The reality hit about 10 years ago as a fledgling facility manager. Our hand-me-down ride-on auto-scrubber from a different custodial account had finally decided it was going to retire without notice. The cost of overhauling it was just as prohibitive as buying a new one, and it was clear that replacing it was the most responsible thing to do. With the prices of new models approaching a new car, how was a small school district supposed to afford a piece of equipment that expensive? This incident started what has become a never-ending quest to figure out funding mechanisms, a journey that we all got the pleasure of experiencing together.
Fast forward to present day and things have gotten much easier. No longer am I worried about financing that new auto scrubber or finding the funds for a new van or other equipment. The HVAC systems have a back-up plan so that if a major component fails, there is a suite of options that we can take advantage of. All this was made possible by looking beyond the usual capital funding sources; the most often tapped area of funding. When we needed equipment, we would budget, withdraw from the account, purchase the equipment, and use it until it no longer made sense to do so. Now, with new technology that helps to keep track of preventative and predictive maintenance on newer systems, the life spans and cycles of equipment can be managed in a way that makes sense for new financing mechanisms as well.
Here are a couple of the tools that I’ve used:
- The professional services contract agreement. While it is easy to link a vacuum or even an auto scrubber to a custodial cleaning services contract, think about assessing what other areas within the FM arena are also struggling for resources. Throwing in a van, tractor, or other large purchase into the specifications makes sense for two reasons. The first reason is that many of the larger services firms have national contract pricing that are traditionally passed on to wholesalers. By making it part of a competitive bid, it encourages them to bid as close to cost as possible. Also, because their revenue mostly comes from the service portion of the contract, it lessens the incentive for markup. The second reason it makes sense is that if it is built into the contract pricing, you are essentially getting free financing on the equipment.
- New applications for the lease/purchase or lease/ lease. I ran into this concept last year at a conference and was instantly intrigued by how it worked. The model is built around a similar concept that is being rolled out by auto manufacturers. Volvo’s subscription leasing service is a good example. Basically, a piece of equipment with a known life span is chosen, as well as a maintenance or service plan, and a flat recurring payment is calculated and charged on a fixed schedule. When it gets to the end of its life, it is replaced in kind with another piece of equipment. Now, while this may, to the educated consumer, look like a rental (it is), let’s talk about application. Airports are using this on pieces of fixed HVAC equipment for an engineered solution as a rental/lease. At the end of the lifespan of the equipment, the roof top unit is swapped for another to ensure continued operability and continuity of service. This is, of course, a long term contract which, in the mobile world we live in today, does not make sense for all companies. But, in fixed institutions, this can be very advantageous as an option where reliability and dependability is key.
Both of these solutions come with a caveat; they both switch the costs from a capital funding source to an operating funding source. For those with separate capex and operating budgets, options like this can help build revolving funding line items into an operating budget and push against the continued squeeze that we all face. Also, careful consideration should be given to the tax effects of a change like this. In most cases, this would shift the equipment from a capital asset subject to depreciation to a business expense. Consulting with a professional with regards to your specific situation and tax impacts is recommended.
As the world is changing, equipment is getting better, and the financing surrounding it is as well. My father always taught me it is cheaper to learn from others’ mistakes (as well as successes), and I hope that you can benefit from mine. Now, go take a look at that piece of equipment that you’ve had your eye on, figure out how to buy it, and share your story with others so we can grow in our endeavors together.
By Adam Nasr, CEFM, CFM, SFP, AssocRICS, LEED AP O&M, Director of Facilities, Matawan- Aberdeen Regional School District