With apparatus prices going up and up, it's becoming more difficult to finance new apparatus acquisitions. It has gotten to the point where an engine can total $250,000 or $300,000, and an aerial can easily reach $500,000 to $600,000, amounts that were unheard-of just a few years ago.

Understandably, even when municipalities don't flinch from these prices, they often prefer a purchasing approach that lessens the initial bite. Leasing can provide such an approach.

Importance of tax-exempt status A critical aspect of making apparatus leases competitive is the concept of tax exempt financing. Just as the interest from municipal bonds is exempt from federal income tax, the income from leases to governmental entities is tax exempt for the organization financing the lease. This applies to governmental agencies of all forms, including state, city, town or village. In addition, many volunteer departments are eligible if they meet certain federal tax law requirements.

Tax-exempt financing, either through leasing or a straight loan, can reduce the interest rate charged from 8% to as low as 5.25%. This decrease, when financing several hundred thousand dollars over five or seven years, can result in major savings to the department.

Over the years, many municipalities and counties have issued general obligation bonds to finance apparatus purchases, especially when a large number of vehicles are involved. While it's a very acceptable means of financing, a single-purpose bond issue, such as for fire apparatus, can be expensive with all of the fees and bond counsel requirements. In addition, bonds are typically less flexible with respect to payoff options. If the lease is tax-exempt, the difference in interest rates between a bond and a lease is usually competitive.

Sources of financing Three types of organizations typically fund capital equipment or facility purchases: local banking organizations, independent public agency leasing organizations and the apparatus manufacturers themselves.

Local banking organizations The obvious advantage of using this approach, especially in smaller communities, is that the department is dealing with someone they know. In fact, many local banks want to provide community assistance, and a loan under favorable terms to the local town government or fire department can be viewed in this context. A tax-exempt loan can also be extremely attractive to the bank from a business standpoint.

It's not unusual for a local bank to finance apparatus, or other capital facilities, at a rate equal to or below the prime rate, the rate that banks charge their very best customers.

In addition to community banks, several of the larger regional or national banks have extensive tax-exempt financing programs. Some exhibit at regional and national conferences, and the options, costs and arrangements are usually very competitive.

Independent public agency leasing organizations Lease-purchase programs by independent public agency leasing organizations can present a very attractive method for financing new apparatus purchases. Essentially these organizations match public agencies with investors to develop a finance program that meets the needs of both parties. For this knowledge, the independent leasing organization charges a fee that varies with the size of the program and the complexity of the arrangement.

Very good financing rates can be achieved through these programs since they're usually tax exempt. One such program that was enacted in late 1999 resulted in a fire department receiving $600,000 for the purchase of two engines at just above 5%, a very good rate. On approval of the project and receipt of the money, the department ordered the apparatus, which weren't scheduled to be delivered for several months. During the interim, the department invested the funds at an interest rate that was almost one percentage point above the rate they were paying. This resulted in a net income of about $4,000 for the department during the nine-month waiting period.

Apparatus manufacturers Most of the major manufacturers have a variety of leasing options available. Here are the most common types of leases.

The tax-exempt municipal lease is by far the most popular leasing option offered by apparatus manufacturers. It's also referred to as a tax-exempt installment sale. These are some typical characteristics:

* Annual payments are made for five, seven or nine years, usually paid in arrears. The payments in this type of lease are usually very competitive with local tax-exempt loans.

* The vehicle(s), for a small fee, are purchased by the department at the end of the lease period. This purchase fee can be as small as one dollar.

* A non-appropriation clause provides that the vehicle(s) will be returned to the manufacturer in the event that the department does not budget funds for the lease payment.

The taxable lease is essentially the same as the exempt lease, except that the interest rate is usually 2 to 3 points higher, because the leasing company doesn't get the advantage of federal tax-exempt income. In addition, the leasing company may impose certain other conditions on the lease, since the purchaser may not be a governmental entity or have a clear or unblemished financial history.

The turn-in lease has a balloon payment due at the end of the lease, so the annual payments are lower. Instead of making the balloon payment, the department may, according to the lease provisions, turn in the apparatus for credit toward another vehicle from the same manufacturer. If the department doesn't want to turn in the vehicle, they can purchase it for the amount of the balloon payment.

The leasing agent, usually the apparatus manufacturer, guarantees the turn-in value at the end of the lease, provided that certain terms and conditions are met. The turn-in lease also incorporates, for those entities that are eligible, a tax-exempt interest rate.

The walk-away lease is typically an eight- or nine-year lease (sometimes expressed as a 102-month lease) that allows the department to "walk away" at the end of the lease with no requirement to purchase the vehicle(s). Typical provisions allow the department to purchase the vehicle for an early termination value, usually at the five- and seven-year points in the lease. The department may also purchase the vehicle at the end of the lease period for what's usually termed a "standard purchase option."

As with the turn-in lease, a number of conditions and terms apply that can affect the "early termination value" of the apparatus if the department takes the purchase option. If the lease's terms and conditions aren't met, there may be a penalty imposed at the end of the lease period.

Manufacturers' programs The major apparatus manufacturers offer a variety of leases, either from sources within their own organizations or from an association with an outside financial institution.

American LaFrance is owned by Freightliner, a subsidiary of the DaimlerChrysler group. Leases are placed through American LaFrance dealers with Mercedes-Benz Credit Corp., another member of the group. They offer several leasing options, including their Vantage Fleet Management programs. For further information, call 877-827-2075 (toll free) for the nearest American LaFrance dealer, or go to their Web site at .

