When should lessor register as foreign corp?
Within a state …
Good – stock of them
Services offered
Inspection or repair of property
Office/employees
Negotiated contracts
What is dode of Hammurabi?
- 1750 BC
- Acknowledges leasing of personal property in his code of laws
- First record of leasing law
Early examples of true lease?
- Phoenicians shipping experts
- charters covered economic life of ships
- lessee to assume benefits and obligations of ownership
What is Statue of Whales?
- 1284 AD
- leasing personal property
- 1571 defined who owned the lease property
What is Philadelphia Plan?
- 1700’s railroads companies only afford tracks
- Finance from private investors for locomotives/cars
- equipment trusts
- precursor of today conditional sale contract
When & how did Independent Leasing Start?
- 1900’s
- Offer short term contracts/leases
- lessor retain title
- rail cars would be returned at end
- beginning of true/operating lease
- third party leasing companies
What is definition of captive?
- sub of mfg. primary purpose to finance parents product
What is the benefit of captive?
- Sales aid
- market control
- product differentiation
- Increase gross margin
- Ongoing customer contact
Why did lease re surge in 1950’s?
- government stimulate economy after WWII
- advance in technology in business equipment
- IRS 167
How does IRS 55-540 define true lease?
P – payment exceed FMV – NOT
A – automatic titletransfer – NOT
I – interest contained in payment – NOT
N – nominal purchase option – NOT
E – equity in lease – NOT
E – excessive lease payments – NOT
What is different between FASB 13 and IRS 55-540?
-FAB 13 – defines operating lease – ACCT
- IRS 55-540 – defines tax lease – TAX
What is FASB 13?
- 1976 Financial Accounting Standard Board
- Issued statement 13
- Set criteria by which to classify a lease capital/operating
- defined treatment on financial statements
How does FASB 13 define an operating lease?
B – bargin purchse option – NOT
E – economic useful life > 75% – NOT
A – automatic title transfer – NOT
P – PV of payments (no resid) > 90% of FMV – NOT
What is AMT?
- Alternative Minimum Tax
- pay greater of regular tax or AMT
- limits depreciation benefit
- prompted growth in operating lease (lessee)
What is definition of Lease
- a transaction in which use and possession but not title to tangible property, is transferred for consideration
- USE AN POSSESSION
- NOT TITLE
- TRANSFERRED FOR CONSIDERATION
What are the key “from whose eyes” comparisons?
- lessee vs. lessor
- operating vs capital (accounting)
- tax vs. non-tax (tax)
- true lease vs. secured transaction
What is ASC 840?
- Accounting Standard Codification 840
- updated FASB 13
Key Elements of Lease Transaction?
- lessee must sign
- lessor must sign
- paid invoice is transfer of ownership
- paid invoice is not transfer of title
What is a Finance Agreement?
- EFA
- Installment Sale
- titleholder and user are the same
What is a single investor lease?
- tow parties
- lessor
- lessee
What is third party lease?
- three parties
- lessor
- lessee
- dealer/vendor
What is Section 38?
- IRS Section 38
- defines personal property that can be leased as depreciable property
What is IRS 179?
- tax deduction loaded to the front of the lease
What is Leveraged Lease?
- non recourse
- three parties – lender, funding source. lessee
- lendor assigns rights to funding source
- tax oriented benefit to lender
- lender responsible for maintenance, insurance & tax
- net investment declines and rises over time
What is Discounting?
- originate, document -> discount
- lessor receives payment immediately PV of stream
- lessor remains lessor of records and ultimately responsible
What is Operating Lease?
- fails FASB 13
- lessee doesn’t own asset
What is Capital Lease?
- triggers FASB 13
- aka Finance Agreement
- P.O. – $1.00, $101, 10%
What is Full Payout Lease?
- realize investments over stream of payments
- no reliance on residual to recoup investment
What is a Finance Lease?
- net lease (cost paid by lessee)
- lease over major portion of property useful life
- often incorrectly confused with non tax lease
What is Net Lease?
- lease with all cost in connection to the use are paid separately by lessee
- insurance, maintenance, tax
- non included in rental payment
What is Master Lease?
- form of documentation
- outlines basic terms and conditions
- separate schedule referring to main document
What is Money Over Money?
- non tax lease
- conditional sale
- guise of a lease
- title intended to pass at end of term
What is Closed End Lease?
- lease with no purchase option
- must be returned
What is Upfront Monies?
- Security Deposit
- Advanced Rentals
- Fees
- Can raise yield
What are Soft Costs?
- cost associated with equipment
- can be included in lease
- installation, warranty etc.
What is At-Risk?
- IRS code
- party seeking tax benefit must retain risk
- need skin in the game
What is Stipulated Loss?
- remaining payments discounted at a rate
What is Fair Market Value?
- price willing seller & buyer negotiate in open marketplace
What is placed in service?
- in use for intended purpose
What is Security Deposit?
cash deposit for performance
What is Stream Rate?
- implicit rate of steam
- does not give lessee total picture
What is Interim Rent?
charge of use of equipment form delivery to start date
What is Residual Value?
expected value of leased equipment at end of lease
What is Rental Agreement?
short term lease, typically 12 mos or less
What is purpose of lessor/vendor relationship?
- increase sales
- earn commission
- easier to market equipment
- more favorable terms
What are some documentation barriers in building vendor relationships?
- right of first refusal
- Hold back
- Re marketing agreement
- Recourse agreement
- Private Label
What should be included on vendor invoice?
- sold to leasing company
- shipped to lessee
- full equipment description – serial numbers also
What is UCC Article 2A?
- distinguishes supplier and funder
- guard against “agency”
- ensure’s arms length transaction
- helps “hell or high water”
Name five forms of Vendor Fraud?
- bunk lessee
- bunk equipment
- false sale leaseback
- bunk signature
- side agreements
- inflated prices
- used vs. new
What is UNL?
- ultimate net lose
- recourse arrangement
- funds in pool are used to cover ultimate loss after resale and legal
List Accounting Lease Classification
Operating, Capital Loan
List Tax Lease Classification?
Tax Lease (True Lease), Non Tax Lease (Non True Lease) (aka conditional sale)
List Legal Lease Classification?
Lease, secured financing, unsecured financing
What is Residual/Unguaranteed Residual?
the estimated fair value of lease property at end of term
What is Bargain Purchase Option?
lessee purchasing lease for less than fair value
What is difference in Financial Statements & Tax Returns?
- financials are accrual basis
- financials are straight line depreciation
- taxes are cash basis
- taxes are accelerated depreciation
What is the Year 1 MACR % for 5 years?
20%
What is Current Ratio?
-CURRENT ASSETS / CURRENT LIABILITIES
- higher is better
What are the different financial statement preparation levels?
- compilation – assemble with no inquiry
- reviewed – inquiry/analysis
- audit – verify with third party
What is Full Disclosure financial statements?
footnotes highlighting key items
footnotes explaining deviation from GAAP
What is Statutory Law?
- law enacted by legislative bodies
- includes UCC
What is Case Law?
- cases that apply to statutory or prior cases
What is Regulatory Law?
- regulations adopted by public bodies
- IRS & SEC are examples
What is Conflicts of Law?
inconsistencies in stat law
What is Statute of Fraud
- must have contract in writing
- if not, may not be enforcable
- total payments > $1,000
What is Legal Definition of Lease?
- not definition but rather what is it NOT
- many “weight of the evidence” type decisions
- all encompassing
- unlike accounting or tax definition, way more than 5-6 tests – more common sense.
What is UCC Article 2 ?
- law of sale of goods
- Lessor may be deemed vendor
- implied warranties
What are UCC Article 2 Implied Warranties?
- merchant sells goods deems to warrant they are fit for ordinary purposes, good condition
-May be excluded with “conspicuous disclaimer such “as is”
What is UCC Article 9?
- law of secured transactions
- record real property used UCC1
- perfect interest in collateral
Where do you file UCC 9?
in state where lessee is incorporated
Who has priority with UCC 9?
generally, first to file
Are UCC 9 required for Leases?
- No but good idea
- In the event transaction not found to be lease, secured creditor has rights to equipment in BK
In BK, lease or secured lender more likely to get equipment back?
Lease
To gain PMSI, how long do you have to file UCC?
20 days
What else is required to earn PMSI?
- lessor must pay for substantially all the equipment
- significant vendor DP, may jeopardize PMSI
To test a scenario in which a PMSI or Blanket Lien prevails, what needs to be analyzed?
- is secured transaction?
- UCC filed in 20 days?
- did lessor pay for majority of equipment?
What is Article 2A?
- Law of True Leases
- Includes implied warranties
- warranties wived with conspicuous language
Where is UCC filed?
SOS in state where company is incorporated
What are UCC Article 2A Benefits to Lesssor?
- warranties are passed to lessee
- lessor absolved from equipment issues
- hell or high water clause should be in lease
How long is UCC good for?
5 years
What are Express Warranties?
any warranty specifically made by lessor
What are Implied Warranties?
- quiet possession
- vendor warranties pass to lessee (goods are fit for use etc.)
Define ‘doing business in’ another state
- Visit often
- Agent present presence of agent
- Tax paid
- Office
When should lessor ‘register” as foreign corporation?
Within a state…
-Goods
-Offices
-Inspection/repair
-Contract negotiation
-Services
What is Acceptance in a lease document?
Lessee accepts equipment when delivered
What is Assignment of a Lease in a document?
- probitslessee from assigning (sub -lease)
- allows lessor to assign without notice to lessee
What is Disclaimer of Warranties in a document?
- LESSOR ASSIGNS ALL WARRANTIES TO LESSEE
Lessor make not warranties of quality of equipment - lessee has inspected and is satisfied
- lessee accepts “as is”
- equipment is for business purposes
What is Severability in a document?
- if one part of the doc is not enforced, other parts are still legally binding
What is Choice of Law?
- state that governs the transaction
- should be lessee, lessor or equipment state
- courts typically uphold if reasonable
What is Acceleration in a document?
In default, lessor claims all future rental are now due
What is Cross Default in a document?
if lessor has multiple leases, a default of one defaults all
What is Hell or Highwater in a document?
- lessee must make payment regardless
- equipment failure or catastrophes do not exempt from payment
What is Waiver of Defense Clause in document?
- lessee pays payments to assignee
- any legal issues fall to the original lessor, not assignee (i.e. discount scenario)
What is Tax Indemnity in documents?
states that lessee is responsible for all taxes of any kind imposed on possession, use, value or payment
What is best way to certify signors?
Corporate Resolution document
Who signs a Landlord Waiver?
Owner and Lessor
What if you forget to file a Landlord Waiver and you need to access your equipment in default?
Do your best to negotiate directly with the owner. They may understand and cooperate.
When is a Real Estate Waiver required?
When equipment is secured/fastened/attached to real property or building.
Where is Fixture Filling Recorded?
- local county recorder of real property
- file as soon as possible < 20 days
What are the most important Acts of Default?
- failure to pay
- failure to pay other sums due (i.e. insurance)
- failure to perform act or obligation under lease
What is CFLL?
- CA Lenders License
- any person makes loans – personal or commercial
What is UCC Article 10?
CA version of UCC Article 2A
What are some common methods of lessor financing?
- self funded
- broker
- discounting
- debt/equity
- securitization
What are advantages of Brokering?
- requires little/no capital
- easiest
- no servicing required
What are disadvantages of brokering?
- limited profit
- lacks control
- loss long term relationship to funding source
Who owns equipment in a Discounting scenario?
Lessor
What are advantages of Discounting?
- lower COF
- flexibility
- brand identity
- increased revenue
- retains customer
What are disadvantages of Discounting?
-significant reps and warranties
- retains some risk (i.e. residual)
- requires working capital
- potentially less upfront profit.
What are advantages of Equity/Debt funding?
- retain long term economic benefit
- control – underwriting, funding etc
What are disadvantages of Equity/Debt funding?
- risk
- limited capital
- large back-office requirements
What is Asset Securitization?
Aggregation of similar types of assets (leases) into a legal structure
- Assets used as collateral to issue bond/note
What are advantages of Securitization?
- low cost of funds
- potential off balance sheet (bk remote company)
- access to capital markets
What are disadvantages of Securitization?
- requires expertise
- huge cost to conduct
- time consuming
- need uniformity in assets
- complexity in accounting
How are Partnership Tax Liabilities treated?
income or losses of partnership are divided among owners.
Lessor can only pursue principal with respect to which types of entities?
- sole proprietor
- general partner
What is the only entity not taxed on a personal basis?
C Corp
How many owners are required in a LLC?
one (1)
What is the purpose of Credit Scoring?
- consistent decisions
- efficient process
- monitor costs
What are ways to enhance credit?
- SD
- Adv. Pymts
- Shorten term
- Add’l pg
- vendor guaranty
- add’l collateral
- fees
- vendor discounts
- co-lessee
With which type of financial statements does it make sense to also require tax returns?
compiled and reviewed
What is unique about Reviewed statements?
- confirm authenticity
- inquire internally
- analysis is performed
What is unique about Audited statements?
- highest level
- opinion of fairness
- conducted in accordance GAAS
- performed by independent licensed CPA
What is Debt to Equity
DEBT / EQUITY
- measures leverage compared to equity
- higher is more risk of failed repayment
- higher has more cash flow risk
- average 7:1 for lessors
What is Current Ratio?
CURRENT ASSETS / CURRENT LIABILITIES
- measure of liquidity or ability to repay short term debt
- higher is better
- ideally over 1.25
What is Quick Ratio?
[CASH + A/R] / [CURRENT LIABILITIES]
- another measurement of liquidity
- only considers assets “close to cash”
- aka Acid Test
- ideally > 1:1
What is Return on Equity (ROE)?
NET INCOME / EQUITY
- measure of profitability
- steady or growing with industry average
- should be reviewed in context of debt
- not firm good – but 25%+ is good
What is Profit on Sale?
GROSS PROFIT / TOTAL SALES
- measure of profit margin
What are the unique characteristics of each org type?
What is the key primary responsibility of the collection department?
- Maintain goodwill with client
- Collect leases
- Recognize signals
- Know collection practices
- track portfolio
- keep losses down
What are secondary collector responsibilities?
- legal
- repo
- remarket
- bK
What is Chapter 7?
-Liquidation BK – personal
What is Chapter 11?
- Reorganization BK – Business
- also reorg for individuals with > $150K networth
What is Chapter 12?
- Reorganization BK Ag/Farmers
What is Chapter 13?
- Reorganization BK Inidividuals
What is Relief of Stay?
- filed by Lessor to request removal of Automatic Stay
- filed by Bar Date
What is Proof of Claim?
- amount and nature of debt being claimed
- does not require attorney to submit
- filed by bar date
What is Assume or Reject?
- Chapter 11 & 13
- debtor may assume or reject TRUE LEASE
What is Summons & Complaint?
A summons is a written notice, which usually is accompanied by the complaint, notifying the defendant and the court that the complaint has been served on all relevant parties and listing the date of the first court appearance for the lawsuit.
What is important to know about payments received around the time you receive bankruptcy notice?
if within 90 days, may need to be returned to bk court
With whom an collections matters be discussed?
- PG
- employees in building
- lease applicant
- CFO/COO/Officers
What is Commercially Resonable Sale?
- written notice to lesse/guarantors
- public auction
- notice of auction date, time & Location
- published in local paper – 5 days prior
What if not Commercially Reasonable Sale?
lessor forfeits rights to pursue lessee for deficiencies
What personal assets cannot be garnished?
401k, IRA, Retirement Accounts
What is Marketing?
The process of finding, DEVELOPING and profiting from opportunities
What are key elements of Marketing Plan?
- Exec Summary
- Situation Analysis
- Marketing Strategy
- Financials
- Controls
Where does Mission Statement belong?
Executive Summary
What are the key elements of Situational Analysis?
- market summary
- environmental audit
- funding
- keys to success
- critical issues
- historical results
What are some ways to research a market
- trade journals
- associations
- internet
- D&B
- Chamber of Commerce
- ELFA
What are some forms of influencers that could introduce prospects?
- attorneys
- vendors
- CPA
- banks
- other leasing companies
- Associations
What is another name for Market Summary?
Go To Market Strategy
How can SWOT help marketing plan
- help you take advantage of what you do well
- avoid what you do not do well
- focus on biggest opportunities
- avoid risk
What are four (4) P’s of marketing?
- Product – RESEARCH FUNDING SOURCES
- Place – direct or indirect sales
- Price – based on many factors
- Promotion – how you advertise
What would be an examples of Promotion?
Application only, fast turn, industry knowledge, flexible, structure, wide credit window etc.
What are ways to measure success in Marketing Plan Financials?
- volume
- penetration
- market share
- ROI
- ROE
- ROA
What is key to marketing to banks?
- banks may not offer leasing
- clients may reach legal lending limit
- lease may be preferred to loan
- risk may not be acceptable to bank
- too large/small transaction
- add’l fee income
What are ways to build relationships with banks?
