Bill Bosco,
President,
Leasing 101

This article depicts another day in the life of a leasing salesperson: a fictitious sales call between a leasing salesperson and a prospect. This could be a face-to-face sales call or just a quick phone call to see how the customer is doing. Calls like these can unearth new problems the CFO is facing or new projects that may spell new business for the lessor.

Leasing salespeople must know more than their products and their pricing. They must be able to probe to figure out and solve customer problems by offering the structure that best serves the customer’s needs. Leasing salespeople also must understand income tax issues and financial reporting issues that are major concerns of CFOs. These topics are complex but understanding them is important to arrive at the best structure.

CFO Chats number five:

LEASING SALESPERSON: Good morning, how are things going?

CFO: We are expanding into the southeast and need to add 20 cars for new salespeople and five new delivery trucks to our fleet. I am planning on drawing on my revolver to buy them and add them to our fleet. It’s simple, and I have some room in my line of credit.

THE LEASING SALESPERSON: Did you consider leasing the vehicles?

CFO: I’ve always bought the vehicles because I can use the MACRS tax benefits, and I like to control the use of the vehicles and sell or trade them in when I see fit.

LEASING SALESPERSON: You should consider working with us, at ABC Leasing, as we offer commercial vehicle fleet leases. Vehicles are the best asset to lease since there are more structuring options available than any other asset because of the IRS TRAC lease provisions. The typical commercial vehicle lease structure is a 12-month lease with monthly options thereafter to renew, buy for a fixed non-bargain price or return, but you provide a capped “first loss” residual guarantee.

The IRS allows “true lease” treatment for the structure if you don’t need the tax benefits; it’s called a Terminal Rent Adjustment Clause lease (TRAC lease) for any licensed over the road vehicle, which includes trailers too. We can also agree to treat the same structure as a synthetic lease (non-true lease for IRS purposes), if you can use the tax benefits, by adding a clause that says the lessee will be treated as tax owner of the vehicle. I think the synthetic lease is the best structure given your current tax position. If that changes, we can offer the other product options.

In summary, the lease can be a synthetic operating lease (lessee is tax owner), a split TRAC lease (accounting operating lease with the lessor as tax owner) or a TRAC lease (finance lease with the lessor as tax owner). We can also structure a split TRAC synthetic finance lease (finance lease the lessee as tax owner).

If you lease vehicles from ABC Leasing, it will preserve your revolver for other uses.

CFO: Sounds very complicated, but interesting. I did not know I had so many options. Can you explain further?

LEASING SALESPERSON: The structures, with some tweaks, can meet your accounting/financial reporting and tax needs. Specifically the tax owner can be you or my company, as lessor (the pricing will be different based on the value of the tax benefits) and the lease can be structured as an operating lease or a finance lease (EBITDA is better with a finance lease but the cost pattern is front ended compared to an operating lease. All of the structures I cited will be partially off-balance sheet, if not entirely off-balance sheet if viewed as a 12-month lease (ASC 842 capitalizes leases with terms of more than one year).

Be aware that the renewal option must not be reasonably sure to be exercised to avoid having to include the renewal rents in the lease term for capitalization purposes. You may have your auditor review the structure in advance to avoid any surprises. I’d be happy to explain the product to your auditors if needed.

The structures also give you control of the assets through purchase and renewal options and the right to return the vehicle at lease expiry.

CFO: How do I know what lease product is the right one for my company, and how do I get the right product?

LEASING SALESPERSON: I don’t expect you to be an expert in lease products. I also understand that the financing of large-ticket asset acquisitions is not an everyday occurrence for you. It puts a strain on you and your staff resources to have to find time from their day-to-day responsibilities to do complex analyses of financing alternatives. At ABC Leasing, we are relationship minded and we can help with the analysis. We offer advice plus a full line of lease products. In fact, we have a template that compares the impacts of a loan, an operating lease and a finance lease. It will save your staff lots of work. Let me know how you want to proceed. •

Bill Bosco is the president of Leasing 101, a lease consulting company. Bosco has nearly 50 years’ experience in the leasing industry. His areas of expertise are accounting, tax, financial analysis, structuring and training. He was on the Equipment Leasing and Finance Association’s accounting committee from 1988 to 2017 and was chairman for 10 years. He is a frequent author and speaker on leasing topics. He was selected to the FASB/IASB Lease Project working group as a lease accounting expert to represent the ELFA and to aid in the development of the Lease Accounting project. He can be reached at [email protected].