Capital leasing is a routine way of financing capital equipment. In 1987, the Surface Transportation and Uniform Relocation Assistance Act (STURAA) started Federal support for capital leasing and it continues today in 49 U.S.C 5301 (a)(1)(F).
How Capital Leasing Works
Grantees may use Federal funds for capital assistance for up to 80 percent the cost of acquiring transit assets by lease. A capital lease can be used to purchase capital equipment such as vehicles or it can be used to purchase a combination of capital and maintenance services such as chassis rebuilding and engine/drive train replacement. Transit agencies use cost-benefit analysis to decide whether to lease or buy.
A capital lease may include financing charges and ancillary costs such as delivery and installation. Also, capital leases can not be longer than the useful life of the asset nor less than 75% of the useful life of the leased asset.
Leasing helps agencies with insufficient revenues meet project requirements; it increases their cash flow to match outlays. It is often used to facilitate fleet replacement or to accelerate capital rehabilitation and replacement policies which can lead to reductions in operating and maintenance costs. Overall, capital leasing helps reduce capital acquisition costs by moving forward purchases of expensive capital assets when capital costs are rising faster than the general level of inflation.
There are some risks associated with leasing. As FTA program funds are subject to annual Congressional appropriations, this is some level of uncertainty for future lease payments. Contractual lease payments may also limit future funding available from FTA grants for the duration of the lease period. In order to acquire the title on the asset, a grantee may need to pay a “bargain purchase option” at the end of lease term. Finally, future tax code changes are uncertain, which may impact the leasing industry.
More information capital lease requirements pertaining to FTA programs can be found in 49 CFR 639 and in Chapter IV(3)(j)(2) of FTA Circular 5010.1D, "Grant Management Requirements."