eLease Equipment Leasing

Proposed FASB Legal Differences

In addition to the new differences between accounting for leases and the income tax rules (IRS), there also will be differences between a lease for the Uniform Commercial Code (UCC) and the new accounting rules under proposed FASB changes. Leasing contracts will have to amend several of its “paragraphs.” The announcement of the changes perhaps will come as early as Tuesday effecting an estimated $1.2 trillion in leased assets.

In addition to accounting changes, it will also center around the legal requirements of what the lease contract must say to be considered a legal lease (Article 2A) versus a “disguised conditional sales contract” or “a lease for security purposes” (Article 9).

This is column is a synopsis. It is best to consult your attorney and accountant who have experience in equipment leasing and finance to discuss how the new changes will affect your leasing contract once they are expected to be announced this week as “adopted.”

It may be that “operating leases” or “true leases” will be for shorter time periods and/or more transactions will be “capital leases.” It certainly will result in major changes on the balance sheet and in sales presentations as well as tax consequences.

To find what the UCC defines as a legal lease (true lease) you must go to Article 1 General Definitions and go to Par.1-201 (37) to find the definition of a “security interest” and there you will find that a lease is an exception to a security interest. It begins:

“Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay to the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee…”

This paragraph is interpreted as the requirement that a true lease must be non-cancelable for the lease term. This requirement is not found in income tax requirements or accounting rules. It is very important to understand this not only in the contract, but for the salesperson making the presentation to understand what he is actually presenting.

The additional requirements must be read in the “negative” because these are what make the lease a lease intended as a security and it will become an article 9 conditional sales contract:

1. The original term of the lease is equal to or greater than the remaining economic life of the goods (it is prudent to limit your lease term to 80% of the economic life to avoid this rule)
2. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods.
3. The lease has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or
4. The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.

A transaction does not create a security interest merely because it provides that:

1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into.
2. The lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance, filing, recording, or registration fees, or service or maintenance costs with respect to the goods.
3. The lessee has an option to renew the lease or to become the owner of the goods.
4. The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed, or
5. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.

For purposes of this subsection (37):

(x) Additional consideration is not nominal if (i) when the option to renew the lease is granted to the lessee the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed, or (ii) when the option to become the owner of the goods is granted to the lessee the price stated to be the fair market value of the goods determined at the time the option is to be performed. Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.

(y) “Reasonably predictable” and “remaining economic life of the goods” are to be determined with reference to the facts and circumstances at the time the transaction is entered into; and

(z) “Present value” means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate is not manifestly unreasonable at the time the transaction is entered into: otherwise, the discount id determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into.

In addition Article 2A creates two types of leases; two party leases and three party (finance leases):

A two party lease is a lease between the supplier of the goods and the user of the goods. In this type of lease the supplier becomes the lessor and is “responsible” for the equipments performance.

A three party lease called a finance lease has an equipment supplier (vendor), a lessor, and an equipment user (lessee).

In order for the lessor to eliminate the risk of equipment performance, the lessor must pass the warrantees and guarantees called the “supply contract” from the vendor to the lessee (after informing the vendor to this in a purchase order). In addition the lease must carry a quite enjoyment clause.

Failure of any or all of these rules places the lease under Article 9 and is considered a conditional sales contract requiring the filing of a UCC 1 lien statement to protect the lessor. In certain states, usury may be addressed, as well as the party(ies) involved are not licensed by the state where the lessee is located.

The legal rules are very different from tax or accounting and need to be followed and understood to prevail in a court of law!

Mr. Terry Winders, CLP, has been a teacher, consultant, expert witness for the leasing industry for thirty years and can be reached at leaseconsulting@msn.com or 502-327-8666.

He invites your questions and queries.

June Machine Tool Consumption Up 35 PercentAug 10, 2010Domestic sales of machine tools totaled $241.47 million during June, according to the monthly U.S. Manufacturing Technology Consumption survey conducted by the Association For Manufacturing Technology and the American Machine Tool Distributors’ Association. The percent is an increase compared to 35.8 percent from May to June, and 71.1 percent from June 2009. “Typically, manufacturing technology order rates slow down in the months leading up to the International Manufacturing Technology Show,” said AMT President Douglas Woods. “However, increased foreign direct investment and a doubling of orders in aerospace and construction equipment through the first half 2010 resulted in an acceleration of USMTC orders rather than the typical slow down.” In the regional consumption reports, the USMTC finds that the Northeast had machine tool sales of $51.4 million during June. The total was an increase 52.3 percent compared with May’s $33.78 million, and up 90.8 percent compared with June 2009. At $210.61 million, regional demand is 33.2 percent higher than it was in June 2009. In the South, June consumption amounted to $34.5 million, 18.5 percent above the May figure ($29.1 million) and 36.5 percent higher than the June 2009 total. Southern demand for the year-to-date amounts to $188.98 million, up 75 percent compared to the same period in 2009. Midwest regional machine tool consumption stood at $72.8 million during June, a rise of 69.3 percent from May ($43 million) and was 82.8 percent from June 2009. For the January-June 2010 period, Midwestern machine tool consumption amounts to $335.1 million, 51.4 percent more than during the first six months of 2009. The Central states manufacturing technology consumption totaled $57.1 million during June, up 7.1 percent over May ($53.3 million) and up 96.9 percent compared with June 2009. For the year to date, the Central region posted machine tool consumption of $329.3 million, up 85.3 percent over January-June 2009. June consumption in the Western Region totaled $25.5 million, up 37.5 percent from May ($18.6 mil-lion) and up 27.6 percent compared with June 2009. Year-to-date regional consumption has been $143.6 million, up 32.8 percent compared to the same six-month period of 2009. The United States Manufacturing Technology Consumption report is compiled monthly by the two trade associations, which represent machine shops and machine tool distributors. Based on actual date reported by participating companies, the USMTC presents regional and national U.S. consumption data of domestic and imported machine tools and related equipment.  

