Recent economic conditions, uncertainty over the proposed changes in lease accounting rules, and Federal tax legislation are resulting in changing demand for financing products in both the public and private sectors for specialty vehicles.

For purposes of this blog, the specialty vehicle industry segment is defined as special purpose titled vehicles and trailers built to be utilized in various work truck or transit applications. Specialty vehicles include buses, motor-coaches, transit vehicles, work trucks, utility trucks, street sweepers, tow trucks, vacuum tankers, and refuse and recycling trucks. They do not include over-the-road trucks used by private fleets or licensed carriers.

As the US economy has slowly recovered from the recession, we have seen a number of broad developments in the equipment finance industry as well as some interesting trends in the specialty vehicle finance segment.

• After over four years and multiple efforts to reach agreement on a unified set of lease accounting standards, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have still not reached an agreement. This failure to reach agreement and the recognition by FASB that lease financing structures do serve a legitimate and important purpose in providing equipment and capital to businesses, seems to indicate movement toward a more pragmatic and reasonable outcome from FASB.
• The decline in real estate values and personal income has rippled through to municipal and state budgets, causing significant shortfalls in tax revenue and leading to declining operating budgets and investments in infrastructure (roads, schools, municipal services, etc.) There is continuing pressure to hold spending and investments down to nominal or zero increases year over year.
• Companies still recovering from the recession may have less taxable income, making operating lease structures more tax efficient and offering greater financing flexibility.
• As with most industries over time, there continues to be a slow and steady process of consolidation of many sub-segments within the specialty vehicle space. Maturing markets tend to create scale and increasingly sophisticated industry participants. This leads to more opportunities to offer more efficient financing structures and in more cases, an operating lease structure. What may have been a sole proprietor or owner operator ten years ago may now be an established middle market company with professional management. In addition, private equity funds have also become prevalent owners in this segment providing additional access to capital and management resources.

As a result of the confluence of these factors, anecdotal evidence from a number of commercial specialty vehicle sub-segments such as refuse, recycling, and motorcoach operators suggests growing demand for operating lease structures.

In addition, in the municipal space, the continued lean budgetary environment is leading to greater demand for financing and/or outsourcing of some services that were formerly provided by municipal operators.

These trends look to be fairly durable, and there is no reason to suggest that they won’t continue for some time. As a result, I think it is likely that we will continue to see the following during the current recovery:

• Continued growing demand for specialty vehicle operating leasing structures, including TRAC (and ‘Split TRAC’), FMV and fixed purchase price option (FPPO) leases;
• The emergence of rental houses and specialty operators in the traditional specialty vehicle dealer space will encourage specialty vehicle dealers to offer a rental option or face erosion of market share;
• The scarcity of tax benefits will continue to challenge both leasing companies and lessees; and
• Municipalities will continue to look at either financing or outsourcing more services requiring specialty vehicles.

This is good news for the equipment finance industry – the traditional buy versus lease equation is once again becoming more relevant. With the ability to offer more customized financing that can be tax optimized and offers lessees greater financing flexibility along with more asset management options, equipment leasing enterprises have a competitive advantage over term loan financing options. Add to that the ability to pass through some level of tax benefits when offering operating lease financing, and the true leasing enterprise has a growing advantage in an increasingly competitive marketplace.