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Capital Leasing
In General...
The FTA provides funding for two different types of capital leases:
- The first is a traditional capital lease arrangement. Under this sort of agreement, a public transit agency would lease vanpool vehicles on a commercial basis directly from VPSI. Part of the cost associated with a lease of this type includes interest expense.
- The second capital lease arrangement to consider is a prepaid capital lease. With a prepaid capital lease, the total purchase price of the vehicle is paid up-front to VPSI. The advantage is the elimination of the associated interest expense associated with traditional capital leases. VPSI holds the title to the vehicle for a predetermined length of time, though the term of the lease can vary. At the end of the lease-term, VPSI signs over the title to the public transportation agency.
In either case, public transportation agencies can take advantage of VPSI's national buying power to acquire vehicles (factory or conversion models) at a competitive cost and retain ownership of the vehicle at the end of its useful life.
The Nitty Gritty...
Under 49 U.S.C,. 5307, Federal funds are made available for capital leasing to urbanized areas based on a formula defined by statue. These funds can be used for either the acquisition or construction of mass transportation facilities and equipment ("capital assistance grants"), as well as to fund a portion of the net operating costs of mass transit facilities and related equipment ("operating assistance grants").
Historically, few FTA recipients took advantage of this program to acquire equipment through leases as the cost of interest (as much as 40% of the total lease costs) was ineligible for reimbursement. In 1987, Section 308 of the Surface Transportation and Uniform Relocation Assistance Act, Public Law 100-17 (STURAA) expressly authorized the use of Section 5307 capital assistance funds to acquire facilities and equipment by lease where leasing is more cost effective than purchase or construction.
At the time the implementation of 49 CFR Part 639 Section 308 was issued, (October 15, 1991); the rule provided that capital grants under Section 5307 could be used to lease facilities of equipment if leasing was more cost effective than purchase or construction. Of particular interest was that Section 639.27 lists maintenance costs among the factors a recipient can use in making that cost-effectiveness determination. It is further stated in Section 639.17 that "only costs directly attributable to making a capital asset available to the lessee are eligible for capital assistance," and cities as examples finance charges and ancillary costs such as delivery and installation charges.
In January of 1996, a proposed rule change was announced, which was issued as a final ruling on May 17, 1996. The FTA amended Section 639.17(a) to recognize maintenance costs as eligible capital expenses under a lease agreement. Section 639.17(b) was revised to define eligibility for capital assistance to not preclude maintenance expenses. Specifically eligible expenses now include (but are not limited to): 1) Finance Charges (including interest); 2) Ancillary costs such as delivery and installation charges; 3) Maintenance costs; and 4) Depreciation. As it turns out, the Capital Leasing Policy allows for an expanded consideration of maintenance expenses and it has no limitation on the capital consumed in the provision of service.
