CC 2013-08-27_08.f. Lease Purchase Financing Public Works VehiclesMEMORANDUM
TO: CITY COUNCIL
FROM: DEBBIE MALICOAT, ADMINISTRATIVE SERVICES DIRECTOR'~
GEOFF ENGLISH, PUBLIC WORKS DIRECTOR
SUBJECT: CONSIDERATION OF LEASE PURCHASE FINANCING FOR PUBLIC
WORKS VEHICLES
DATE: AUGUST 27, 2013
RECOMMENDATION:
It is recommended the City Council: 1) Award a bid for lease financing to Sovereign
Bank, N.A. and authorize the City Manager to execute all related documents; and 2)
Amend the Water Fund budget to reflect debt service payments of $24,000 annually
beginning in FY 2013-14.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
The purchase and lease financing of ten Public Works vehicles was identified in the FY
2013-14 budget. The total amount of the financing depends on the final vehicle and
equipment bids, but is estimated to cost $434,900. Based on the stated interest rate
and costs associated with the financing from Sovereign Bank, this would result in
annual payments of approximately $111,500. The amounts currently budgeted in each
fund are as follows:
• Sewer Fund-
• Gas Tax/ Streets-
• General Fund-Parks-
• General Fund-Soto-
• General Fund-Buildings-
$ 6,000 per year
$ 54,000 per year
$ 21,000 per year
$ 6,000 per year
$ 6,000 per year
In addition, staff requests the Water Fund budget be amended to reflect debt service
payments of $24,000 annually, as discussed later in this report. This would bring the
total budget for the lease payments to $117,000.
Minimal staff time is anticipated in reviewing and executing the lease and in making the
annual payments.
Item 8.f. - Page 1
CITY COUNCIL
PUBLIC WORKS VEHICLE LEASE FINANCING
AUGUST 27, 2013
PAGE2
BACKGROUND:
The FY 2013-14 budget identified ten Public Works vehicles in need of replacement.
The vehicles consist of a backhoe, six pickup trucks, a dump truck and two specialty
trucks and represent vehicles used in various program areas in Public Works from
parks, streets, buildings, water, and sewer maintenance.
In review of the budget for the vehicle purchase, staff also identified an administrative
error in the FY 2013-15 Biennial Budget. As identified in the "Supporting
Documentation" section at the end of the budget, $24,000 was identified in the Water
Fund for the lease purchase payment estimated for the purchase of a replacement
backhoe. However, this was not reflected in "Section 5 -Enterprise Funds" in the
budget worksheets. As a result, the adopted budget did not include this $24,000 lease
payment in the total budget for the Water Fund. Staff regrets this oversight and
requests that the Council amend the Water Fund budget to reflect this amount.
ANALYSIS OF ISSUES:
Given the life cycle of the equipment and the current economic situation, it was
determined that spreading the cost of the equipment over a four year period would be
prudent and appropriate. This is also consistent with an overall goal previously
recommended to Council to transition large capital purchase to leases in order to
reduce upfront costs and establish consistent annual replacement costs. Use of lease
purchase agreements has been very successful with public safety equipment
purchases.
Staff solicited Requests for Proposal (RFPs) for financing the vehicles for a four year
term and received four responses from various lenders. After review of the proposals,
staff recommends using Sovereign Bank, N.A. as the lender for the proposed lease.
Sovereign Bank is a large lender with a thorough understanding of the needs of
municipal borrowers and provided the lowest interest rate and lowest total cost of
borrowing. The interest rate is 1.85% for 4 years, with payments in advance. In
addition, Sovereign Bank has provided two options in their proposal. The first option
would require debt service payments annually every September (based on our
estimated vehicle purchase schedule). The second option would require the first
payment to be made in September, like option #1, however future payments would be
made each July 1st. This saves the City approximately $1, 100 in interest over the life of
the loan. Staff recommends utilizing this option as it is the most cost effective and does
not pose any problems administratively.
ALTERNATIVES:
The following alternatives are provided for the Council's consideration:
Approve staff recommendation to award the lease financing agreement with
Sovereign Bank;
Do not approve staff's recommendation;
Provide direction to staff.
Item 8.f. - Page 2
CITY COUNCIL
PUBLIC WORKS VEHICLE LEASE FINANCING
AUGUST 27 I 2013
PAGE3
ADVANTAGES:
The cost for the purchase of the Public Works vehicles will be minimized by using the
lender with the lowest cost of borrowing, in this case, Sovereign Bank. The leasing
program will allow the Public Works fleet to be updated and reduce upfront costs by
allowing payments to be made over four years.
DISADVANTAGES:
The disadvantage of approving the recommended action is that it will commit the City to
a four year lease program for the Public Works fleet replacements.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted in front of City Hall on Thursday, August 22, 2013 The Agenda
and report were posted on the City's website on Friday, August 23, 2013. No public
comments were received."
