Sustainability Rules

Equipment financing is an effective form of sustainability. Let’s spread the word.

If you could work for an industry that not only contributes significantly to the U.S. economy but also helps preserve the environment by preventing millions of tons of unnecessary waste annually, wouldn’t you want to do that? Oh, wait—you already do.

As part of the equipment finance industry, you and your company—or companies that you serve—provide financing to thousands of businesses that lease or purchase used equipment. From earthmovers to MRI machines, equipment finance companies take off-lease equipment, inspect it, repair or refurbish it if necessary, inspect it again and offer it a second and sometimes a third time for financing. As Vince Kolber, Chairman of Chicago-based Residco, aptly puts it, “Sustainability is a new term for what we’ve been doing for decades.” And it’s one more way that equipment financing is equipping business for success.

“Locomotives can be used for even longer periods of time than railcars. We’ve sold locomotives that were 60 years old. But eventually, the need for new technology—to provide greater fuel efficiency, for example—takes over.”

—Vince Kolber, Residco

Expanding Our View

How many of us think of our industry as playing a vital role in curbing the expansion of landfills or in using natural resources more wisely? Equipment finance does both, and it has since the industry’s beginning. The railroad rolling stock and commercial aircraft financed by Residco serve as excellent examples.

Residco has specialized in financing both types of equipment since 1982, and it’s no exaggeration to say that many railcars built that year are still working the tracks. That’s partly because the federal government and the Association of American Railroads both now list the regulatory useful life of railcars at 50 years. It’s also because companies like Residco help railroads and investors buy, lease, manage and sell railcars. “Locomotives can be used for even longer periods of time than railcars,” says Kolber. “We’ve sold locomotives that were 60 years old. But eventually, the need for new technology—to provide greater fuel efficiency, for example—takes over.”

A similar life cycle is possible for commercial aircraft. Before computer models could simulate the stress of expansion and contraction that occurs each time an aircraft takes off and lands (a take-off and landing = 1 cycle), Kolber says manufacturers physically tested airframes, wings and other components for well more than 100,000 cycles. “But on average, a commercial aircraft will cycle just 3,000 times per year,” he says. “It’s unusual to find a 20-year-old aircraft that has cycled 60,000 times, so at 20 years, many aircraft are just half-way through their physical life potential. We can honestly say that the prospect of sustainability in both rail and aircraft equipment is outstanding.”

Creating Opportunities for Others

Bruce Trachtenberg, Senior Vice President, Global Asset Management and Remarketing for DLL in Wayne, Pennsylvania, observes that financing plays a key role not only in sustainability, but in the use of equipment across multiple market levels. “We have statistics that tell us that when customers purchase equipment, they hold it until its end of life,” he says. “But when they finance equipment, the length of time they use it before replacing it is significantly shorter. These customers have a decision point at the end of the original lease term, and by working with the manufacturer and the finance company, there’s potential to put them in new technology at a lower cost. This creates the opportunity to take the original equipment back, refurbish it and put it back into the market for another customer who can’t afford or doesn’t need new equipment. The refurbishing process will extend its overall life. So we’re not just supporting an extended equipment life cycle; we’re expanding the use of the equipment to a broader customer base.”

Kimberly Esposito, Managing Director, Asset Management Services for The Alta Group in Clearwater, Florida, provides an example. “If a wheel loader is used in general construction service, then it is recommended that the drive or power train be rebuilt, depending on the manufacturer, at 10,000 to 15,000 hours,” she says. “Rebuilds can also be performed on separate systems, such as the drive train, and including hydraulics, frame, attachments and so on, or the entire machine. A complete manufacturer-rebuild can significantly extend machine life, and the rebuilt components are generally given a fresh manufacturer warranty. Rebuilds performed by the original manufacturer or OEM dealer are preferable to third-party rebuilds because of the sophisticated electronic or computerized controls on all modern machines.”

Saving Energy

Raj Thadani, Chief Operating Officer of Ross International, a Clifton, New Jersey-based provider of remarketing and supply-chain logistics services to the office imaging and medical industries, believes reuse is the highest form of recycling. “You’re not expending any additional energy to change the equipment’s form,” he says.

Along with logistics, warehousing and inventory management, Ross International offers clients refurbishing and parts-reclamation services. “We have thousands of photocopiers in stock right now,” says Thadani. “We may sell a photocopier as is, or we may refurbish it if we’re contracted to do that.” Machines to be refurbished receive a thorough inspection that determines the amount of usage, any malfunctions and the copy cycle of the print drum. “There’s an assessment process we go through to determine the parts to be replaced,” he says. “Then the machine is cleaned and refreshed, and dust is removed from the optics. Then key parts are changed and the whole copier is cleaned, and for the most part, the copier would be ready for redeployment.”

Remanufacturing is another form of reuse, albeit one that is more extensive and requires additional energy and resources. “Remanufacturing occurs when a machine is stripped down and rebuilt with many parts replaced, like the full restoration of a classic car,” says Thadani. High-volume copiers are sometimes candidates for this process. “All asset types are assessed and sent where they are needed,” Thadani says. “At our company, less than 5% of off-lease copiers go to conventional recycling where they are de-manufactured for plastics and metals.”

“We have thousands of photocopiers in stock right now. We may sell a photocopier as is, or we may refurbish it if we’re contracted to do that.”

