Index – Getting the Best Equipment Lease Deal

Index

Acceptance certificate, 127

Accident Reports, 132

Accounting rules, 14, 15, 23, 117–121

ADS. See alternative depreciation system (ADS)

After-tax cash flow, 131, 141

Air market rental value, 126

Alternative depreciation system (ADS), 80

Annual depreciation expense, 105

Base lease term, 129

Best efforts, 53, 54

Big-ticket leases, 34

Bond, 80

Broker, 2, 3, 6, 7, 29, 52, 55, 89

Business lessees,

fundamentals of, 1–30

operates, 31–45

Call, 148

Cap, 55

Capital, 118

Capitalized, 130

Cash flow, 11, 22–23, 34, 87, 101–102, 106, 109, 112, 113, 115, 131, 141

Casualty value, 40, 41, 65, 137

Chase Manhattan Bank, 9

Closing lease financing, 153–165

equipment bill of sale, 162

equipment purchase agreements, 161–162

financial reports and information, 158–160

guarantees, 161

legal opinions, 154–157

lender’s trust agreement, 163–164

mortgagees, 162

organizational authorization documents, 160

owner’s trust agreement, 163

participation agreement, 162–163

partnership, 164

proof of insurance documents, 161

underwriter’s fee agreement, 164

waivers from landowners, 162

Collateral, 10, 14, 20, 42, 93, 130, 153, 154

Commencement date, 104, 113

Conditional sale agreement, 75

Cost of money, 34, 36

Cost, 130

Counted rate of return, 141

Customer Business Annuity, 34–35

Customer Money, 32

Debt participant, 7, 50, 53, 94, 97–98, 162, 163, 164

Discounted cash flow analysis, 109

Earnings before interest, taxes, depreciation, and amortization (EBITDA), 120

Earnings, 131

EBITDA. See earnings before interest, taxes, depreciation, and amortization (EBITDA)

End game, 33

End-of-lease (residual) value, 4

End-of-lease equipment, 11

End-of-lease residual investment, 32

End-of-lease sale, 33, 43

Equipment alterations,
134–135

Equipment exchange privileges, 5

Equipment financing,

conditional sale arrangement, 10

debt financing, 10

rental arrangement, 10

Equipment inventory, 4

Equipment leasing, 1–30

business, type of, 2

tax motivations, 15–27

lease decision, 27

checklist for, 28

operates, 31–45

making money, 35–45

business environment, 31

key traditional profit strategies, 31–32

potential lessors, 2–9

leases, types of, 9–15

financing arrangements, 9–15

Equipment Location Reports, 132

Equipment maintenance, 133–134

Equipment Manufacturer, 98

Equity participant, 7, 49, 67, 97, 135, 162, 163, 164

Event of default, 144, 145–146

Fair market purchase value, 126, 148

Fair market rental value, 62, 72, 126, 148

Fair market Value, 147–148

FASB. See Financial Accounting Standards Board (FASB)

Fee, 6, 61, 67, 68, 73, 95, 124

collection, 44

commitment, 27, 127–128

counsel, 73

documentation, 36, 38, 42

filing, 36, 38, 42

late payment, 44

non-utilization127–128

redelivery, 44

re-marketing, 38, 43

underwriter, 164

Fee-per-use agreement, 10, 15

Finance Foundation, 1

Finance lease, 4, 5, 6, 8, 10–12, 13, 39, 43, 69, 117, 118, 119, 120, 121, 126, 133, 138

