A lease is a contract in which a customer (lessee) pays a monthly, quarterly, semi-annual, or annual rent to an owner (lessor) for the right to use equipment (dumptruck, loader, computer) for a specific amount of time, i.e. 60 months.

Although leasing began in 2010 B.C., modern leasing began in the early 50s. The creation of the

Investment Tax Credit in 1962 spurred additional growth through “tax-oriented” leasing. New

products were quickly developed to meet the growing demand. Over the last 50 years, many

leasing companies developed non-tax oriented products such as income funds, operating leases,

limited partnerships, vendor programs, and residual sharings in order to remain competitive.

Equipment leasing blossomed over the last 20 years due to:

· The banking industry entered the picture, giving credibility to a marketplace which had

been previously regarded as a last-resort financing alternative.

· The accounting profession produced a document (FASB13) to help standardize lease

reporting in financial statements.

· The IRS issued guidelines (Rev Ruling 55-540 and Rev Proc 75-21) to aid lessors and

lessees in structuring leasing transactions.

Why choose a business lease:

Cash Flow – monthly payments are generally smaller for leases than for loans and they usually require a smaller or no downpayment.

Use vs. Ownership – many businesses have discovered they don’t need to own the equipment they use. In the past, renting and leasing were frowned upon. Today’s psychology looks more to the economics rather than the moralities of ownership.

Benefits of Leasing

CONSERVES CAPITAL: Leasing eases the strain on working capital by providing 100%

financing. By converting a large cash sale price into a low and affordable monthly payment, your

customer will have more money available to invest in profit generating activities.

PROVIDES TOTAL FINANCING: Leasing offers 100% financing usually without any money down. Installation, delivery, and other costs not financed by a bank can be in the lease. Taxes may be included in the lease.

KEEPS EQUIPMENT UP TO DATE BY EXPANDING BUDGET LIMITS:

Lease payments are lower than monthly installments, and make the most of your customer’s current budget. Your customer can acquire all of the equipment necessary to meet current needs, rather than being forced to make do with outdated or inferior equipment due to budget restraints.

LESSENS THE IMPACT OF INFLATION: Offset inflation with fixed lease payments by acquiring equipment at today’s prices, and paying for it with tomorrow’s less

valuable dollar. The monthly payment is 100% tax deductible as a business expense.

PROVIDES CREDIT ALTERNATIVE: The decision to lease allows your customer to retain

intact the existing line of credit they have established at the bank. This is essential to expanding

their business because growth requires working capital from every available source.

OFFERS FLEXIBILITY: As business grows or technology changes, additional or upgraded equipment will be required. With leasing, your customer can add or upgrade equipment through add-on or master leases. You can have deferred payments, step/up or step/down payments, seasonal payments, etc.

TAX ADVANTAGES: Reduce Tax Liability

TAX BENEFITS: Depreciation and interest on debt produce potential tax benefits.

BETTER LOOKING FINANCIAL STATEMENTS: Certain leases provide the user with “offbalance sheet” accounting treatment.

Governing Standards

Leasing is governed by the Financial Accounting Standards Board (FASB), and the Internal

Revenue Service (IRS), and the Uniform Commercial Code (UCC).

Confusion arises when these regulatory bodies do not agree. Since lease contracts are fairly

complicated, regulatory bodies must decide whether the language of the contract governs the

transaction or whether the intention of the parties should be followed.

The following highlights the major differences between FASB and IRS. Basically, ownership

interest is transferred to the lessee when:

FASB

1. explicit transfer of ownership

2. bargain purchase option exists

3. term of lease is at least 75% of equipment’s economic useful life

4. present value of payments is at 90% of the equipment’s fair market value

IRS

1. explicit transfer of ownership

2. bargain purchase option exists

3. lessor makes less than 20% “at risk” investment in the asset

4. payments significantly higher than fair rental value

5. part of the rent can be construed as a recovery or principal or interest

Ownership interest remains with the lessor only if none of these criteria are met. Because the

criteria differ somewhat, ownership interest may transfer to the lessee according to one authority and remain with the lessor according to the other.

As far as state and local taxing authorities are concerned, ownership resides with the lessor unless title has been explicitly transferred. This usually makes the lessor responsible for remitting sales and personal property taxes as well as billing the lessee.

In general, there are two (2) major lease types: capital leases and operating leases. Until 1986, both types of leases were very popular leasing products for the equipment leasing industry.

However, the 1986 Tax Reform Act, which strongly de-emphasized federal tax benefits and

lowered corporate tax rates, discouraged the use of capital leases and encouraged the use of

operating leases.

