Lease Revenue Bonds

Lease revenue bonds are a specific type of revenue bond. Unlike general obligation bonds, which are backed by the full faith and credit of the issuing government, lease revenue bonds are secured by the revenue generated from a lease agreement. This lease agreement typically involves the government entity leasing a facility or equipment from a special purpose entity created to issue the bonds.

The structure of a lease revenue bond involves several key players. The issuer is usually a special purpose entity or a public authority created specifically to issue the bonds. The lessee is the government entity or organization that will use the facility or equipment and make lease payments. Bondholders are the investors who purchase the bonds and receive interest payments.

The importance of lease revenue bonds lies in their ability to provide financing for public projects without directly impacting the government's debt ceiling. This allows governments to fund essential infrastructure and services while maintaining their credit rating and financial flexibility. They offer an alternative funding mechanism when traditional debt financing is less desirable or unavailable.

Lease revenue bonds are commonly used to finance a wide range of public projects. Examples include schools, courthouses, government office buildings, hospitals, and transportation infrastructure. The specific project being financed is typically outlined in the bond documents and lease agreement.

The security for lease revenue bonds is derived from the lease payments made by the lessee. These payments are typically structured to cover the debt service requirements of the bonds, including principal and interest. The creditworthiness of the lessee is a crucial factor in determining the bond's rating and attractiveness to investors.

The historical context of lease revenue bonds reveals their evolution as a financing tool for governments. They gained popularity as a way to circumvent constitutional debt limitations and voter approval requirements for traditional bond issuances. Over time, regulations and legal interpretations have shaped their use and structure.

One key consideration for investors in lease revenue bonds is the essentiality of the leased asset or service. If the leased asset is deemed essential for the lessee's operations, the likelihood of continued lease payments is higher, making the bonds more secure. Investors carefully evaluate the lease agreement and the lessee's financial stability.

The risks associated with lease revenue bonds include the possibility of non-appropriation, where the lessee fails to appropriate funds for lease payments in future budgets. This can lead to a default on the bonds. Other risks include project delays, cost overruns, and changes in the lessee's financial condition.