- meet establish confidence
- share marketing/sales plan
- offer to train and provide marketing material
What is Assumptive Close?
You assume they are taking your deal an proceed to close
What are CLFP’s thoughts on spiffs/rebates?
CLFP frowns upon them
What shoudl be avoid when submitting a deal to funding source?
Don’t shotgun deals to multi lenders at once.
What is difference in marketing vs sales?
- marketing efforts occurs prior to sales
- marketing supports sales
- sales acts on opportunities generated by marketing
What are the steps in selling process?
- lead development
- prospecting
- info gathering
- presentation
- overcome objections
- closing
How is the selling process conducting porcess conducted across many different companies?
- all companies handle differently
- some buy lists, some cold call, some vendor, some broker etc.
What is key with respect to interim rent in selling process?
Should be introduced early in the process?
What is Direct Selling?
- employees of your company
- focus on selling your product
- maintain control
What is Indirect Selling?
- selling through dealers or independent reps
- easier to scale up/down
- less control
What are characteristics of a strong sale person?
- on time
- organized
- take initiative
- empathetic
- understands sales cycle
- knowledgeable
- works well with others
- team player
What is the Primary sales tool for a saleman?
Knowledge – creates efficiency and opprotunity
What are some examples of how a salesperson could structure a deal to win?
- Client pays AMT – True lease
- Client need depreciation – capital lease
- Client violated covenant – operating lease
What is important to remember about Lease vs. Buy analysis?
doesn’t always result in lease being the “lowest cost” option
What are some Lease vs. Buy variables?
- Termination Option
- Cost of capital
- How will it be used
- tax rates (state, federal, sales, ppt)
- depreciation treatment
What is an important concept related to Key Management?
- Sales/Marketing
- Finance/Accounting
- Risk Mgmt.
- need to work well together
What is a key concepts with respect to budget?
- should be in sync with business strategy
- top management should be involved
- changed throughout year.
What is the budget creation process?
- submit by department
- reviewed by management
- request revisions
- repeat until complete
What are key budget elements?
- growth
- economy
- past history
- cost of capital
What is important about Cost of Capital with respect to budget?
- lower COF – more flexibility
- COF may determine LESSOR or BROKER model
What some major cost for Leasing companies?
- Cost of capital
- marketing
- reserves
- payroll
What are common reserve targets?
1.5 – 2 times annual losses
How is Outsourcing viewed in the leasing industry/
it is a good management practice.
What is Direct Finance Lease?
a lease in which the lessor does not select, manufacture, or supply the goods
Lease Intended As Security
Transaction which is written in the form of a lease, but the substance is a conditional sale contract or a loan with a security agreement on the property.
Sales-Type Lease
From the lessor’s perspective – a capital lease that gives rise to manufacturer’s or dealer’s profit to the lessor
What is Step Payment Lease?
Lease that contains a payment stream that requires the lessee to make payments that either increase (step-up) or decrease (step-down) in amount over the lease term.
What is TRAC lease?
A lease on a qualified automobile, truck or trailer, which may be considered a true lease for federal income tax purposes even though it contains a clause which effectively guarantees the lessor the residual value.
What is a Wet Lease?
A gross lease, traditionally for aircraft or marine vessels in which the lessor provides bundled services such as the payment of property taxes, insurance, maintenance costs, and provisions necessary to operate the craft (e.g., personnel, fuel, etc.)
What is a Progress Payment?
Payments required by an equipment vendor or manufacturer prior to delivery of equipment to be leased. The progress payments lessen the outlay necessary for the vendor to purchase the equipment or the manufacturer to build the equipment and it adds an economic penalty if an order is cancelled mid-stream.
What is Chattel?
Personal property
What is Cross Border Financing?
The providing of leasing or financing by a funder in one country for a lessee or borrower in another country. Such transactions are subject to each country’s applicable tariffs.
What is Bundled Lease?
A lease that includes many additional services such as maintenance, insurance and property taxes that are paid for or performed by the lessor; the cost is built into the lease payments. Also referred to as a “full-service lease.”
What is a Service Lease?
A lease in which the lessor provides service(s) such as maintenance and care of leased property. The cost of such service(s) may be built into the lease or it may be paid under a separate maintenance agreement that the lessee was required to purchase.