A capital lease typically transfers ownership of the equipment from the lessor to the lessee at the

end of the lease. Whereas, in an operating lease, the lessee returns the equipment to the lessor at the end of the lease without any further obligation.

· Tax-Oriented Leases – Lessors receive the tax benefits provided by the federal

government. Examples include accelerated depreciation and tax credits. These types of

leases are not as attractive today since they no longer carry the tax benefit of the

Investment Tax Credit.

· Full-Payout Leases – Transactions in which the total payments other than the residual

cover the lessor’s total equipment cost. This type of lease would normally be a capital

lease for accounting purposes, but could be structured either way for taxes.

· Operating Leases – Used for short-term equipment rental. An example would be an

equipment manufacturer who created a specific rental market, such as specialty railcars

and oil tankers. These leases have become very popular with most companies looking for

income rather than tax savings.

· Leveraged Leases – Complex financial arrangements in which a third party lends money

to the lessor who puts in some equity to buy an expensive piece of equipment, such as a

jumbo jet. The lender bases his credit decision on the creditworthiness of the lessee and

makes the loan to the lessor on a non-recourse basis. The lessor keeps all the tax benefits

and uses the leverage to create a high return on investment.

· Sales Type Leases – This term is defined by FASB13 for manufacturers who build

equipment and then lease it to their customers. These leases are structured like direct

financing or capital leases for accounting purposes. This type of lease has also been

affected due to the restriction of installment sale accounting and the disproportionate

allowance rule. Nonetheless, captive finance companies use this type of structure

frequently to help finance parent’s products and customers.

Capital and Operating Leases

There are two (2) types of leases, a capital lease and an operating lease. The Financial

Accounting Standards Board No. 13 – Accounting for Leases (FASB13) has published criteria to

determine if a lease will be classified as a capital or an operating lease.

FASB13 stipulates that “a capital lease shall be recorded as an asset and an obligation on the

lessee’s financial statements . . .” but “. . . the rental on an operating lease shall be charged to

expense over the least terms as it becomes payable . . .”

There are certain tax and financial ramifications to the lessee that will determine the type of lease they need.

Consequently, if the lessee uses a capital lease, they will be required to list the least as an asset on their books as outstanding lease payments as long term debt. This affects their future borrowing ability and increases their debt ratios.

If the lease is classified as an operating lease, the asset and long-term debt are kept off the lessee’s books (balance sheet financing). The lease payments are listed as an expense item and no long-term debt appears on the books.

Credit Enhancements

Structure – An effective way to add strength to a transaction is to add structure (collateral).

Typical credit enhancements ROI has used are in the forms of security deposits, additional

equipment and additional guarantors.

· Additional Guarantors – Co-signers can be used to help an application that is lacking the

strength to be approved on its own. Credit reports and financial statements (if above

application only limits) will be reviewed to determine the strength of the additional

guarantor.

· Additional Collateral – Equipment and/or titled vehicles that are owned free and clear by

the Lessee can be pledged as additional collateral on a transaction. Please see your

Account Manager for instructions on additional collateral.

· Security Deposits – These are collected in advance and released to the Lessee at

completion of the lease.

What is the Prime Rate?

The prime rate is the variable cost at which a broad survey of banks lend to perfect credit

customers. In practice, what happens is that a bank borrows from the Fed at a discount rate then

lends it to their customers at the Discount Rate +3%. The 3% is their profit.

The Prime Rate is that Discount Rate plus the profit the bank makes.

When does it go up or down? Whenever the Fed votes to raise or lower rates, they are adjusting

the Discount Rate – the rate at which they lend to banks. The banks, in turn, raise or lower their

adjustable consumer and commercial lending rates, i.e. Prime Rate.

The Fed chooses to change the Discount Rate when they think the economy is growing too fast,

when they fear inflation or in a number of other circumstances. They have publicly announced

that they intend to continue changing the rate.

