Clauses for Concern – Part 2 – Power Factor Equipment

Reading and understanding the fine print is often a topic I write about, because it’s critically important for any club. In this article, I want to focus on the financing/sales pitch of solar panels and other energy factor equipment, rather than the equipment itself.

I recently reviewed a proposal for a large Sydney club for power factor equipment (Power factor is the ratio of real power (kW) which is consumed by the equipment, to apparent power (kVA) which is what must be supplied by the network). The sales pitch “guaranteed” the deal was cash-flow positive, and therefore an easy decision for the club to make.

The proposal presented what “appeared” to be a detailed analysis of the club’s energy needs, followed by a proposal whereby the club would receive energy factor equipment, which provides a “guaranteed” energy saving of X dollars per month. The cost of this equipment (via rental agreement), was less than the savings, therefore the deal appears cash-flow positive.

But there were substantial flaws, the main being:

• Any suggestion that the proposal is in some way “guaranteed”.A guarantee would mean the supplier provided the club with a written guarantee that if for any reason the “outlined savings” are not achieved, the supplier would compensate the club. This is not the case. No guarantee was provided, rather if savings were not achieved, I would suggest they will lower the repayments and extend the term of the agreement. In my opinion the proposal is misleading in this regard. If a written guarantee had been provided, it would then be up to the club to undertake due diligence and financial analysis, to ensure the supplier had the financial capacity to meet any guarantee.
• Third party-validation of the savings: As there were no details of who, how, what and when, this should not be relied on and there is no obvious way of knowing if there is any conflict of interest between the third party and supplier. The proposal noted the benefits of off-balance sheet rental financing and provided a third-party rental agreement. Under no circumstances should any club finance this type of equipment via an operating lease as it means the club has use of the equipment, but by definition and as per documentation, at the end of the term, the club would have to return the equipment to the third-party financier, in good working order, at the club’s cost! There are also substantial flaws and catches in the operating lease (rental agreements) that I have written about previously.
• The club sought to clarify the ownership issue of the equipment as they were advised that the supplier would provide the club with a side guarantee to confirm at the end of the term the club could purchase the equipment for $1. I note however, that any such letter would have no legal basis, as the supplier was not a party to the rental agreement. The club would still be obliged to return the equipment as per the terms and conditions of the rental agreement.
• One thing glaringly missing from the proposal is the cost of the equipment if the club was to purchase it. Suppliers often fail to provide this information as it is in their best interest to finance via an operating lease. By not giving you the capital cost of the equipment, you are unable to compare the cost of the equipment with other suppliers and unable to calculate the true interest rate in the proposed financing transaction.
• If we assume this equipment is energy efficient and will reduce a club’s energy costs, what is needed are three separate quotes for equipment delivery, installation and servicing. Quotes would need to be comparable, like-for-like equipment and similar specifications. Once three quotes are received, the club should look to finance via a commercial hire-purchase agreement, so the equipment is owned at the end of term. This is best serviced by a club’s own banker.
• So the key points to take out of this are to take time to question any proposals presented to your club and undertake due diligence of the providers and their undertaking and also read and understand the fine print of any documentation presented. I can review in my capacity of Director, Integrity Finance Group, or feel free to call with any questions. Please do not wait until it’s too late.