Financing Energy Management Projects 39True Lease
“Pros”:
- Allows use of equipment, without ownership risks.
- Has reduced risk of poor performance, service, equipment
obsolescence, etc. - Is good for short-term use of equipment.
- Entire lease payment is tax-deductible.
“Cons”:
- There is no ownership at the end of lease contract.
- There are no depreciation tax benefits.
Performance Contract
“Pros”:
- Allows use of equipment, with reduced installment/opera-
tional risks. - Reduced risk of poor performance or service, equipment
obsolescence, etc. - Allows host to focus on its core business objectives.
“Cons”:
- Involves potentially binding contracts, legal expenses, and
increased administrative costs. - Host must share project savings.
Rules of Thumb
When investigating financing options, consider the following gen-
eralities:
Loans, bonds and other host-managed arrangements should be
used when a customer has the resources (experience, financial
support, time) to handle the risks. Performance contracting (ESCO
assumes most of the risk) is usually best when a customer doesn’t
have the resources to properly manage the project. Remember that
with any arrangement where the host delegates risk to another
firm, the host must also share the savings.
Leases are the “middle ground” between owning and delegating
risks, and they are very popular due to their tax benefits.
True leases tend to be preferred when: