For some, it may be a bright spot. For others, it may not be.
If you plan to sell off under-utilized units or trade in equipment, you may be hitting the market right. But if you plan to buy some of the "cheap" low-hour equipment out there, or expect to get rock-bottom rental rates going forward, your opportunities may be slipping away. In short, used equipment prices are firming up.
How do I know this? Because I...
...spend two days a week working with the Association of Equipment Distributors and its construction equipment dealer members;
...spend two days a week working in the equipment rental business;
...read a lot about construction equipment;
...talk to dealers and end users;
...and see industry stats that back up what I'm saying.
Prices are gaining strength
I believe we reported last month that the recession is over. But that doesn't mean an aggressive recovery is on the way. What it means in this case is a very slow recovery and the probability we will not return to "bubble year" levels anytime soon.
Even if recovery is on the way, the construction industry is usually a lagging indicator because of the complexity of getting work through the planning and financing stages. So we still have some months to go before you will feel the effects of the rebound.
In my daily travels, I can see that both equipment prices and rental rates are firming up. Time utilization is climbing along with rental rates. It may not be a lot, but at least it's moving in the right direction.
Dealers I talk to have mentioned that auction prices have increased, and when they drive by auction house storage yards, they are not seeing as many units for sale as before. I'm sure many of you have recognized this phenomena when reviewing the sales brochures the auction houses are sending out.
One report that came across my desk to support these conclusions is the
Rouse Rental Report (www.rouseservices.com). Rouse is a leading appraiser of rental and dealer construction equipment. The report indicates the orderly liquidation value of equipment has increased 2.2% in April (as a percentage of replacement value) and about 9% over the last six months. It also shows double-digit increases over the last six months for just about every equipment category.
This report is a great tool to have in your files to support equipment values on your balance sheet, as well as to give to your banker to support your claim that values have actually increased. Even your auditors will love to have a copy. Anytime you can get this type of data, be sure to place a copy in your current audit file or bank files for future reference.
Of course, by now you've figured out that new equipment prices will follow suit with used, if they haven't already. If you plan to order a new piece of equipment, don't be surprised if you can't get it (from anybody), because both dealers and manufacturers have little to sell. At a recent meeting with dealer representatives, many were complaining about the lack of manufacturer inventory to fill the new orders they had received. Sometimes you just can't win!
With equipment pricing firming up, it's time to rethink your equipment needs -- are you a buyer, seller or renter? Along with this thinking, you have to plan out your purchases, financing and rental transactions.
One big thing to also consider is tax planning. If you sell used equipment, you will most likely generate gains taxable in 2010. After reducing your costs and using up past operating losses, you may find yourself with a tax bill you didn't expect.
To help you understand the tax ramifications of selling equipment and the way to defer the gain, turn to the article, "Preserving Cash After the Expiration of Bonus Depreciation", prepared by Ron Hogeman, Esq., an expert in like-kind exchange transactions, and tax director for WTP Exchange LLC. You can access the article at www.EquipmentToday.com.
Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or email@example.com.
Is Bonus Back?
In regards to new equipment orders, I thought I might note that the Bonus Depreciation Rules may once again appear in 2010. From what our D.C. friends tell us, the President himself is pushing to get this incentive put back in place. If it returns, any new equipment purchased in 2010 will be able to get the 50% bonus, so let's hope it happens.