Analysis of Renting Equipment vs Purchasing 1
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Presentation by Tom Bagwell, Peterson CAT
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Analysis of Renting Equipment vs Purchasing 1
- 1. Leasing, Rental, Ownership Tom Bagwell Peterson Cat
- 8. Financing – Money over Time
- 10. Financial Products Loans & Capital Leases Operating Leases Installment Sale Contract (ISC) Long Term Rental Lease (FMV) Finance Lease (FLOP) Window Lease Flex Lease (I & II) Split TRAC Lease Governmental Lease Purchase Revolving Line of Credit TRAC Lease
- 11. What to Consider: • Strategy – Own (Build Equity?) or Lease or Rent • Tax Considerations – Do you want/need depreciation tax shields • Financial Considerations – Loan Covenants
- 12. Installment Sale Contract (Loan) > Benefits: > Finance Rate: • Tax benefits of ownership, including • Fixed depreciation and interest-expense deductions > Down Payment: • New and used equipment may be financed • Generally required in the form of cash, trade-in • Lowest total acquisition cost option for machine or rental equity ownership > Tax Benefits: > Length: • Retained by customer • New equipment: 12–60 months (terms greater than 60 months may be considered upon request) > Payment Flexibility: • Monthly, quarterly, semi-annual and annual • Used equipment: 12–48 months payments are available, provided payments are in advance Lowest total acquisition cost option for machine ownership.
- 13. Installment Sale Contract Example Standard Rate = 5.95% Promotional Rate = 3.35% Amount Financed: $100,000 Amount Financed: $100,000 Term: 48 mths Term: 48 mths Payment: $2,346.21 Payment: $2,228.90
- 14. Finance Lease > Benefits: > Finance Rate: • 100 percent financing for qualified customers • Fixed • Bargain purchase options or mandatory > Purchase Option Alternatives: purchase amounts (balloons) are available • Provision to purchase at predetermined amount or return • For U.S. tax purposes, the customer is entitled machine to Lessor to tax benefits of ownership. • May choose bargain purchase option or mandatory balloon as low as $1 or at a predetermined amount based > Length (new equipment): on the finance term, equipment use, application and machine specification • 12–60 months (terms greater than 60 months considered upon request) > Tax Benefits: • Retained by Lessee (Customer) > Payment Flexibility: • Monthly, quarterly, semi-annual and annual payments are available, provided payments are made in advance Potentially Lowest Upfront Cash Option where tax benefits are retained by the customer.
- 15. Finance Lease Contract Example $1 Balloon Residual Option Sale Price: $100,000 Sale Price: $100,000 Term: 48 mths Term: 48 mths Payment: $2,334.62 Payment: $1,791.26 Balloon: $1.00 Option: $29,511.20
- 16. Flex Lease > Benefits: > Purchase Option Alternatives: • Provides low monthly payments • Provision to purchase at a bargain purchase option or return machine to Lessor • For U.S. tax purposes, the customer is • Purchase option is based on the machine entitled to tax benefits of ownership, specification, equipment usage, application and including depreciation and interest expense finance term deductions > Tax Benefits: • Early Return Options available at a • Retained by Lessee specific time before termination of the lease (outs) > Payment Flexibility: • Monthly, quarterly, semi-annual, and annual > Length (new equipment): payments are available provided payments are in • 24–60 months advance. Customers have the option to return the equipment at the predetermined out(s). Tax benefits are retained by the customer.
- 17. Tax Lease – Customer Value Option > Benefits: > Purchase Option Alternatives: • Provides low monthly payments • Provision to purchase at predetermined amount • Generally qualifies for off-balance sheet or return machine to Lessor. The option is based financing on machine specification, equipment usage, application and finance term. • Frees working capital for operating needs > Length (new equipment): > Tax Benefits: • 24–60 months (terms greater than 60 months • Retained by Lessor may be considered upon request) > Payment Flexibility: • Monthly The off-balance sheet CVO Lease solution allows the machine to be “rented” while achieving price realization.