Everywhere on the news talks about small business lending recovering but from my vantage point more and more banks are abandoning small business and moving to the 5 million plus space.  There is surely less demand out there but for the small business that needs a loan/lease there are few options and FASB looking to change mark to market is very scary.We had our banker in our office today and we spoke about the Accounting lobbyists and what it means for our space.  I am very concerned this is 1933 all over again.  A major lender is abandoning the small business space and 3rd party originations which is US Bancorp.  They are the nations 3rd largest bank, took TARP, and are leaving entrepreneurs abandoned.I have not been writing the last few months but will become very vocal about my views on entrepreneurs, lending, and the America I love.

If you are  an entrepreneur which has managed to survive and even thrive in this market I applaud you.  I do believe this is the worst economic cycle I have lived through and will most likely be one of the worst for our country.  I also believe we are turning the corner in this economy but not for the same reasons Wall Street points to.I have long believed small business is the engine and the backbone of this country and these business’s do much of the heavy lifting in this world.  I have had the pleasure to talk with many brand new entrepreneurs who are looking to change the world and have a new sense of vigor and courage that some of us might have lost after the last 2 years or so.  For my industry specifically it is apparent that the shine has worn off the penny and work became less fun and painful at times.In dealing with these newly minted entrepreneurs I am refreshed and enlightened about this concept called Capitalism in this place called America.  I would never bet against this economy and our way our life because there are too many smart people creating new opportunities and it is ingrained in our culture to create value and opportunities.  For that reason I think the recession is over.  There are so many people capitalizing on opportunities and inefficiencies in the market place.I fear has always falls back to the people in Washington who we elect.  I would really like to see some tax incentives for REAL small business’s under 20 employees to start getting some people back to work and return to some sustained level of growth.  These companies are the real engine of growth and and creating real jobs.On the leasing side credit is still excruciatingly tight but not impossible.  We lend in the new normal of what small business lending has become.  Things get done because both parties want to succeed as they always have and always will.  Some things never change.

Greetings Entrepreneurs,

Today I got sad news that my corporate credit card was being cancelled from Advanta Business Card.  The Card had a a 50K limit and it was the card that I issued to key employees for purchasing.  Although we tended to use the card and pay it off monthly I thought about the small business owner that relied on this card exclusively in tough times to meet cash flow needs.

Advanta was a great company and even owned a leasing company which later became Marlin Leasing.  This is their final exit off the business stage and unfortunately might take a few hundred small business’s with them.

I am hearing almost daily on long established lines of credits being cancelled or a minimum being reduced.  Are we all having fun yet?

eLease is hosting a one hour Webinar for Sales People to better understand equipment and how to sell financing in todays economy.  Please email me if you are interested in attending.  We are limiting the people to 50 and will most likely do this every 2 weeks.

Thanks,

Tom

We finished our First Vendor Boot Camp yesterday and had some great feedback.  This was the first time this seminar was put on so I am excited to see the attendees got a tremendous amount of value out of the 4 hours. 

 The main interest was:

 Pricing and Proposals

Benefits of leasing

How to incorporate leasing into their sales process

This was the first of many.  If anyone is interested please shoot me an email and I can let you know about upcoming events.

BNI (Business Network International on web at www.bni.com) is an international networking organization with has over 8000 chapters worldwide and half a million members.   I have been a member of BNI in San Francisco and also in St Petersburg for the last 5 years and have found it a very efficient way to gain referrals and find new customers.

 For any small business trying to find new business and also create more awareness there is no better format than BNI.  In tough markets it is hard to stretch marketing dollars and BNI only costs a a few hundred dollars a year and you get a good meal.

 BNI also provides an excellent format to tell people about your business.  eLease has found some great vendors through this word of mouth marketing so find a chapter and see it work for yourself.

 Congratulations President-Elect Obama!

With the information overload of the bailout I thought this was very interesting.  I saw this on the National Association of Equipment Lease Brokers site www.naelb.com and I thought it was very relevent to small business owners to give the government perspective. 

