplate”) which you and the bank agree on the terms of the financing. It will describe what type of legal entity you both are ( a volunteer fire   department  or city, for example for you and a corporation for the bank), will ensure that you are complying with all the IRS rules for you to qualify for tax-exempt  financing , will set your requirements for payments, insurance, maintenance, repairs, compliance with all state and federal laws, and finally, will set up what happens if something goes wrong (this will be called the “defaults”) and how you both agree to settle the problem.

Next, you’ll see a document called a Resolution or Ordinance. This document is telling the bank that your organization has agreed to enter into the contract and it will let the bank know who can sign the documents for the organization. You’ll also be asked to provide a letter from your attorney verifying that you have complied with all state or federal laws in buying the fire truck.

Next, you’ll see some documents about insurance requirements and your insurance agent’s name, the description of the fire truck you are financing, a payment schedule, and an IRS form called a 8038 that will be filed with the IRS to let them know the lease purchase agreement is tax-exempt.

Finally, if you are a volunteer fire department, you’ll have some additional documents required by the IRS. You will have a public meeting to comply with the Open Meetings Act. Your bank should be able to guide you through and should complete all the legal newspaper filings for your meeting for you. Secondly, your local government will be asked to sign a document to verify that you provide fire fighting services to the community and that the funds are being used to buy a fire truck for that public purpose.

In summary:

Don’t be afraid of a “fire truck lease purchase”. It’s a common and useful financing tool that is mature and has been tested with millions of transactions over the past 30 years.

But be sure to examine the documents carefully to get the full advantage of this useful tool.

Source by John R. Hill

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