Industries and Equipment

Industry Information

Industrial Technology Agricultural

1.Construction 1.Electronic 1.Farming

2.Transportation 2.Scientific 2.Horticulture

3.Manufacturing 3.Engineering 3.Forestry

Construction Electronic Farming

a. Building a. Computers a. Row Cropping

b. Landscaping b. Phones b. Dairy and Citrus

c. Excavating c. Production c. Live Stock

Transportation Scientific Horticulture

a. Shipping a. Radiology and Ultrasonic a. Transplanting

b. Rail b. Laboratorial b. Hydroponics

c. Hauling / Trucking c. Aerospace c. Botany

Manufacturing Engineering Forestry

a. Mining and Drilling a. Robotics a. Logging

b. Product Production b. Scanners b. Timbering

c. Printing c. Lasers c. Milling

Industrial

>Construction

>Transportation

>Manufacturing

Construction Equipment

1) Bulldozers

2) Cranes

3) Backhoes

4) Earth Moving

Equipment

5) Concrete

Equipment

6) Trucks & Tractors

7) Graders

8) Excavators

9) Crawlers

10) Compactors

Transportation Equipment

1) Tractors

2) Flat Bed Trailers

3) Utility Trucks &

Vans

4) Drop Deck Trailers

5) Fuel Trucks

6) Vacuum tank

trailers

7) Garbage Trucks

8) Tow Trucks

9) Rail cars

10) Oil Tankers

Manufacturing Equipment

1) Mining Drilling

equipment

2) Conveyers

3) Band Saws

4) Hydraulics

5) Lasers

6) Welding

equipment

7) Cutting Equipment

8) Presses

9) Milling

Technology

>Electronics

>Scientific

>Engineering

Electrical Equipment

1) Computers

2) Phone Systems

3) Copiers

4) Fax Machines

5) Printers

6) Servers

7) Routers

8) Software

9) Flat Screen

monitors

10) Rack equipment

Scientific Equipment

1) Radiology

2) Ultrasonic

3) Laboratorial

4) Aerospace

5) X-Ray

6) MRI

7) Operating Room

Equipment

8) Mobley Medical

Equipment

9) Anesthesia

Equipment

10) Sterilizers

Printing Equipment

1) Printing Presses

2) Graphic Design

equipment

3) Dye equipment

Engineering Equipment

1) Robotics

2) Scanners

3) Lasers

4) Portable Surveying

equipment

Agricultural

>Farming

>Horticulture

>Forestry

Farming Equipment

1) Crawlers

2) Caterpillar

3) Plows

4) Cultivators

5) Power & rotary

Tillers

6) Tractors

7) Sprayers

8) Cotton Pickers

9) Corn & Potato

Harvester

10) Baler

Horticulture Equipment

1) Pumps

2) Growing Trays

3) Timers

4) Sprayers

5) Growing Tents

6) Light Movers

7) Tractors

8) Hydroponics

System

9) Sprinklers

10) Tables

Forestry Equipment

1) Skidders

2) Forwarders

3) Delimbers

4) Harvesters

5) Knuckleboomers

6) Yarders

7) Shredders

8) Dozers

9) Conditioners

10) Chippers

10) Drills

Lending

Special Financial Programs

ROI has financial solutions for many specialized industries and

collateral programs. If your industry is not covered in the following

information please contact us for specific guidelines customized for your

needs... 

Hotel / Motel: App (one page) only to 50K. Over 50K requires last 2 years tax returns (on

business and personal) w/ most recent interim. Tax returns should include all

schedules. New equipment only. Owner must personally guarantee. 5 yrs tib.

Minimum of 50 rooms. Acceptable equipment varies. Email us for specifics of

what is acceptable and what is not.

Restaurant: App (one page) only to 25K. Over 25K requires last 2 years tax returns (on

business and personal) w/ most recent interim. Tax returns should include all

schedules. Owner must personally guarantee. 5 yrs tib.

Transportation: App (one page) only to 75K. Over 75K requires last 3 years tax returns

(on business and personal) w/ most recent interim. PFS not more than 60 days

old is required. Tax returns should include all schedules. 5 yrs tib. Minimum of

5 employees. At least 5 trucks on road. Owner must personally guarantee.

Rental Fleet: App (one page) only to 75K. Over 75K requires last 2 years tax returns (on

business and personal) w/ most recent interim. Tax returns should include all

schedules. Equipment may be used in the fleet. 5 yrs tib.

Religion: Minimum size is 25K. App only up to 50K. Over 50K requires last 2

years tax returns on the business w/ most recent interim and all schedules.

Church must be a nationally recognized affiliation with a minimum of 100

members and an annual budget of at least $500,000.00. 10 yrs tib and must be

in their own building.

Water Treatment: App (one page) only to 25K. Over 25K requires last 3 years tax returns

on business w/ most recent interim and all schedules. New equipment only.

Owner must personally guarantee. 5 yrs tib

HVAC: App (one page) only to 50K. Max is 75K. Last 3 yrs tax returns on business w/

most recent interim with schedules. 5 yrs tib. New equipment only. Owner must

personally guarantee. Building owners only.