How many zeros in a billion?
This is too true to be funny. The next time you hear a politician use the
word ‘billion’ in a casual manner, think about
whether you want the ‘politicians’ spending
YOUR tax money. A billion is a difficult number to comprehend,
but one advertising agency did a good job of
putting that figure into some perspective in
one of it’s releases.
A.

A billion seconds ago it was 1959.B.
A billion minutes ago Jesus was alive .C.

A billion hours ago our ancestors were
living in the Stone Age.D.
A billion days ago no-one walked on the earth on two feet.E.
A billion dollars ago was only
8 hours and 20 minutes,
at the rate our government

is spending it.

While this thought is still fresh in our brain…
let’s take a look at New Orleans …
It’s amazing what you can learn with some simple division.
Louisiana Senator,
Mary Landrieu (D)
is presently asking Congress for
250 BILLION DOLLARS
to rebuild New Orleans . Interesting number…
what does it mean?A.

Well… if you are one of the 484,674 residents of New Orleans
(every man, woman, and child)
you each get $516,528. B.
Or… if you have one of the 188,251 homes in New Orleans, your home gets $1,329,787.C.

Or… if you are a family of four…
your family gets $2,066,012.Washington , D. C

< HELLO! >
Are all your calculators broken?? Accounts Receivable Tax
Building Permit Tax
CDL License Tax
Cigarette Tax

Corporate Income Tax
Dog License Tax
Federal Income Tax < BR>Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax
Hunting License Tax
Inh erit ance Tax
Inventory Tax
IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Tax
Marriage License Tax
Medicare Tax
Property Tax
Real Estate Tax
Service charge taxes
Social Security Tax
Road Usage Tax (Truckers)
Sales Taxes
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Tax
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax STILL THINK THIS IS FUNNY? Not one of these taxes existed 100 years ago..
and our nation was the most prosperous in the world.

We had absolutely no national debt…
We had the largest middle class in the world…
and Mom stayed home to raise the kids. What happened?

Can you spell ‘politicians!’ And I still have to
press ‘1′
for English.

Why are so many businesses installing surveillance systems in their offices? The main reason is TO SAVE MONEY. Companies that invest in surveillance equipment are likely to save money in a number of ways:
Insurance (workers comp) - Every year American businesses pay out millions if not billions of dollars to their employees for workers compensation for accidents that aren’t work related. Employment law in the United States heavily favors the employee and for good reason. But without a way to prove your employee wasn’t hurt on the job, businesses are extremely vulnerable to abuses of the system. By installing surveillance cameras companies can monitor their stores, production lines or any work place and have photographic evidence of specific injuries or accidents. Additionally, by seeing accidents first hand, business owners can take preventative measures to minimize future injuries.

Theft - All businesses have problems with theft from grocery stores to banks. By installing surveillance cameras not only can you abate theft from outsiders, but you can curb internal theft.

Productivity - Wonder what your employees are doing all day? With surveillance cameras you can track productivity of your workers and work on improving the efficiency of your business.

The other reason companies get a surveillance system for their business is to have PEACE OF MIND.

Internet Viewable - Surveillance systems today allow the business owner to
view their business operations from another location. The owner could be on a business trip in China and still keep an eye on his business.

Multiple Locations - Some business owners have more than one location and can only be present at one location at a time. With security cameras, owners can monitor locations simultaneously.

No how do business owners pay for their new surveillance system?

There are many different ways to pay for equipment for your business. The first and most obvious is paying cash. Not all business owners have the budget to pay cash for a surveillance system. This brings us to financing:

Financing your security system is a great way to acquire your equipment without having to seriously impact your cash flow. Traditional loans with banks can be good when considering an interest rate. You will typically have to put down anywhere from 10%– 20%. Along with the hefty down payment, banks place a blanket lien on all company assets.

What if a business owner could get that brand new surveillance system to save money in the long run and for peace of mind at the same time not giving up interest in assets or having to put down a bunch of money? Equipment leasing is the solution. Equipment leasing is a way to finance your surveillance system 100% only having to put down the first and last payment upfront. The leasing company only holds a lien on the particular equipment you are acquiring not all assets of the company.

The top 5 reasons to lease the new surveillance system:

1. Cash Flow - Making monthly payments are much easier than coming out of pocket thousands of dollars. Let the equipment pay for itself instead of waiting years before you break-even.
2. Low Down Payment (100% financing) - Paying your first and last payment upfront is much easier than having to come out of pocket 10% or 20% for a traditional loan from a bank.
3. Service contracts for the surveillance system can be bundled into a lease so you have one low monthly payment.
4. Upgrading - Adding equipment to your lease agreement is extremely easy. All it takes is a one-page contract added to the original agreement.
5. Leasing allows “Up Selling” - Having a leasing company pay for equipment allows customers to get EVERYTHING that they need without having to take certain items out because they can not afford them. Adding additional equipment to the lease will not change the monthly payment significantly allowing it to stay within customers’ budget.