Tax-Exempt Debt vs. Leasing

Tax-Exempt Debt vs. Leasing

Would the availability of tax-exempt debt financing make leasing more or less attractive to the Center than before? Why?

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Tax-Exempt Debt vs. Leasing

The availability of tax-exempt debt financing would likely make leasing less attractive to the Center than before. Here’s why:

1. Lower Cost of Capital – Tax-exempt debt typically carries lower interest rates than taxable financing options, making it cheaper for the Center to borrow money rather than lease.

2. Ownership Benefits – If the Center can finance a purchase at a lower cost through tax-exempt debt, it may prefer to own the asset instead of leasing, thereby avoiding lease payments to a third party.

3. Reduced Need for Leasing’s Tax Benefits – One of the advantages of leasing is that the lessor may benefit from tax deductions (e.g., depreciation) and pass on some of that benefit through lower lease payments. However, if the Center can access tax-exempt debt, it may find owning more cost-effective, as it doesn’t need the lessor’s tax advantages.

4. Flexibility in Asset Use – Leasing is sometimes attractive because it provides flexibility in upgrading or disposing of assets. However, if tax-exempt financing lowers the cost of ownership significantly, the Center may prefer purchasing and managing assets itself.

When Might Leasing Still Be Attractive?

• Short-Term Needs – If the Center needs an asset for a short period, leasing could still be preferable despite the availability of tax-exempt debt.
• Maintenance & Risk Transfer – If leasing includes maintenance and risk transfer (e.g., for specialized equipment), the Center might still opt to lease.
• Liquidity Constraints – Even with tax-exempt financing, if the Center wants to preserve liquidity for other investments, leasing might remain and…

When Might Leasing Still Be Attractive?

• Short-Term Needs – If the Center needs an asset for a short period, leasing could still be preferable despite the availability of tax-exempt debt.
• Maintenance & Risk Transfer – If leasing includes maintenance and risk transfer (e.g., for specialized equipment), the Center might still opt to lease.
• Liquidity Constraints – Even with tax-exempt financing, if the Center wants to preserve liquidity for other investments, leasing might remain and…