It’s time to replace one of your department’s pumping fire apparatus or add one to your existing fleet. Budgets and financial resources being what they are — tight and getting tighter — your department must figure out the most fiscally responsible option for getting that fire truck into the fire station.
Depending upon your department’s experience with financing fire apparatus purchases, the financial options available can be numerous and, to some degree, confusing as you consider leasing, lease/purchase, walk-away lease, or turn-in lease options.
Each of these dramatically different financial options have different responsibilities and considerations. Carefully evaluates each option, as what works well for another department may not be the best option for your department. Suffice to say that there is no “one size fits all” apparatus financing options.
The vast majority of fire departments use this financing option to acquire both new and used rigs. Lease/purchase is very similar to a loan: the department owns the apparatus after completing the payment schedule.
The lease/purchase agreement is the most straightforward apparatus financing option. The department doesn’t have to pay any buyout fees or payments at the end of the agreement and the apparatus is typically titled in the department’s name from the beginning.
Like a loan
A lease/purchase agreement typically qualifies for low, tax-exempt interest rates and terms usually range from three to 15 years. Payment options can be made monthly, quarterly, twice a year or once a year. This gives a department options for managing its cash flow.
A down payment is usually not required, however many departments will use a down payment to lower the payment amount.
So if it looks and sounds like a loan, why isn’t it a loan? The answer it allows the department to cancel the agreement annually. By having this choice, most states consider this financing option an operating expense that does not count toward debt limits.
If the department cancels the agreement, it simply returns the apparatus to the financing institution.
A department may choose the lease/purchase option when it wants to own the truck longer than the financing period. For example, the apparatus will be paid off in 10 years and remain in the fleet for 15 or 20 years.
Lease/purchase agreement terms are similar to a loan in that the department is responsible to insure the truck and keep it in good working order, accounting for normal wear and tear. A department can usually pay off the lease/purchase agreement early without financial penalties.
Walk-away lease
Much like leasing a personal vehicle, a walk-away lease enables a department to use the apparatus for a defined period of time — typically five to seven years — while making payments. It is not designed for a department to own the apparatus; rather, it allows the department the use of the vehicle for a set period at a set payment.
At the end of the term, the department has the options to return the apparatus and walk-away from the payment and truck, purchase the truck for a set amount, or continue making payments until the apparatus is paid off.
If a department walks away, it is responsible for the condition of the truck according to the terms of the agreement. A department would usually be liable for any costs necessary to bring the apparatus’ condition up to those specified in the leasing agreement.
While this option is offered on a tax-exempt interest rate, there have been no rulings to date to confirm that this actually qualifies according to IRS rules.
Turn-in lease
While very similar to a walk-away lease, the turn-in lease does have a couple of important differences.
The primary difference comes at the end of the financing term, usually five or seven years. When the leasing term ends, the department can return the apparatus to the manufacturer and receive a new piece of apparatus, or purchase the truck for the previously negotiated price.
If a department chooses to get a new vehicle, it is responsible for the repair, maintenance and condition of the truck and may pay costs to bring the truck up to the specifications agreed upon upfront. A turn-in lease also requires that the department purchase a new replacement truck from the same manufacturer.
While a walk-away lease is a good fit for many departments, this financing option works best if a department can answer yes to the following questions:
- Does it have a formal replacement program with a five- or seven-year rotation?
- Does it have the discipline to be financially prepared to purchase a new truck every five or seven years?
- Is it OK knowing that it will never really own the apparatus?
- Can its maintenance care for the apparatus according to the operating requirements (including mileage and pump hours)?
- Does it have the money or borrowing power to buy the truck rather than walk away or turn in?
- Is it OK continuing to buy from the same manufacturer in the future in the case of the turn-in lease?
There are upsides and downsides to all apparatus financing options, so it’s important to ensure the financing option fits your vision and use of the apparatus over its useful life for your department.
When done correctly, each option can work well for a department. Done wrong, it will become a department’s worst nightmare.