—Raj Thadani, Ross International

Selling More Equipment

Trachtenberg discusses the synergy present in highly functional aftermarkets, using DLL’s business model. “There’s an integral link between equipment finance companies and manufacturers’ ability to establish a secondary market,” he says. “For manufacturers to set up refurbishing operations with the kind of investment that is required, they need to be comfortable knowing they’ll get used equipment back on a regular basis. If they aren’t sure that there is a vehicle to get the equipment back, why would they invest? By partnering with companies like DLL and setting up programs to get that equipment returned, manufacturers can feel more comfortable building a secondary channel and refurbishment operations.” Equipment that is refurbished by a manufacturer comes with certification. “It’s like a certified, previously owned automobile,” Trachtenberg says. “It’s not just a dealer taking it back and cleaning it up.”

Trachtenberg cites three criteria that, when present, make equipment most suitable for refurbishment. These are modularity, broad usage and long useful life. “When modules can be taken out and replaced with new ones to provide improved functionality, that’s an important efficiency,” he said. “When an older piece of imaging equipment can be used in an ER that needs a basic workhorse to perform scans as quickly as possible, that’s broad usage. And when a backhoe needs simple parts traded out but the overall structure of the equipment remains good, that’s long useful life.”

“Large companies will install a fuel cell as a clean, reliable and cost-effective way to produce a portion of their own electricity and heat.”

—Chris Pagano, Hitachi Capital America Corp.

Financing Clean Technology

Chris Pagano, Vice President and General Manager of Structured Finance at Hitachi Capital America Corp. in Norwalk, Connecticut, says the equipment finance industry also promotes sustainability in yet another way: through the financing of clean technology. “Clean technology includes the financing of renewable energy projects as well as energy-efficient equipment, such as lighting, heating and cooling systems, and batteries,” says Pagano.

Hitachi Capital America Corp. entered the clean technology market by financing LED lighting projects. “These projects are relatively easy to implement, and the cost savings are significant,” Pagano says. “In many cases, the savings can pay back the financing.”

Subsequent clean-tech markets for the company include fuel cells, battery storage and combined heat and power systems for commercial buildings. “Large companies will install a fuel cell as a clean, reliable and cost-effective way to produce a portion of their own electricity and heat,” says Pagano. “Commercial and industrial companies may also install their own lithium-ion battery on the premises to store energy for use during peak periods, relieving pressure on the electrical grid while reducing energy costs.” Both fuel cells and lithium-ion batteries can be as large as a shipping container or a standard truck trailer, and multiple units may be installed for a large project.

Why the uptick in these markets now? “Corporate sustainability strategies are creating demand and the technology has improved, leading to reduced energy and maintenance costs,” says Pagano. “We’re seeing more and more companies that have defined, visible sustainability targets around improving efficiency and decreasing their impact on the environment. It’s all about becoming responsible corporate citizens.”

It’s also about saving money. Numerous federal, state and local incentives are driving adoption of clean technology. Companies can use tax credits, utility rebates and grants to offset the cost of implementing clean technology while gaining control over their energy usage and costs. “Large users of power are the most interested in doing something, as well as companies with old, inefficient technology,” Pagano says. “Manufacturers are early adopters.”

Clean-technology financing is a key focus of Hitachi Capital America’s structured-finance department. Pagano says the company takes a project-financing approach to structuring clean technology transactions, “which allows us to provide customized, flexible financing solutions, including loans, leases and the assignment of power purchase and energy savings agreements.” The business is not conducive to standard equipment lease agreements typically offered by traditional funding sources because each transaction is different, and a more structured solution is needed to mitigate risk. “All the vendors involved in installing, operating and maintaining the asset must be underwritten and monitored, along with the key performance metrics of the project,” says Pagano. “Clean technology projects are financed over long terms—10 years for lighting and battery storage projects is typical, and up to 25 years for other technologies is not unusual—so it’s very important to know who you’re working with.”

Despite complexities, Pagano says the clean-technology market is still developing. He cites office buildings as another budding segment. “There’s so much opportunity to update old equipment that’s not energy-efficient,” he says. “Various programs from utility companies and states exist to encourage these updates, so we’re already doing some transactions in this area.”

The market potential in office buildings, he says, is huge. “All buildings have heating and cooling technology that at some point will need to be updated,” Pagano points out. “It can be easy to put these projects off, but they make a lot of sense, and technology advancements have come a long way. We’re seeing companies move forward with adoption of clean-energy strategies, and although this has been happening for quite a while, the trend is really picking up now.”

Exploiting Obsolescence

At the root of the equipment finance industry’s role in sustainability are economic useful life and technological obsolescence. As Esposito notes, economic useful life is “the amount of time an asset can be used cost effectively for its original purpose.” Today, however, advancing technology can shorten equipment’s economic useful life very quickly when a new model contains fresh and innovative functionalities. Thus, the role of equipment financing becomes even more important. Esposito’s example:

“Food-processing equipment has been around a long time, and I’ve appraised a lot of it,” she says. “But what I’m seeing now is increasing automation. Sensors on an assembly line are calibrated to meet certain criteria so that if a package gets ripped or is the wrong temperature and no longer meets those criteria, the operator is alerted immediately so he or she can stop the line. The whole process is incredible and as a result, we get our cornflakes cheaper—and we won’t get sick.” Meanwhile, older food-processing equipment rendered obsolescent but still containing normal useful life can be sold in less developed nations where it may be used until it can be used no more.

“Sustainability needs to be driven by economics,” concludes Thadani. “And fortunately, thanks to equipment leasing, it works that way.”