Legal Administrator Lease Training Program

1
Legal Administrator Lease Training Program
2
Biography David Ibarra

• 25 Years Experience in the Copier Leasing
  Industry
• Xerox, Dealership, Kodak, Danka
• COPIERS Sales, Pricing Analyst, Business Manager
  
• LEASING Business Development Manager, Regional
  Leasing Manager, Division Leasing Manager

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Responsibilities

• Support Danka sales representatives facilitating
  lease transactions through various funding
  sources.
• Respond to leasing questions, concerns issues
• Review and respond to RFPs/Bids
• Negotiate
• - Credit Issues
• - Credit Approval Conditions
• - Changes to Lease Terms Conditions
• - Declinations
• - Special Lease Rates

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Lease Training Agenda

• Definition of a Lease
• Lessors Risks
• Economics of a Lease
• Calculating Payments, Equipment Cost and Rate
  Factors
• Lease Financial Products
• Benefits of Leasing
• Creative Financing
• Operating vs Capital Lease
• Credit Approval Process
• Buyouts, Upgrades, Returns
• Equipment Add-On to Existing Lease
• Letter of Intent Notification
• Cost-Per-Copy Program

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Basic Lease Questions

• What is a lease?
• How do leasing companies make money?
• Why do customers lease?

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Definition of a Lease

• A legal contract granting usage of equipment for
  a specified time in exchange for payments.
• The owner of the leased asset is called the
  lessor.
• The company using the asset is the lessee.
• Different laws govern business versus
  consumer leasing.

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Definition of a Lease

• The most common lease in the copier industry is a
  Net Lease.
• The lease only includes the financing of the
  equipment.
• It does not include and is net of the following
  costs
• Insurance
• Maintenance
• Taxes

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Lease Three Party Transaction
2 Funding Source Lessor
Lessor allows Lessee Use of the Copier
Lessor pays Dealer for the Copier
Lessee pays Lessor monthly rent payments
Dealer sells Copier to Lessor
3 Customer Lessee
1 Dealer Danka
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GE Equipment Lease Agreement
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(No Transcript)
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Lessors Risks

• Lessor must manage three (3) risks
• Interest rate
• Credit
• Residual

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Lessors Risks

• Interest Rate Lease Rate quote only valid for 30
  days.
• Credit Thorough investigation of customers
  credit history in Dun Bradstreet. Review
  customers previous years financial statements.
• Residual Values Lessors analyze industry trends,
  technological advancements, similar asset
  historical and current market value realizations
  to establish realistic fair market value
  assumptions.

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Economics of a Lease

• Cashflow Timeline illustrates the Lessors
  Internal Rate of Return (IRR)
• Lessor must recover their residual value
  assumption to make an acceptable IRR.

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0
1
2
3
5
6
278
278
278
278
278
278
278
(-10,000)
RV 500
IRR without RV .05
RV 1,500
IRR w/ 500 RV 3.09
IRR w/ 1,500 RV 8.26
IRR w/ 3,000 RV 14.5
RV 3,000
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Equipment Acquisition Process

• Involves two mutually exclusive decisions

Equipment/Vendor Decision
Financing Decision
What type of Equipment/ Vendor best satisfy my
needs ?
How will I acquire the copier?
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Benefits of Leasing

• Three Acquisition Methods
• Lease
• Installment Purchase - Loan
• Outright Purchase

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Benefits of Leasing

• 1. PROTECT AGAINST TECHNOLOGICAL OBSOLESCENCE
• According to the Equipment Leasing Associations
  market data
• 80 of companys lease equipment
• COPIERS are the most frequently leased assets due
  to rapidly changing technology
• 80 of Dankas copiers are acquired on short
  term (3yr) leases.
• Lessor assumes the industry and equipment
  technological risk.
• Lessee eliminates the risk of technological
  obsolescence by USING, not OWNING technology
  sensitive equipment.
• Lessee employs a planned replacement strategy
  to migrate to new technology at the end of the
  lease term.
• Avoids owning technologically obsolete equipment
  for 5 years to fulfill a mandatory 5yr
  depreciation schedule.
• Copiers have insignificant salvage value. Ex
  IR600 MSRP was 30,000 Trade-in value is 1,200.
  

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Benefits of Leasing

• 2. INCREASED CASH FLOW PROFITABILITY
• Small affordable monthly lease expense conserves
  cash for other demands and opportunities in your
  business.
• Plan future budget expenses with fixed monthly
  lease payments.
• Flexibility to structure lease payments to meet
  customers cash flow requirements.
• Leasing usually is the least expensive financial
  alternative
• GEs 100K 36 month lease factor of .02770 is a
  (-0.18) rate.
• Prevailing bank prime rate is 7 .
• Leasing yields a pre-tax savings of 371.71/month
  or 11,437.56.

