You may have significant shortfalls in your budgets, but your need for new apparatus has not diminished.
It is a fact that there is less money in your yearly operating and capital budgets. However, the need for newer and safer apparatus remains. The reality is that the financial strain grows bigger the longer the purchase is put off. This is not only due to manufacturer cost increases, but also to the additional money spent in maintenance costs keeping the aging apparatus in service.
Risking Property And Lives
When the purchase of new equipment is postponed, everyone in the community is affected. Response times can be hindered and equipment can break down on the way to the scene or even at the scene, potentially risking property and lives.
Fortunately fire departments have the ability to enter into tax-free lease purchase agreements.
If it is a foregone conclusion that your department needs to purchase new equipment in the next two years, or if you have been putting off the purchase due to reduced revenue, buying now will save your department considerable money over the life of the apparatus. Interest rates are very low and will likely climb in the near future.
In the past few years, inflationary costs of new fire apparatus have been outpacing interest rates. For example, the price of a typical pumper has been increasing about 4 to 5 percent per year (with the exception of this year), and interest rates for tax-free lease purchase agreements are hovering in the neighborhood of 3.9 percent.
Pre-2010 Engines
In addition, changes to National Fire Protection Association standards and federal Environmental Protection Agency regulations have had a significant impact on the cost of a truck. Right now many manufacturers are sitting on inventories of pre-2010 motors. Once these engines are gone, the cost connected to new engines and related equipment may be as much as $15,000. This does not take into account added expenses associated with maintenance of emission-reduction technologies, such as selective catalytic reduction (SCR) using diesel exhaust fluid (DEF). Buying now can help you avoid this added operating expense.
Over the years, I have been told many fire departments just won’t consider leasing. The term “lease” seems to have a negative connotation and gets confused with lease instruments used for passenger cars. Fire apparatus leases are structured to accommodate the fiscal funding restrictions of political subdivisions. In most cases, obligations terminate if a department fails to appropriate funds to make the renewal year’s lease payments. Because of this provision, neither the lease nor the lease payments are considered debt. Non-appropriation is not an event of default, but the fire department may lose the asset.
The interest earnings under a properly structured and documented lease-purchase agreement are exempt from federal income tax under the same tax laws that enable a municipal bond to carry a tax-exempt rate. Because the lending agency does not pay federal tax on the interest earned, the tax-exempt lease carries a much lower interest rate than other kinds of leases and installment loans, thus significantly lowering the cost of financing for the borrower.
Tax-Free Lease Financing
There are a lot of financial institutions that specialize in tax-free lease financing solutions. Because tax-free leasing is a specialty, one should be sure the local bank understands the law as it pertains to this process.
When you are preparing to talk to your financial decision makers, it may be best to approach them with a financing proposal in lieu of simply saying you need $400,000 for a new pumper. If you get turned down, you may have a hard time coming back later with financing options.
The payment for a $400,000 truck based on a 10-year lease-purchase agreement will be about $52,000 per year. This frees up a lot of cash to do other things, such as repair roads and city buildings when you are not rolling the entire $400,000 into one year. Keep in mind that if the economic situation changes and more cash becomes available, you can simply pay off the loan early.
Don’t be afraid to challenge your attorney when you are told that bonding is the best way to secure funds. It is simply not true. Remember that attorneys make money when you secure bonds. In addition, you need voter approval, which is costly in itself.
Another way to reduce the cost of your new truck is to take advantage of prepay discounts offered by most manufacturers. When the lease is closed (often as much as 10 months or so before delivery of the truck), the lender will pay the manufacturer as much as 100 percent of the price of the truck, and the manufacturer will, in turn, reduce the price anywhere from 3 to 8 percent of the prepay amount.
Optionally, instead of paying the manufacturer at closing to earn a prepay discount, funds can be deposited into an escrow account where they will earn interest until the truck needs to be paid for. The purchaser will benefit from the interest earned in the escrow account.
There are a lot of benefits of lease financing, among them:
- Low interest rates.
- Replacing high-maintenance older apparatus.
- Having the ability to pay the loan off early.
- Spreading the cost over the useful life of the machine.
- Leaving cash available for other needs in the community.
- Delaying the first payment until the next fiscal year.
- Leases are flexible and can be structured to meet your needs. You can also take advantage of down payments and reduce the initial cost.
Over the last several years, advancements have been made to help make the purchasing of fire equipment easier. We’ve seen the introduction of cooperative purchasing programs that allow departments to buy off of state and regional contracts, avoiding the expensive and time-consuming bid process. Government grants are available as well to assist with the purchase of equipment.
Leasing is another valuable tool that can be used to help justify your purchase and aid in obtaining the equipment your department and community needs.
Editor’s note: Ken Creese, the director of sales and marketing for the Sutphen Corporation, is a 29-year veteran of the fire apparatus industry. He has worked in various management capacities in manufacturing, engineering and sales.
More Fire Apparatus Current Issue Articles
More Fire Apparatus Archives Issue Articles
