Figure 25.12 Resource Flow Diagram for a Capital Lease. The Synthetic Lease

A synthetic lease is a "hybrid" lease that combines aspects of a true lease and a capital lease. Through careful structuring and planning, the synthetic lease appears as an operating lease for accounting purposes (enables the Host to have off-balance sheet financing), yet also appears as a capital lease for tax purposes (to obtain depreciation for tax benefits). Consult your local financing expert to learn more about synthetic leases; they must be carefully structured to maintain compliance with the associated tax laws.

With most types of leases, loans and bonds the monthly payments are fixed, regardless of the equip ment's utilization, or performance. However, shared savings agreements can be incorporated into certain types of leases.

25.4.6 Performance Contracting

Performance contracting is a unique arrangement that allows the building owner to make necessary improvements while investing very little money up-front. The contractor usually assumes responsibility for purchasing and installing the equipment, as well as maintenance throughout the contract. But the unique aspect of performance contracting is that the contractor is paid based on the performance of the installed equipment. Only after the installed equipment actually reduces expenses does the contractor get paid. Energy service companies (ESCOs) typically serve as contractors within this line of business.

Unlike most loans, leases and other fixed payment arrangements, the ESCO is paid based on the performance of the equipment. In other words, if the finished product doesn't save energy or operational costs, the host doesn't pay. This aspect removes the incentive to "cut corners" on construction or other phases of the project, as with bid/spec contracting. In fact, often there is an incentive to exceed savings estimates. For this reason, performance contracting usually entails a more "facility-

Table 25.10 Economic Analysis for a Capital Lease.

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