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Benefits of Leasing

• 3. TAX ACCOUNTING SAVINGS
• Greater Short term earnings with full
  deductibility of lease payment.
• Leasing eliminates an accounting book loss for
  unclaimed depreciation expenses when upgrading a
  purchased asset before the mandatory 5 year
  depreciation period.
• Example A customer takes a 40 book loss when
  upgrading a purchased asset after 36th month.
• 4. STRATEGIC FINANCING COST-PER-COPY BILLING
• State-of-the-art program designed to measure,
  monitor and control copier operating expenses.
• Lease, Service and Supplies combined into a
  single cost-per-copy billed on a one invoice for
  the entire copier fleet.
• Eliminates processing and auditing separate
  checks for multiple invoices.

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Benefits of Leasing

• 5. ASSET DISPOSITION
• Eliminates the potential loss on the assets
  future salvage value.
• 6. CREDIT
• An additional source of debt financing.
• Preserves the companys bank line of credit for
  other budget demands and opportunities.

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Benefits of Leasing

• 7. Flexibility to Upgrade
• 8. Easy to Add-on accessories
• 9. Attractive End-of-Lease Options
• - Renew
• - Purchase _at_ FMV
• - Return

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What Items Can be Financed on a Lease?

• New Used Equipment
• Lease Buyouts
• Delivery Installation Charges
• Professional System Engineer Hours
• Software
• Third Party Devices (copy controllers, binding
  equipment, etc.)
• Used Equipment must be approved by the leasing
  company. Special rates and terms apply. Also,
  some transactions may require rate blending and
  may be subject to review for overbooking.

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Lease Financial Products

• Fair Market Value Lease (FMV)
• 1.00 Buyout Lease Purchase (LP)
• 10 Fixed Lease Purchase Option (FPO)

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Fair Market Value (FMV) Lease

• Most commonly used financing option.
• Offers the lowest monthly payment.
• FMV Lease Tax Lease True Lease.
• Lessee acquires use of equipment for a fixed
  payment over a fixed term.
• Offers an option to purchase the equipment at the
  end of the term at the then current FMV price.
• From a Tax perspective, Lessee expenses the lease
  payment as an operating cost.

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Lease Purchase

• Installment Purchase Plan (loan)
• Lessee enters into lease purchase agreement with
  full intention of owning the equipment.
• Title passes from lessor to lessee at lease
  inception for 1.00.
• Lessor retains a security interest in the
  equipment until the contract is completely
  satisfied.

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10 Fixed Purchase Option

• Lessee enters into lease agreement with the
  option to purchase the equipment at 10 of the
  financed amount of the transaction.
• Title passes from lessor to lessee at lease
  inception.
• Lessor retains a security interest in the
  equipment until the contract is completely
  satisfied.

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Creative Financing

• Typically driven by customers budget constraints
  or limited cash flow
• Examples
• Deferred Lease No payments for the first 3
  months of the lease. Payments commence after the
  3rd month.
• EX Months 1 - 3 _at_ 0.00
• Months 4-39 _at_ 350.00
• Step Lease Graduated payments during the lease
  term.
• EX Months 1-3 _at_ 0.00
• Months 4-12 _at_ 300.00
• Months 13-60 _at_ 1,000.00
• Seasonal Lease Skip billing during specified
  months
• Quarterly/Semi-Annual/Annual Billing Reduce the
  frequency of vendor invoices and customer checks
  to process.

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Lease Calculations

• Three financial components to a transaction
• Equipment cost
• Lease Factor
• Monthly Lease Payment

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Lease Calculations

• Monthly Payment
• - Equipment Cost x Rate Factor
• Example 10,000 X .0201 201.00/Month
• Equipment Cost
• - Monthly Lease Payment / Rate Factor
• Example 201.00 / .0201 10,000.00
• Rate Factor
• - Monthly Lease Payment / Equipment Cost
• Example 201.00 / 10,000.00 .0201

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Operating vs Capital Lease

• The Financial Accounting Standards Board (FASB)
  is a rule making body responsible for creating
  generally accepted accounting principles
  (GAAP).
• In November, 1976, the FASB created a revenue
  pronouncement called FASB 13.
• FASB 13 is the test that is applied to a lease to
  determine how it should be accounted for and
  reported from an accounting perspective.
• The intent of the FASB 13 test is to determine
  whether a lease is a
• Purchase Agreement or
• Usage Agreement
• If the lease implies ownership, it is a CAPITAL
  LEASE
• If the lease implies usage, it is an OPERATING
  LEASE.

