Page 85 - Burleson FY22 City Budget

ATTACHMENT E - SECURITIES LAW COMPLIANCE AND DISCLOSURE POLICY©

EXHIBIT A
LEASE AGREEMENTS OPERATING AS VEHICLES TO BORROW MONEY (FINANCIAL OBLIGATIONS)
As a result of the amendments to Rule 15c2-12, compliance therewith effective February 27, 2019, Issuers or Obligated Persons
that periodically enter into leases should develop policies and procedures to (i) determine whether the lease is a vehicle to borrow
money, and is therefore a Financial Obligation, as opposed to an operating lease, (ii) determine if such lease becomes Material
once incurred, after considering other relevant factors and all outstanding Financial Obligations (an Issuer or Obligated Person's
threshold for outstanding Financial Obligations) and (iii) require that all executed leases are timely communicated to the Disclosure
Officer for purposes of determining whether an Event Filing is necessary.
I. Leases Operating as Vehicles to Borrow Money (Financial Obligations)

The SEC has determined that a lease should generally be considered a debt obligation and thus a "Financial Obligation" under the
Rule when such lease operates as a vehicle to borrow money (i.e., capital leases but not mere operating leases). 1
Capital leases are generally recorded on the balance sheet of the Issuer or Obligated Person as an asset and a liability by an
amount equal to the present value of the minimum lease payments; in contrast, operating leases are handled as off-balance sheet
financings of assets and are recorded as operating expenses on the Issuer or Obligated Person's income statement. In determining
which types of leases to include under the umbrella of "Financial Obligations," the SEC deemed it appropriate to include only those
leases that could represent competing debt of the Issuer or Obligated Person (e.g., capital leases which are essentially vehicles
to borrow money).
Because capital leases of the Issuer or Obligated Person are recorded in the same fashion as other competing debt of the Issuer
or Obligated Person, each sharing a line item in the balance sheet as a liability or included in a more general line item (i.e.,
competing debt), capital leases are viewed by the SEC as rising to the level of a Financial Obligation because they operate more
like a debt obligation. As such, Issuers and Obligated Persons should have procedures in place that help determine whether
leases are capital leases or operating leases, as the incurrence of a capital leases will require a Materiality analysis to determine
whether an Event 15 notice filing is required.
To make the determination of whether a lease operates as a vehicle to borrow money, the Disclosure Officer should work with
appropriate staff and accountants, municipal advisors, financial advisors and other outside consultants of the Issuer or Obligated
Person, to the extent necessary, to determine whether the lease is a vehicle to borrow money (i.e., a capital lease) or an operating
lease as operating leases will not rise to the level of a Financial Obligation under Event 15 of Rule 15c2-12.

Characteristics of Leases Operating as Vehicles to Borrow Money (Capital Leases)

In making the determination of whether a lease operates as a vehicle to borrow money and is therefore a Financial Obligation for
purposes of Event 15, relevant characteristics may include, but are not limited to, the following:
i. The lease contains a transfer of ownership of the underlying asset at the end of the lease term
or shortly thereafter;

ii. An option to purchase the underlying asset being leased at a discounted price is available,
which may be exercised during or at the end of the lease term;

iii. The term of the lease is greater than 75% of the useful life of the leased asset; or

iv. The present value of the lease payment is greater than 90% of the leased asset's fair market
value.

Although the characteristics above may be helpful in determining whether a lease operates as a vehicle to borrow money, the
Disclosure Officer and appropriate staff and consultants should review of the entire lease, in context with the Issuer's financing
and/or operating objectives, in considering whether a lease is a Financial Obligation subject to Event 15. Although a capital lease
(as such term in commonly understood) will generally be treated as a vehicle to borrow money, the mere labelling of the lease as
"capital" or "operating" will not itself be determinative.

II. Determining Factors for Materiality of Leases that Constitute Financial Obligations

1 Although the SEC in Release No. 34-83885, implementing the amendment of Rule 15c2-12 to include Event 15 and
16, has discontinued (following GASB's lead) the use of the term "capital lease" and "operating lease," the distinction
remains useful to the extent that "capital leases" are commonly understood to be financed purchases of an underlying
asset (and thus generally are vehicles to borrow money) whereas "operating leases" are not.

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