Emergency One offers and retains their own leases. Their standard lease requires no money down and no payments for one year after delivery, while another lease requires no payment for one year after contract, with interest starting at time of delivery. Other programs include a walk-away lease and their Guaranteed Trade-In Value Lease. For further information, call 352-861-3510, or go to their Web site at .

Ferrara Fire Apparatus works with several financial companies to provide a variety of leasing services. They can help direct customers to an appropriate leasing source based on the customer's specific needs. With their Specified Trucks Available Today program, they can offer eight-year lease packages with no money down and no payments for one year. For additional information, contact the Ferrara sales department at 800-443-9006.

KME Fire Apparatus provides leases through KME Direct Financing, which was established to offer their customers a direct source of lease financing. Their HotLease program can offer a variety of lease packages customized for each customer. To obtain additional information, call 877-468-5327 or visit their Web site at .

Through e.v.team lease financing services, the combined Emergency Vehicle Team of Luverne, Quality, Road Rescue and their national network of dealers offers flexible leasing solutions for their customers. For information, call 800-287 5155 extension 11, or visit .

Pierce Manufacturing offers leases through its Pierce Acquisition Program, which they developed with Bank One Leasing Corp. There are several flexible leasing programs, including a five- or seven-year walk-away lease and a five- or seven year turn-in lease. For information call 920-832-3231, or go to .

Smeal Fire Apparatus offers leases through their SmeaLease program, which they developed in conjunction with the Baystone Financial Group. They have a variety of leasing options to meet each individual customer's needs. For further details, call Blake Kaus at 800-752-3562, or go to the Smeal Web site at under Contact Us/Customer Service.

Leasing is a popular means of financing apparatus at Sutphen. They work with Commercial & Municipal Capital to offer tax-exempt leases with low interest rates and flexible lease structures. For more information call 800-848-5860, or see their Web site at .

SVI Trucks provides leasing services to interested customers by directing them to a variety of leasing sources and programs. For more information call 800-525 5224.

Other manufacturers may offer leasing programs as well. For information contact each company directly.

Especially at today's costs of $250,000 to $600,000 per vehicle, leasing apparatus is a realistic alternative to the traditional approach of purchase. The cost of two or three engines or aerials can easily reach $1 million or more. This can put a strain on a capital replacement fund of many cities, especially when you realize that a fleet of 50 police cars costs less than two aerial ladders.

Recognizing the advantages and disadvantages of leasing programs is important. While leasing might not be appropriate for every situation, it can offer an attractive form of financing for many departments.

Turn-in and walk-away leases are a new and innovative method of apparatus financing. They have a number of advantages that fire service organizations should seriously consider.

The annual costs for acquiring apparatus can be stabilized. This lets the department set aside a known amount each year from its operating budget.

The department can replace apparatus before it becomes functionally obsolete. The days of 15-, 20- or even 25-year life spans for apparatus are almost gone. Most apparatus becomes functionally obsolete before it wears out, and the trade in or walk-away lease usually allows a department to obtain new apparatus every five or seven years.

Payments are made in arrears. While not unique to trade-in and walk-away leases, this feature obviously is an advantage to many organizations purchasing apparatus. Essentially, the department has the use of the rig for a year before the first lease payment is due.

The lease program can include a bumper-to-bumper warranty. This can be a major advantage to fire departments that don't have reliable maintenance capabilities available.

The turn-in or walk-away lease isn't for everyone, however. Some specific disadvantages make it inappropriate for some fire agencies.

The lease costs can vary based on conditions. As an example, the amount of annual maintenance required can affect the lease costs in some cases. Some of these types of leases require annual maintenance inspections by the leasing agent, with penalties added if certain conditions are found or certain maintenance functions haven't been performed or documented. The resulting added costs are designated for either making the necessary repairs or reducing the value of the vehicle when it's turned in to the leasing agent.

Another condition found in some of these types of leases is a penalty payment if the apparatus isn't ordered in a certain color. The penalty offsets the cost of repainting the apparatus to a more acceptable color if it's returned to the leasing agent.

These conditions aren't unlike an automobile lease. If you exceed certain leasing parameters, such as too many miles, you'll pay a penalty to ensure that the leasing organization can turn a profit.

The amortized value can be less than the actual value. Under typical "normal" usage, apparatus can be expected to have a value of about 60-70% if sold or traded in after five years of use. Guaranteed value with either trade-in or walk-away leases, however, is usually somewhat less, possibly up to 10-15% less. Again, the leasing agency is ensuring that it will make a profit from the transaction.

Payment in arrears and/or a bumper-to-bumper warranty aren't free. While not having to make an annual lease payment for a year sounds great, someone has to finance the cost of that apparatus until a payment is made. A three-year, five year or even longer duration bumper-to-bumper warranty isn't free, either. Some of the lease programs include up to $30,000 over the course of the lease for the costs anticipated in servicing the bumper-to-bumper warranty.

Although these types of leases are very attractive in many respects, some industry estimates put the dollar amount of these conditions, warranties and/or guaranteed values at up to $30,000 for an engine costing about $250,000 to $300,000. It's a good idea to prepare a thorough cost analysis that compares several purchasing and leasing options, so the costs of the leasing program can be balanced against the conveniences and services offered.