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Operating vs Capital Lease

• The financial statement impact is the single
  most important reason why a company wants an
  operating lease.
• The following explains the different accounting
  treatment for each lease
• With an Operating Lease
• No Balance Sheet Entry for the Lease.
• It is viewed as off-balance sheet financing.
• Company expenses the Lease Payment on their
  Income Statement.
• They footnote the lease obligation in the Notes
  section of their companys financial statements.
• With a Capital Lease
• Company records an Asset Liability (Capital
  Lease Obligation) on their Balance Sheet
• Records a Depreciation Expense and Interest
  Expense on their Income Statement.

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Operating vs Capital Lease

• Operating leases improve the financial ratios of
  a company.
• Return on Assets (ROA) ratio is higher because
  the leased equipment is not recorded as an asset
  on the companys books.
• Debt-to-Equity ratio is lower because the leased
  equipment does not have a liability recorded on
  the companys books.

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Operating vs Capital Lease

• There are four (4) criteria to the FASB 13 test.
• If all four criteria are passed, then it is an
  operating lease.
• If any one of the criteria are failed, then it
  is a capital lease.

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FASB 13 Lease Classification Test Criteria

• Test 1 Does the lease transfer ownership?
• Test 2 Does the lease offer a bargain purchase
  option?
• Test 3 Is the lease term greater than 75 of
  the equipments useful life?
• Test 4 Are the discounted payments greater than
  90 of the net equipment cost?
• If the answer to any of the above tests is YES
  then it is a CAPITAL LEASE.
• If the answer to ALL of the above tests is NO,
  then it is an OPERATING LEASE.

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Operating Lease Test Methodology

• Step 1 Determine FASB 13 Comparison Basis
• Equipment Net Selling Price 100,000.00
• X 90
• FASB Comparison Basis 90,000.00

• Step 2 Determine the Present Value of
  Lease Payments discounted at the

Customers Borrowing rate

• Lease payment proposed 2,750.00
• Term of lease 36 months
• Customers Borrowing rate 7.5
• Present Value of Payments 88,406.76

• Step 3 Compare FASB Comparison Basis (1) to
  Present Value (2)
• If Present Value (2) is LESS than FASB
  Comparison Basis (1), it is
• an OPERATING LEASE.

• If Present Value (2) is GREATER than FASB
  Comparison Basis(1), it is
• a CAPITAL LEASE.

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THE ABCs of CREDIT

• Dont ASSUME credit approval is AUTOMATIC.
• Dont wait until you sign the order to secure
  credit approval.
• Funding sources often require the firms last two
  years financial statements to validate
  creditworthiness.
• Ask whether there are conditions to your credit
  approval.
• Ask whether additional documentation is
  necessary.

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GE Credit Application
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Credit Review Process

• Submit Completed Credit Application
• - Customer name, location, transaction
  details
• - Personal financial information (social
  security ) on sole proprietorship required.
• Dun Bradstreet (DB) Review
• - DB is accessed to view customers
  business tenure, paydex score, financial
  information, history of suits, liens, judgments,
  bankruptcy, industry profiles, etc
• - If company financial information is available,
  it is analyzed to determine whether they can
  support the requested financed amount.
• Company Financial Statements
• - Last 2 years audited financial statements
  including cover letter, balance sheet, income
  statement and notes.
• - Interim financials
• Checking Account Trade History
• - Business checking account with at least a 6
  month history.
• - Trade Accounts reflect a prompt payment
  pay history.

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PARTIAL DB EXTRACT

• BUSINESS SUMMARY      
• DOLLAR BANK LEASING COR (SUBSIDIARY OF DOLLAR
  BANK,
• PITTSBURGH, PA)
• Three Gateway Center, Pittsburgh, PA 15222
• DB D-U-N-S Number19-460-7883 This is a single
  (subsidiary) location.
• Web sitewww.dollarbank.com
• Telephone [phone]   
• Chief executive JOHN ANDERSON, PRESIDENT   
• Year started 1985  Employs15  History CLEAR  
• Financing SECURED  SIC6035/7359   
• Line of business Equipment rental/leasing    
• Credit Score Class  5High risk of severe payment
  delinquency over next 12 months
• Financial Stress Class  2
• Moderate risk of severe financial stress over the
  next 12 months
• 12-Month DB PAYDEX 72

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Authorized Signatures

• Depending upon the transaction size and the
  entitys business structure, a managing partner
  may be required to sign the lease agreement.

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Additional Documentation

• Additional documentation may be required as a
  condition of the credit approval
• Certificate of Incumbency
• Certificate of Resolution
• Letter of Authorization
• Certificate of Insurance
• Purchase Order

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End of Lease Options

• Upgrade Payoff remaining obligation and write a
  new lease.
• Purchase FMV - Pay assets Fair Market Value and
  own the asset.
• Return Satisfy the lease payments and return
  the asset to the lessor.
• Renew - continue to rent the asset.

