Reel provides a comprehensive finance program for Tax-Exempt & Not-for-Profit entities and Federal Government Agencies. We have prepared this Glossary of Tax-Exempt terms to help you better understand some often confusing definitions.

Arbitrage
Arbitrage Bonds
Assignment
Bargain Purchase Option
Basis Point
Best Efforts Clause
Bond
Bond Counsel Opinion
Certificate of Acceptance
Certificate of Need (CON)
Certificate of Participation (COP) Lease
Commitment Fee
Conditional Sales Lease
Debt Limit
Debt Service
Default
Disclaimer of Warranties
Economic Life
Essential Use Property
Financing Statement
General Obligation Debt
Insured Value
Internal Revenue Service Form 8038-G and 8038-GC
Issuer
Lessee (or Sub lessee)
Lessor
Net Lease
Non-appropriation Clause
Non-substitution Clause
Official Statement
Pooled Financing
Private Activity Bond
Quiet Enjoyment Clause
Redbook
Refunding
Section 501(c)(3) Organization
Security Agreement
Security Interest
Tax-exempt Lease
True Lease
Uniform Commercial Code (UCC-1) Financing Statement
Useful Life


Arbitrage
The difference between the interest on governmental obligations exempt from federal income tax under the Internal Revenue Code and the yield on securities and obligations that are not exempt from federal income tax in which the proceeds of the governmental obligations are invested.

Arbitrage Bonds
Obligations issued by a state or a political subdivision in contravention of the Internal Revenue Code which results in the obligations becoming taxable.

Assignment
A transfer of property or rights in property to another.

Bargain Purchase Option
An option given to the lessee to purchase the equipment at a price that is fixed sufficiently below the expected fair market value, so that, at the inception of the lease, purchase appears to be reasonably assured.

Basis Point
One hundredth of one percent (.01% or .0001).

Best Efforts Clause
A clause in a tax-exempt lease in which the lessee agrees to use its “best efforts” to obtain appropriation for funds necessary to continue the lease.

Bond
An interest bearing security of indebtedness, i.e., a promise to pay a certain sum of money by a future date, usually referred to as the maturity date, with interest payable thereon periodically at a specified rate, in registered form and regulated by state and federal securities laws.

Bond Counsel Opinion
An opinion which addresses the validity of the bonds and the extent to which interest on the bonds is exempt under federal income taxes. The bond counsel opinion may also address whether or not the bonds are exempt from certain state taxes.

Certificate of Acceptance
A written statement by the lessee acknowledging that equipment subject to the lease has been delivered and accepted for purposes of the lease. Such a certificate may also contain representations as to the proper function, manufacture and construction of the equipment.

Certificate of Need (CON)
An authorization issued to a health care provider by the state agency which provides reviews of capital expenditures of such organizations within the state, usually required in connection with the acquisition of major medical equipment.

Certificate of Participation (COP) Lease
A lease in which the lessor’s ownership interest has been divided, with each such partial interest represented by a certificate of participation. The certificates are sold to investors.

Commitment Fee
A fee charged by a lessor covering the period from commitment to lease commencement. This fee may hold the lease rate until scheduled delivery of the equipment, as well as provide for the lessor to make available its funds at a later date.

Conditional Sales Lease
A type of quasi-lease, a non-true lease for federal income tax purposes which in substance is a time-purchase. Rev. Rule 55-540 sets out a number of circumstances which, in the absence of countervailing factors, will indicate a conditional-sales lease and not a true lease. These include, but are not limited to: (1) the lessee acquiring title to the leased equipment upon payment of a stated amount of rental payments; (2) the lease payments being made over a comparatively short period of time relative to the life of the equipment, with a provision for continued use after the rental payments are made; (3) a portion of the periodic lease payments are made specifically designated as interest; and (4) the lessee having the right to purchase the leased equipment for a purchase price which is nominal.

Debt Limit
The maximum amount of debt which a governmental unit is legally permitted to incur.

Debt Service
Payments of interest and principal on outstanding debt.

Default
Failure to pay interest or principal on a debt or other obligation when due, or the violation of a covenant made in connection with the incurrence of debt as well as any other act or omission specified as a default.

Disclaimer of Warranties
A contractual provision found in many loans, true net leases and conditional-sales leases by which the lessor disavows any representation or warranty express or implied, with respect to the equipment and states that any claim by the lessee should be directed to the manufacturer or dealer (vendor, supplier) of the equipment.

Economic Life
The period of time over which property may be used in a cost efficient manner.

