With rising heating and energy prices combined with a growing appreciation for the environment and the need to conserve, many business and building owners are looking for ways to increase energy efficiency without going broke in the process.
While outright purchasing and installing energy-saving equipment such as HVAC, heat-pumps, or solar hot-water systems may be cost-prohibitive to many businesses, leasing energy equipment is quickly becoming an excellent alternative.
As energy efficiency technology has advanced in capabilities as well as price, leasing has taken on new importance, becoming a key facilitator in the widening adoption of these technologies. Advanced energy-saving lighting, heating, ventilation and air conditioning systems can be expensive, and such emerging technologies as geothermal heat pumps, small wind power-generating systems and photovoltaic or hot water solar systems may seem daunting innovations to you and your fellow building operators.
However, as the leasing industry has adapted to evolving market conditions, the equipment for nearly any kind of energy efficiency upgrade can be leased. In addition, you may include in your lease the “soft costs” associated with adopting them. These include installation, which often equals half of the total price tag, and operator training. This is important because efficient use of complex systems may require specialized operator skills and staffing requirements.
Leasing energy efficient equipment makes sense for a lot of business owners because leases don’t require a large down payment, if any at all. This allows business owners to make substantial energy-efficient improvements while still conserving cash for other parts of the core business.
In addition, if you lease energy-efficient retrofit systems and equipment, you often can match lease payments to your energy savings and reduced maintenance costs. As a result, many such projects are cash-flow neutral; some are actually cash-flow positive. This provides a significant competitive edge if you operate commercial properties because you can translate savings on energy and maintenance into stabilized rents for your tenants, for example.
Let’s look at the specific advantages of leasing and examine how it can be an efficient win-win option for enhancing energy efficiency in your facility.
Perhaps the most powerful aspect of equipment leasing for energy retrofit projects is the positive cash flow such projects can produce for you. Consider an office complex, for example, where you seek to install a lighting retrofit system to save on energy costs. If the price tag totals $150,000, you may not be able to accommodate the added building costs of purchasing retrofit equipment in your budget for the complex. However, leasing could bring the project within reach. With typical projected annual energy savings of $57,000 and leasing costs of $56,700 annually for three years or $44,300 annually for four years, the project would produce a positive cash flow right from the outset and on through the life of the lease.
Leases also provide favorable tax treatment, though these differ somewhat depending on the type of lease. A nontax lease provides the benefits of ownership, so the value of the leased systems can be depreciated. In addition, any applicable federal or state energy tax incentives that the lessee is eligible for can be taken directly by the business.
A tax lease, on the other hand, allows the leasing company to take the tax benefits of ownership — though the leasing company typically passes a portion of these benefits on to the business in the form of a lower financing rate. In addition, under current tax regulations, the lease payments can be deducted as overhead, a business expense, on the business’ tax return. This can be a critical way to optimize tax benefits if the business is not able to fully utilize them due to prior year tax losses or Alternative Minimum Tax status.
Regardless of the type of lease, the business chooses the specific energy equipment solution that fits its needs and can retain long-term ownership of the solution at the end of the lease.
Leases are often very flexible, allowing for additions or upgrades to equipment — to keep up and take advantage of evolving technology and efficiency improvements.
Leasing companies and banks both provide equipment leasing services. However, rates — and therefore your choice of how to proceed — may differ depending on your previous relationship with your bank.
It’s also important to understand the terms of the lease agreement clearly. For example, what purchase options are available to you at the end of the lease? Once installed and in ongoing use, leased equipment becomes not only part of your operating budget, but also of your day-to-day operations. Consider continuity as you consider purchase options.
It’s important to understand your responsibility under the lease in such important areas as taxes, financial reporting goals, insurance and maintenance. Be certain to talk to your financial adviser to see if leasing benefits your unique situation.
It’s not often that businesses have the opportunity to implement “green” initiatives in a way that is either cash-flow neutral or positive. Leasing is a unique opportunity to help the community where your business operates to thrive by reducing your carbon footprint. The benefits of leasing energy equipment are considerable, but it’s important to be realistic and systematic about understanding your responsibilities as well.
Steven Gagnon is a senior vice president and oversees KeyBank’s Business Banking in Maine. He can be reached at Steven_L_Gagnon@KeyBank.com or 764-9419.
Editor’s note: The Deans of Business column will return next week.