Finance leasing companies, 4

Finance, 118

Financial Accounting Standards Board (FASB), 117, 120

Financial Reports, 132

Financing agreement, 35

Financing Bids, 47–49

Financing Business, 35–45

casualty occurrences, 40–41

collection charges, 44

documentation/filing fees, 42

end-of-term equipment residual earning, 38

equipment maintenance, 42–43

equipment tax benefits, 37–38

excess use charges, 43

insurance cost markups, 41

interest charges, 36–37

interim lease rent, 39

late payment charges, 44

potential lease profit, 38–

prepayment penalties, 39–40

profit areas, 36–45

redelivery charges, 44

re-marketing fees, 43

repair charges, 42–43

upgrade financing, 42

Firm basis, 53, 54

Fixed price purchase option, 24, 25, 72, 88, 148, 149

Formula, 146

Full payout, 117

General taxes, 138–152

benefits, 139

event of default, 145–152

interest penalty for late payments, 151–152

law governing the lease, 151

lose your lease options, 151

indemnifications, 139–140

law changes, 140–141

loss indemnity date, 141–142

loss payment formula, 141

risk, 140

unauthorized transfer, 144

Get tough, 51

Good working order, 134

Half-year convention, 79, 115

Hell or high-water obligation, 131

Hell or high-water rent, 12

Indenture trustee, 60

Indenture, 163

Initial lease term, 129

Institutional investors, 60

Insurance, 4

Interim lease term, 58, 129

Internal Revenue Service (IRS), 66

Investment tax credit (ITC), 3, 15, 21, 37, 38, 62, 75, 76, 103

IRS. See Internal Revenue Service (IRS)

ITC indemnity, 140, 141–142

ITC. See Investment tax credit (ITC)

Lease agreement, 10, 43, 123, 126, 138, 143, 144, 145, 147, 151, 153, 157, 161

Lease brokers, 2, 6–7

assests of, 7

documentation of, 7

transaction structure of, 7

Lease document

common lease forms, 124

lease’s central purpose, 123–125

negotiation, 123–

negotiation, 125–

single-transaction lease, 124

Lease line, 158

Lease termination, 5

Lease underwriters, 6–7. See also Potential Lessors

Lease underwriting, 95, 98

Lease versus buy decisions, 101

Leasing, 1–24

advantages of, 18–24

administrative services, 20–21

borrowing challenges, 21

capital budget restrictions, 22

financing flexibility, 23–24

inflation hedge, 22–23

less red tape, 18

limited use needs, 20

lower rent, 21

minimize obsolescence concerns, 19

off-balance sheet benefit, 23

preserves capital, 20

trade tax benefits, 21

upper management approval, 22

value-added technical, 20–21

leveraged lease, 14

non-leveraged lease, 14–15

definition of, 9

documents, 9

pros and cons of, 18–27

types of, 9–15

long-term lease, 10–12

finance lease, 10–12

short-term lease, 12–13

operating lease, 12–13

Leasing deal, 2, 9, 32, 47–74

Leasing equipment, 2, 3, 6, 15, 20, 22, 101

Leasing financial analysis, 101–115

cash flow, 101–102

comparing cash flows, 112

financing alternative, 109–112

lessee financial analysis, 102–112

lessor’s lease investment analysis, 112–115

timing for, 101–102

Legal issues, 155, 157

Lender, 94

Leveraged lease, 7, 9, 10, 13–14, 38, 50, 52, 53, 57, 59, 67, 84, 85, 86, 93, 94, 97–99, 153, 156, 162, 163

Leveraged leasing decisions, 93–99

advantages to a lessee, 99

best efforts basis, 95–96

concept of, 93–95

different from, 98

firm commitment underwriting proposal, 96–97

participants characteristics of, 97–98

Limited-use property, 88–89

Loan certificate, 164

Lock in, 149

Long-Term Lease, 10–12

Loss, 138

MACRS. See Modified Accelerated Cost Recovery System (MACRS)