Essential Use Property
Property which is necessary and important for the normal ongoing governmental or proprietary operations of the lessee.

Financing Statement
Form required by the Uniform Commercial Code to be filed in one or more public records office in order to perfect a security interest.

General Obligation Debt
Debt secured by the full faith and credit of the issuer.

Insured Value
Value at which leased or other property is insured against a casualty loss. In a tax-exempt transaction, this value is often required in the document to be the replacement value of the equipment or the sum designated as the stipulated purchase option price of the equipment. Such a sum is usually calculated on the outstanding amount owed by the borrower/lessee/sub lessee to the lender/lessor under the lease and may include a premium for prepayment.

Internal Revenue Service Form 8038-G and 8038-GC
An information return required to be filed by the governmental obligor under a tax-exempt obligation. Failure to file the information return can result in the transaction’s loss of tax-exempt interest. Generally, Form 8038-G is required to be filed for each transaction of $100,000 or more within forty-five (45) days after the calendar-year quarter in which the transaction is closed. Generally, Form 8038-GC is required to be filed by February 15 on a consolidated basis for the prior year’s transactions with issue prices less than $100,000. Issuer A governmental entity which incurs debt and other obligations.

Issuer
A governmental entity which incurs debt and other obligations.

Lessee (or Sub lessee)
The party to the lease agreement who is obligated to pay the rentals and perform other duties. Such lessee may also be deemed the owner and title holder of the equipment for which rentals are being paid under a lease-purchase arrangement

Lessor
In a lease-purchase or conditional-sales lease, the party that finances the property for the lessee.

Net Lease
A lease agreement where the lessee assumes the costs and expenses related to the use and maintenance of leased equipment.

Non-appropriation Clause
This provision permits the cancellation without penalty of the lease agreement at the end of a fiscal period, if, and only if, the lessee is unable to obtain appropriation for funds to meet future scheduled lease payments.

Non-substitution Clause
This provision provides that if the lease is cancelled for non-appropriation, the lessee is prohibited from replacing the leased equipment with any other assets for the same purpose for a specified time period.

Official Statement
A document prepared by the issuer or the underlying borrower containing detailed information about the security being offered, the issuer, the obligor and the security pledge for payment of the issue. It is similar to a prospectus in a corporate transaction.

Pooled Financing
A financing in which the proceeds of bonds are used to make loans to two or more governmental units or other persons.

Private Activity Bond
A term used in the Tax Reform Act of 1986 to describe bonds, the proceeds of which are used in a trade or business of a private entity or secured by revenues from a private entity, and includes 501(c)(3) bonds as well as classic Industrial Development Bonds (IDB).

Quiet Enjoyment Clause
A contractual provision which provides that a lessee’s use of the leased equipment will not be interrupted by the lessor, as long as the lessee is not in default under the lease agreement.

Redbook
The Bond Buyer’s Directory of Municipal Bond Dealers of the United States which contains the directories of bond dealers, bond counsel and financial advisors. Refunding The sale of a new issue, the proceeds of which are to be used to pay debt service on and retire an outstanding issue. The purpose of a refunding may be to save interest, extend the maturity of the debt or remove restrictive covenants in security documents.

Refunding
The sale of a new issue, the proceeds of which are to be used to pay debt service on and retire an outstanding issue. The purpose of a refunding may be to save interest, extend the maturity of the debt or remove restrictive covenants in security documents.

Section 501(c)(3) Organization
Not-for-profit organizations such as charities, education institutions, hospitals, etc., whose income has been determined to be exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.

Security Agreement
An agreement that creates or provides for a security interest under the Uniform Commercial Code.

Security Interest
An interest in personal property or fixtures which secures payment or performance of an obligation.

Tax-exempt Lease
In this guide, a financing transaction in which (1) the obligor is a state or possession of the U.S., the District of Columbia, a political subdivision, or a 501 (c)(3) organization thereof; (2) the interest component of the rental payments made is excludable from lessor’s gross income for federal income tax purposes; and (3) “debt” is not created for state law purposes.

True Lease
A lease which, for federal tax purposes, permits the lessor to claim the tax benefits of ownership on the leased equipment. Rents under a true lease are taxable income to the lessor.

Uniform Commercial Code (UCC-1) Financing Statement
This form is filed by the lender/lessor to perfect and give notice of its security interest in the equipment subject to the agreement. It is signed by the borrower/lessee/sub lessee as debtor and filed with the appropriate public records office. Once filed, it generally remains in effect for up to 5 years.

Useful Life
The period of time in which equipment may be used with normal repairs and maintenance.

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