Using a lease purchase structure, the lease payments made to the Lessor (IPPD) includes an equity build-up component (debt amortization) and at the of the Lease term, the Lessee (the Governmental Entity) may acquire the leased asset for one dollar. For statutory and GAAP purposes, lease purchase agreements are classified as a long-term debt obligation by the Lessee, and generally have a fixed maturity of twenty to thirty years. They appear as a depreciable asset and as a liability on the balance sheet as if the asset was purchased and financed with debt.

Under a true lease structure, the Lessee pays only rent to the Lessor and there is no debt amortization or equity build-up component. At the end of the lease term, the Facility is owned by the Lessor. As a result, a true lease is not a long-term debt commitment by the Lessee, and thus, no asset or liability appears on its balance sheet. Because there is no amortization component to the lease payment, this lease structure results in higher cash flow and lower leverage ratios for the Lessee.

In a zero-net, or gross lease, the insurance, taxes, and maintenance are the responsibility of the Lessor and the Lessee pays a fixed payment. Benefits of a zero-net lease include fewer responsibilities for the Lessee and fixed annual real estate expenses for budgeting purposes. In contrast, when the Lessee is responsible for the maintenance, insurance, and taxes, it is referred to as a triple-net lease (NNN) or net lease. It may be in the Lessee’s best interest to be responsible for the maintenance, insurance, and taxes due to access to insurance pools, bulk rate maintenance contracts and other cost saving benefits. When these expenses are passed directly on to the Lessee, the amount paid to the Lessor is simply for the base rent for the real estate itself. A third option is called hybrid or expense stop lease. In this scenario, the Lessor pays all expenses up to a specific, predefined amount. After reaching this expense stop, all additional expenses are passed through to the Lessee. Regardless of an election by the Lessee to chose a zero-net, triple-net or some combination of the two, IPPD is committed to tailoring the Lease responsibilities to meet the unique needs of the Lessee’s.

1. Government entity enters into operating agreement with the private vendor.
   
   
   • Government entity pays private vendor combined per diem inclusive of operating costs and facility rent payment.
   
   
   • Private vendor finances facility or leases facility from third-party owner and pays a portion of the per diem as a facility rent.

1. Private vendor controls the facility design.


2. Private vendor controls access to the real estate.
   
   • There is no opportunity for government entity to operate facility.


3. Private vendor has negotiating leverage upon operating agreement expiration because it controls the facility.


4. Lease rate is based off of the private vendor’s credit.


5. Creates large barriers to entry as many private vendors do not have the capital to carry the facility.

1. Government entity enters a “true” lease agreement (not debt) with IPPD for the facility.


2. IPPD supplies the private sector capital to secure a facility.
   
   • Government entity controls design and/or construction decisions.
   • Build-to-suit facility delivery may be utilized


3. Government entity begins lease payments once facility is put in service.


4. Government entity chooses to either hire private vendor or use government employees to operate the facility .


5. Government entity is assured continued access to the facility by controlling the real estate.

1. Government entity doesn't use bonding capacity.
   
   • A “true” lease saves debt capacity because lease payments are not classified as debt.


2. Government entity has control over facility operations.
   
   • It can either operate facility with government employees or hire a private vendor.


3. Separate operating agreement will help expand list of potential private vendors because they are not required to provide capital for facility.


4. Government entity has leverage for operations negotiations because it controls the facility.


5. Lease rate is based off of the government entity’s credit.