NCJ Number
114210
Date Published
1987
Length
31 pages
Annotation
Tax-exempt lease purchase (LP) agreements provide a means for State and local Governments to finance the construction of prisons, jails, and other large institutional facilities.
Abstract
Unlike the general obligation bond, the LP is not technically a debt obligation. Under LP, private-sector investors provide funds to enable a Government to buy property until all payments have been made. LP's provide a means for dealing with financing obstacles such as debt limits and restrictions on incurring new debts, voter resistance, the need for a special election or referendum, and pressures related to court-ordered prison improvements. In some instances, LP's may result in cost savings associated with low interest rates or anticipated increases in construction costs. Potential cost savings may be offset by higher interest or increased legal and underwriter expenses. In addition, LP's may raise political issues by sidestepping taxpayer scrutiny. While riskier than general obligation bonds, LP's are less risky than moral obligation bonds; and their tax exempt status makes them attractive to investors. The typical LP agreement involves a unit of Government, a quasipublic corporation such as a building authority, and investors. The building authority borrows the money, contracts construction, and eventually pays off its debts using the lease payments made by the Government unit. The authority releases title to the Government once the LP bonds have been paid off. An example of LP and general obligation bond financing illustrates relative advantages and disadvantages of the two methods. 2 tables, 2 appendixes, and 6 figures.