Q: My contracting firm has generally resisted leasing construction equipment in the past. We always bought because times in recent years were good or average and we always knew we’d have the equipment we’d need for projects. We do mostly light construction work as a steel erector: retail, some public buildings and schools now and then. But we’re concerned about the economy and think we might sell some equipment to shore up our cash position. Do you think that’s a good idea? Some people say we should wait but others say jump now to get the good prices before everyone does the same.
A: The decision concerning purchasing or leasing equipment is based on a number of factors. Before making the first step, it is wise to consult with your CFO or auditing / accounting firm to gather as much pertinent information as possible before you make a decision. In order to prepare for beginning this research, it is important that you consult with your management and operations team to frame the issue and come up with consensus on some basic information. Consider all of the following questions and come up with answers to each:
• What is the purchase cost of any and all equipment we are considering as needed for our firm?
• How long would we like to make the term of the lease?
• What would be the most appropriate depreciable life of the equipment for corporate tax purposes?
• Would our company prefer to purchase the equipment at the end of the lease or will we have an ongoing need to renew a lease on another piece of equipment that is similar?
• What is the current cost of capital for our company? Your CFO should be able to calculate this based on your debt rate in terms of after tax return on equity.
• What is your marginal federal tax rate?
• What is your marginal state tax rate?
Armed with this information, there is a free web-based service that provides a lease-vs-buy calculator as a courtesy to the capital equipment leasing community. This Web site is sponsored by S.B. Associates, Inc. You can view sophisticated lease-vs-buy analyses at this Web site. In addition to the calculations, a variety of definitions pertaining to the issue are provided.
This will help ensure that you understand all the terminology related to the various aspects of your lease vs buy decision. There are several elements shown in this on-line calculator that can reveal some of the potential advantages of leasing.
They include such items as the potential for stepped or skipped rents, alternative minimum tax situations, loss carry forwards, or end of term options. The Web site is www.lease-vs-buy.com.
You should also consider that the sale price of your current equipment might also be tempered by current changes in the construction marketplace. You should look carefully at equipment available in your local market, and the potential upcoming impact of local and/or national clean-air regulations.
It would be wise to take the age of your equipment into account and assess its future usefulness and value based on the proposed changes in air-quality regulations. These are currently under consideration in any number of local, state, and federal agencies. You can check out the EPA’s latest available information on this issue at http://www.epa.gov/air/oarregul.html. Depending on the local adoption of these regulations, you may need to make a move to cleaner, newer equipment sooner than you think, or you may be OK.