Pooling together enough money to purchase two, six or even eleven school buses can be difficult for any school district, let alone a program that has had a number of budget ups and downs during the last decade. For Head Start agencies around the country, new options are being investigated to make transportation available for it students.

“I am looking at leasing quite simply because we don’t have the money to buy,” said Kay Strand, administrative and support services manager for City of Rockford, Ill., Head Start. “Unfortunately, without the needed budget increases for Head Start, buses have been what has suffered.”

Operating vs. Capital Leases
Most leasing options fall into one of two categories: operating lease or capital lease. An operating lease is basically a rental — no equity is built towards the purchase of the bus. At the end of the lease, the agency returns the vehicle, and it undergoes an inspection to ensure that the bus was in compliance with the contracted annual usage parameters and all scheduled maintenance was performed. The agency may also not be listed as the official title holder, which could lead to higher related costs.

“It would be expected that they would have to pay for higher insurance coverage in order to protect the lender/dealer, which retains the title holder position,” said Blake J. Kaus, vice president of Baystone Financial Group. “I would expect this type of contract would be used in a situation where it was known that the bus was not needed for more than one to three years.”

A capital lease, on the other hand, is more like a traditional loan. According to Kaus, a portion of every payment goes towards the reduction of the principal and the building of equity with the purchase. Usually, the payments would be equal amounts, with no balloon or residual payment at the end of the lease. Customized payment amounts can be structured into this type of lease, like back or front loaded payment options where an agency would pay a larger portion at either the beginning or end of the lease. Unfortunately, the buyout option at the end of a lease could lead to more work for some Head Start agencies.

“Some of the programs here don’t like to put a buyout option in the lease, because if you do, it becomes a purchase instead of a service and you have to bid it out,” said Bruce Ross, owner of Ross Bus Sales in Alexandria, La.

TRAC Leasing
Another option available when leasing a bus is a terminal rental adjustment clause or TRAC lease. Since most Head Start programs don’t qualify for tax-exempt financing, this type of lease can provide a easy and cost-effective alternative, said Tony Petrolis, DaimlerChrysler Truck Financial municipal and bus finance manager. TRAC leases can offer a program incentives in many cases that can help when readily-available money is an issue.

“You obtain the low monthly payments that can help you preserve your cash, and you can also preserve your bank lines of credit for normal business purposes,” said Petrolis.

The TRAC option offers a number of choices at the end of the lease. Programs can purchase, trade-in or refinance the residual value of the bus. They can also return the bus to the dealer for sale and have the net proceeds applied to the residual. Any additional proceeds would be returned to the agency. If the proceeds are less than the residual, the agency would be liable to pay any difference. There is also an option to extend the lease for an additional term.

Like some leasing options, the TRAC lease frees up cash with lower monthly payments, usually no security deposit and an effective lease rate that is generally less than retail financing.

“Because of our industry knowledge, we are aware of the changing legal and tax environment that impacts your business,” said Petrolis. But he added that “Daimler Truck Financial neither offers nor endorses any tax advice or tax strategy to its dealers or potential customers. You should consult with your own tax advisor as to the tax consequences of executing a TRAC Lease and whether or not it is appropriate for your particular tax position.”

Other Common Benefits and Options
By leasing their buses, Head Start agencies can spread payments over three, five, seven or 10 years, depending on the size of the vehicle being leased. Sometimes the number of buses leased can have an affect on the overall costs.

“Although the options do not change with the number of vehicles purchased, the interest rate we are able to offer would be reduced for larger transactions,” said Ken Kaminsky, president and chief operating officer of Traxis Financial Group and Blue Bird Financial Services. “Our lease programs can be tailored to specific customer needs, and can include purchase options, deferred payments, skip payments and non-uniform payment schedules.”

With the unpredictable nature of Head Start funding, some companies offer a bridge loan/lease for agencies that know that they will receive funding for their purchase inside of one year. By using this option, they can still receive their equipment today and pay it off once their funds become available. This is merely a short-term financing option.

“Compare this to waiting to purchase or receive their equipment until their funds are in hand, and you could have a variety of issues from increased equipment costs, continued use of unreliable or unsafe equipment, or not being able to service children at all because of the lack of equipment,” said Kaus of Baystone Financial. “As you can imagine, any of these scenarios can wreak havoc within an organization and either create or continue an unsafe or unhealthy work environment.”

With funding, especially for transportation, being such a hot topic for almost all Head Start programs, leasing is becoming more and more attractive.

“Our leasing program has been in place for four years. It seems to be working well and enables the agency to replace school buses on a regular basis,” said Susan Hunt, lead transportation specialist for the Oregon Child Development Coalition. “There have been no downfalls that we have encountered.”

Reprinted from the January 2008 issue of School Transportation News magazine. All rights reserved.