Attachments:
1. Proposal for financing from Sovereign Bank
Item 8.f. - Page 3
ATTACHMENT 1
Sovereign: •Santander·
14362 N. Frank Lloyd Wright Blvd.
Suite 1000
Scottsdale • AZ • 85260
VIA OVERNIGHT MAIL
July31,2013
Geoff English
City of Arroyo Grande
300 East Branch Street
Arroyo Grande, CA 93420
[ICOPY
RE: Municipal Fleet Financing Services
Dear Mr. English:
Sovereign Bank is pleased to submit the following proposal for your review and
acceptance. Our proposed terms and are as follows:
Company Overview: Sovereign/Santander Bank is a market leader in providing cost-
effective financing to public entities nationwide. With just over $1 billion in financings we
have the knowledge, flexibility and financial strength that is unmatched in the finance
industry.
Our public finance team of professionals has a thorough understanding of the municipal
market to ensure transactions are completed quickly, efficiently and cos~ effectively.
Sovereign/Santander Bank is part of Banco Santander, founded in Northern Spain in
1857, with over $1. 7 trillion in assets. Santander is one of the world's strongest, safest
and most successful banks and has grown to become one of the five largest banks in
the world by profit.
Structure:
Borrower:
Lender:
Est. Financed Amount:
Equipment:
Interest Rates:
Projected Closing Date:
Tax-exempt Municipal Lease/Purchase Agreement
(Subject to annual appropriation) ("Lease")
City of Arroyo Grande, CA ("City")
Sovereign Bank, N.A. ("Sovereign")
$434,900.00
Various Public Works Vehicles
4 years@ 1.85% (see below amortization schedule)
(Interest rate is valid for 45 days)
September 6, 2013
Item 8.f. - Page 4
Financing Proposal
Sovereign Bank, N.A.
July 31, 2013
Page 2 of 3
Prepayment Terms:
Tax Assumption:
Credit Review:
Fees/Closing Costs:
Financing References:
On any payment date per the below payment schedules.
Interest income received by Sovereign will be exempt from
Federal and State Income Tax.
Upon award by the City, Sovereign will complete the credit
approval process after receiving a complete credit package
which consists of the last (3) years audited financial
statements, most recent approved budget, equipment
quote and an executed lease application from the City.
None other than those listed herein, however the City will
be responsible for any fees or expenses with respect to its
(i) legal counsel, if any and (ii) title and registration fees, if
applicable. Sovereign is willing to finance any expenses
related to closing the transaction.
Denver Maw
City and County of Denver
201 West Colfax Avenue, Dept. 1004
Denver, CO 80202
(720) 913-9353
David Felix
City of Sierra Vista, AZ.
1011 North Coronado Drive
Sierra Vista, AZ. 85635
( 520) 458-3315
This proposal is subject to final credit approval and final documentation. Please feel free
to call me at 480-477-7896 with any questions or further clarification.
Thank you for the opportunity to present this proposal.
Sincerely, ~
~ C<-l~lu ch-
Bruce Block
Senior Vice President
14362 N. Frank Lloyd Wright Blvd.• Suite 1000 •Scottsdale• AZ.• 85260
(480) 477-7896 (480) 477-7897 Fax
Item 8.f. - Page 5
Financing Proposal
Sovereign Bank, N.A.
July 31, 2013
Page 3 of 3
Option #1: (4 Annual Payments)
Totals: $446,930.25
Payment Payment
Pmt# Date Amount
9/6/2013
1 9/6/2013 $111,732.56
2 9/6/2014 $111,732.56
3 9/6/2015 $111,732.56
4 9/6/2016 $111,732.56
Amortization Schedule
$12,030.25 $434,900.00 Rate 1.8500%
Purchase Outstanding
Interest Principal Price Balance
$434,900.00
$0.00 $111, 732.56 $323, 167 .44
$5,978.60 $105,753.97 $217,413.47 $217,413.47
$4,022.15 $107,710.41 $109,703.06 $109,703.06
$2,029.51 $109,703.06 -$0.00 -$0.00
Option #2: (Payments 2 -4 due July 1, 2014, 2015 and 2016 to reduce overall interest cost)
Totals: $445,840.16 $10,940.16 $434,900.00 Rate 1.8500%
Payment Payment Purchase Outstanding
Pmt# Date Amount Interest Principal Price Balance
9/6/2013 $434,900.00
1 9/6/2013 $111,460.04 $0.00 $111,460.04 $323,439.96
2 7/1/2014 $111,460.04 $4,903.26 $106,556.78 $216,883.18 $216,883.18
3 7/1/2015 $111,460.04 $4,012.34 $107,447.70 $109,435.48 $109,435.48
4 7/1/2016 $111,460.04 $2,024.56 $109,435.48 $0.00 $0.00
14362 N. Frank Lloyd Wright Blvd.• Suite 1000 •Scottsdale• AZ• 85260
(480) 477-7896 (480) 477-7897 Fax
Item 8.f. - Page 6