Maintenance, 4

Managed services agreement, 14

Master lease, 23, 35, 124, 125

Mid-quarter convention, 78, 80

Minimum lease payments, 118

Modified Accelerated Cost Recovery System (MACRS), 76

Mortgage, 123, 162

Net lease, 11, 28, 87

Net return, 141

New lease

accounting rules, 117–

classification categories, 120–121

lessee lease accounting classifications, 118–120

Non re-course loan, 12

Non-debt, 120

Nonlease components, 119

Non-leveraged lease, 10, 14

Non-payout leases, 5

Non-utilization fee, 56, 127, 128, 141

Off-balance sheet, 15, 117

disadvantages of, 24–27

equipment control limited, 26

residual perspective, 24–26

key situations, 26–27

service lease, 14

Operating lease arrangement, 10

Operating lease, 10, 12–13, 28, 117, 118, 119, 120

Option, 23, 24, 26, 62, 72, 88, 101, 146, 147, 148, 149, 151

Ordinary wear, 134

Package payments, 5

payment of services, 5

rental charge, 5

Packagers, 98

Participation agreement, 162–163, 164

Personal property, 73

Potential lessors, 2–9

independent leasing companies, 2, 3–6

lease brokers, 2, 6–7

banks, 2, 8–9

individuals, 2, 3

captive leasing companies, 2, 8

Portfolio lease, 34

Pre-commencement period, 39

Present value, 26, 102, 103, 106, 107, 110, 112, 118, 119, 121, 146

Primary lease term, 58, 62, 129

Primary term, 11

Private letter ruling, 66, 67, 73, 84, 85, 89

Product financing agreements, 10, 31, 45

Product financing, 10

Product Warranties, 136–137

Progress payments, 71

Proposal stage, 47–74

agreement to, 69

best deal, 47–49

checklist for lessee, 71–74

completion risk, 55

deal collapses, 68

debt arrangement, 59–61

delivery timeframe, 61–62

direct offer, 55

equipment cost commitment, 55–56

equipment damage/loss, 65

equipment location, 62

indemnification, 65–66

interim lease terms, 58

issues to address, 52–55

key elements in, 48–49

lease proposal, 49–51

lease request, 48–49

lease type, 69

obligations, 69–70

offer, 52–53

owning entity, structure of, 59

prospective lessor’s obligations, 71

purchase or renewal options, 62–63

real lessee, 56

rent payment, 56–58

tax assumptions, 65–66

tax rulings, 66–67

time to negotiate, 51–52

transaction expenses, 67–68

upgrade financing right, 64–65

Purchase option, 24, 39, 88, 90, 118, 120, 147, 148, 149, 150, 151

Put options, 88

Railcar leases, 3

Re-lease (residual) value, 11

Re-lease value, 33, 43

Renewal option, 23, 26, 62–63, 149

Rent adjustment, 56, 57, 60, 66, 131

Rental rate, 6, 16, 19, 27, 149

Rents, 11

Repeat Customers, 35

Request-for-Bids Letter, 47–49

Re-sale value, 11

Residual value, 4, 8, 11, 19, 25, 33, 37, 38, 50, 87, 88, 103, 113, 118, 144

Right of first refusal, 63, 72, 150

Right to

renew the lease, 148–149

sublease, 147

terminate the lease, 149–150

upgrade financing, 150

Sale risk, 5

Sales tax, 11, 69, 130

Sales-type lease, 120, 121

Salvage value, 78, 80

Satisfactory documentation, 50

Service leases, 5, 14

Service leasing companies, 4, 5

Short-Term Lease, 12–13

Sign off, 51

Soft costs, 130

Spread, 36

Stipulated loss value, 12, 126, 131, 137,

Stub period, 39

Sublease, 23, 146, 147

Syndicators, 6–7. See also Potential Lessors

Tax advantage, 16

Tax Attributes, 75–81

equipment depreciation, 76

Expensing, 81

investment tax credit, 76

MACRS deductions, 77–81

amount depreciated, 77–78

averaging conventions, 79–80

depreciation methods, 78–79

depreciation recapture, 81

recovery classes, 78

property eligible for MACRS, 77

Tax depreciation rules, 16

Tax indemnification, 49, 66, 72, 73, 75, 139–140, 141, 142

Tax lease, 85–86, 90, 139, 148

Tax motivations, 15–16

equipment ownership tax benefit, 16–17

general equipment tax picture, 15–16

lease structuring, importance of, 17–18

lessee’s tax consequences, 17

Tax Reform Act (TRA), 3, 75

Tax savings, 11

Tear excepted, 134

Termination option, 63

Termination Right, 63–64

Termination value, 40, 63, 126, 149

Third-party claim Reports, 133

Third-party leasing companies, 3

Titleholder, 94

Total earnings, 141

TRA. See Tax Reform Act (TRA)

Traditional Profit Strategies, 31–32

Transition rules, 77

True lease, 17, 24, 76, 83–91, 139, 148

True Lease Rules, 83–90

foundation tax rules, 89–90

IRS private letter ruling contain, 89

IRS tax guidelines, 86–89

IRS tax lease rules, 85–86

RS private letter ruling, 85

treatment, 85

Trust, 59, 67, 73, 94, 97, 162, 163–164

Trustee, 60, 67, 97, 145, 163, 164

Underwriter, 98

Valuable Assets, 32

Vendor program, 124

Vendor, 4, 6, 10, 15, 124, 126, 127, 157, 159

Windfall Profits, 33

Yield, 37