ATM: 5 yrs tib. Personal guarantee required. Machines financed: Triton, NCR,

Tidel, Diebold

Medical/ Dental / Vet: App (one page) only to 75K. Over 75K require last 2 yrs tax returns

(business and personal) w/ most recent interim with schedules. Practice must be

in business for at least 3 years. Medical professional must personally guarantee.

Software Only: App (one page) only to 50K. Maximum is 100K. Between 50K and 100K

require last 3 yrs tax returns (business and personal) w/ most recent interim and

all schedules. 5 yrs tib. Owner must guarantee. New software only.

Lease vs. Loan…..  Either way….. ROI IS YOUR KEY...

Loan: A loan requires the end user to invest a down payment in the equipment. The loan finances the remaining amount.

Lease: A lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term. The lessee usually has an option to buy the equipment for its remaining value at lease end.

Loan: A loan usually requires the borrower to pledge other assets for collateral.

Lease: The leased equipment itself is usually all that is needed to secure a lease transaction.

Loan: A loan usually requires two expenditures during the first payment period; a down payment at the beginning and a loan payment at the end.

Lease: A lease requires only a lease payment at the beginning of the first payment period which is usually much lower than the down payment.

Loan: The end user bears all the risk of equipment devaluation because of new technology.

Lease: The end user transfers all risk of obsolescence to the lessor as there is no obligation to own equipment at the end of the lease.

Loan: End users may claim a tax deduction for a portion of the loan payment as interest and for depreciation, which is tied to IRS depreciation schedules.

Lease: When leases are structured as true leases, the end user may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules,

resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting. (Equipment financed with a conditional sale lease is treated the same as owned equipment.).

Loan: Financial Accounting Standards require owned equipment to appear as an asset with a corresponding liability on the balance sheet.

Lease: Leased assets are expensed when the lease is an operating lease. Such assets do not appear on the balance- sheet, which can improve financial ratios.

Loan: A larger portion of the financial obligation is paid in today's more expensive dollars.

Lease: More of the cash flow, especially the option to purchase the equipment, occurs later in the lease term when inflation makes dollars cheaper.

Ten Reasons to Lease Equipment vs. Purchase

1. USE OF EQUIPMENT IS THE USE OF AN ASSET – No business pays its employees

in advance: they pay people as they contribute. It should be no different with a

contributing asset like business equipment. Leasing enables you to pay as you use.

2. FIXED PAYMENTS – Monthly payments on a lease are generally fixed for the entire

term of the lease. This is a distinct advantage in times when many financing transactions

have floating interest rates. Knowing in advance what your payments will be enables you

to budget and manage equipment dollars for a long time.

3. LONGER TERMS – Many banks only lend money short term; usually 12 – 36 months. In

lease arrangements the term can be as long as 84 months and, in some cases, even

longer.

4. NO DOWN PAYMENT – Most traditional financing options require a sizable down

payment. On cash purchases, this can be as much as 20% down. No down payment

required in the majority of our leases.

5. 100% FINANCING – Traditional methods of financing usually do not include “soft” items

such as installation and freight. A good lease transaction includes both of these, thereby

allowing the lessee to finance the total package.

6. FLEXIBILITY – Leasing provides a customer with greater structuring flexibility. JMV

Associates’ financial specialists are aggressive entrepreneurs who find ways to

structure the lease to fit the needs of the customer. This allows the lessee the

opportunity to make the most of our lease structure variables, purchase options, etc.

7. SIMPLER THAN BANK LOANS - Leasing programs and procedures are specifically

designed to take the “red tape” out of financing capital equipment for business. In

today’s restrictive banking environment we can be more aggressive and flexible than

other financial institutions.

8. CONSERVATION OF CAPITAL – Because of the sizable cash outlay involved in

purchasing new equipment, many businesses lease to conserve capital. Money that

could be used to buy inventory, advertise, or hire personnel, is preserved for that

purpose, rather than purchasing equipment that is worth less as time passes.

9. EASIER CASH FLOW FORCASTING – Leasing simply dollars-per-month financing,

helps an equipment user fit a monthly payment into a budget. Because payments are

fixed, user can continue to intelligently budget into the future.

10. TAX BENEFITS – A business lessee can usually deduct their monthly payment as an

operating expense. This clearly reduces the net cost of the lease. While it is always

advisable to talk to your accountant first, leasing is generally to the advantage in most

businesses.

**Under the Alternative Minimum Tax rules (AMT), ownership of equipment triggers

depreciation.