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End of Lease Options

• What is an Upgrade ?
• The termination of the original lease and the
  commencement of a new lease.
• The original equipment is removed and the new
  equipment is installed.
• Upgrades can occur
• Before the expiration of the original lease term
• At the lease expiration date of the original
  lease term
• After the lease expiration date.

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End of Lease Options

• 1. Upgrade
• Asset is sold to the dealer at a discount for a
  new lease transaction
• Remaining Discounted Lease Payments Discounted
  Residual Value Taxes Fees

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End of Lease Options
2. Buyout with Title

• Remaining Payments Residual Taxes Fees
• Customer retains possession of the asset
• Is the most expensive buyout option

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Sample Buyout Quote

• _X_ Buyout with Title
  6,963.08
• Customer wishes to purchase the
  equipment that is currently on lease.
  
  
• _X_ Upgrade 5,938.33
• Customer is upgrading through GE
  Capital or Danka Trust. The equipment
  upgraded becomes the property of Danka when this
  figure is utilized
• Quoted by Lease Base Management
  
• Date Quoted 10/29/2004
• Good through Date 11/29/2004
• Remit to Address P. O. BOX 642111
• Remit to City, State, Zip PITTSBURGH, PA 15264 -
  2111

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End of Lease Options

• 3. Renew the Lease
• Lease auto renews if customer does not provide a
  written letter of notification to the funding
  source before the deadline date referenced in the
  lease terms and conditions.
• Lease auto renews for specific minimum duration,
  at the current lease payment.

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Letter of Intent

• Per the lease terms and conditions, the Lessee
  must provide the Lessor with written letter of
  notification of their intent to terminate the
  lease prior to the notification deadline.
• LESSOR NOTIFICATION DEADLINE RENEWAL
• GE/TFS 60 DAYS PRIOR TO EOL M-T-M
• CFS 60 DAYS PRIOR TO EOL M-T-M
• CIT 90 DAYS PRIOR TO EOL 90 DAYS
• ILC 90 DAYS PRIOR TO EOL 90 DAYS
• DFS (TRUST) 30 DAYS PRIOR TO EOL 12 MONTHS
• CITICAPITAL NOT LESS THAN 90 DAYS 12 MONTHS
• NO MORE THAN 180
  DAYS
• DeLage Landen NOT LESS THAN 60 DAYS 60
  DAYS
• NO MORE THAN 120 DAYS
• WELLS FARGO NOT LESS THAN 90 DAYS 12 MONTHS
• NO MORE THAN 180 DAYS

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Sample Letter of Intent

• January 2, 2006
• To Lessor Name (ex GE, ILC, etc)
• From Customer Name
• Customer fax
• Subject Notification of Intent to Return
  Copiers
• This letter is to notify you of our intent
  not to renew the following leases. At the
  conclusion of the lease, we wish to return the
  following copiers to you
• lease XXXXXXX Model_____ serial
  ZZZZZ
• lease WWWWW Model_____ serial YYYYY
• Please fax the pay-off to return figures for
  terminating the copier leases. My fax number is
  (XXX) XXX-XXXX. Also, please designate the
  location where the copiers should be returned to.
  Thank you for your assistance.
• Respectfully,
• Customer Name

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Add-On Accessories to Existing Leases

• Add an accessory or other copiers to the original
  lease so they expire upon the original leases
  commencement date.
• You must verify the lease expiration date of the
  original lease
• The Lessor will
• Calculate a coterminous lease rate for the new
  transaction.
• Prepare Lease Amendment documentation for the new
  transaction.

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Cost-Per-Copy Program

• Customer commits to a Minimum Copy Volume
  Commitment for the entire fleet of copiers.
• All copies in the fleet are billed a common
  cost-per-copy charge, regardless of which copier
  actually makes the copies.
• The CPC charge includes the use of equipment,
  maintenance and supply charges. It does not
  include staples or paper.
• The CPC is billed on a single invoice
• End of Term options
• Return,
• Upgrade/Downgrade
• Renew

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Cost-Per-Copy Program

• Single Invoice - Simplifies purchasing of
  equipment, service, and supplies
• Simplified Billing - Enhances budget planning.
  Only one check to process which reduces Accounts
  Payable costs.
• Aggregate Volume - Volume commitment is made on
  fleet basis for maximum flexibility.
• Company Financial Statements expense the full
  payment.
• Easy Upgrades - Facilitates the migration to new
  technology
• Monthly or Quarterly Billing - Accommodates
  customer billing preference.
• Flexible Invoicing Formats - Various options.