- 18. Tax Lease – Long Term Rental > Benefits: > Purchase Option Alternatives: • Provides the lowest possible monthly payment • Provision to purchase at a Fair Market Value • Generally qualifies for off-balance sheet (FMV) or return machine to Lessor financing • FMV purchase option based on machine • Frees working capital for operating needs specification, equipment usage and application and finance term > Length (new equipment): • 24–60 months (terms greater than 60 months > Tax Benefits: may be considered upon request) • Retained by Lessor > Payment Flexibility: • Monthly (Other schedules considered upon request) FMV option is not a predetermined amount and is not stated on the contract as such. Cat Financial determines FMV.
- 19. FMV vs. CVO Contract Example CVO FMV Sale Price: $100,000 Sale Price: $100,000 Rate: 5.45% Rate: 5.17% Term: 48 mths Term: 48 mths Payment: $1,626.45 Payment: $1,610.26 Option: $38,733.45 Option: $FMV
- 20. Thank you! Tom Bagwell tbagwell@petersoncat.com
Notes de l'éditeur
- As you can see, here is a list of our current product offerings. Cat Financial offers both balance sheet and income statement driven financial solutions. We’ll be going through each one of these on a high level but I encourage you to please ask questions at anytime. In regards to loans and capital leases we offer the…. Installment Sales Contract commonly referred to as an ISC Finance Lease with Option commonly referred to as a FLOP Flex Lease Gov’t Lease Revolver And TRAC Lease Regarding Operating leases we offer the… Cat Value Option Lease commonly referred to as a CVO Long Term Rental commonly referred to as an FMV Window Lease And Split TRAC Lease At the bottom of each slide we’ll provide key takeaways for the product we just covered. In regards to any of our product offerings, we don’t want to be portrayed as tax advisors so it’s best to leave those conversations to the customer and their accountants.
- For the customer who desires immediate ownership yet wants to pay over an extended period of time. Trade-ins or down payments are typically included in these transactions. Customer claims the tax benefits of ownership (including depreciation and interest expense deductions) New and used equipment may be financed. Cat Financial’s lowest total acquisition cost option for machine ownership. A variety of flexible payment plan are offered, including monthly, quarterly, semi-annual and annual payments. Skip payment plans (up to 3 per year) are available on monthly schedules. Immediate ownership, higher payment, quickest equity buildup through repayment No early payoff restrictions Customer pays PPT Customer owns and depreciates
- For the customer who wants to own or have an option to return or purchase at lease end. Characteristics of an ISC with the lower payments of a lease. Customer may choose a bargain option or mandatory balloon as low as $1 or at a predetermined amount based on the finance term, equipment use and application, and machine specification. Available to qualified customers Provision to purchase as predetermined amount or return machine to CFSC. Bargain option set at max 80% of RV reduces payment. Slower equity buildup, lower payment Lessee has ownership and may take depreciation. Contract flexibility and no early payoff restrictions. Customer pays PPT
- For the customer who wants a finance lease with multiple options to return the equipment at stated intervals or “outs” prior to lease termination. Customer can lease equipment for an extended term, typically at a lower monthly payment than the dealer rental rate. Competitive pricing compared to Dealer Rental Fleet Ideal for customers who have a specific need (outside their normal scope) for a specific project – can return to CFSC after project completion. Customer has the option to return the equipment at predetermined out(s). Example: A pc of equipment is purchased using a 60-month finance lease with an “out” at 36 months. After 36 months, you have the option to return the machine to Cat Financial or continue with the lease at a substantially lower payment. 1 st out is 100% of RV, 20% decrease at each additional out. Typical outs are mid-term – ex. 36 on a 60, 24 on a 48. Flex II – CFSC Residual
- For the customer who wants to use the equipment and have the option to purchase at a predetermined FMV. CVO is 105% of the RV. No equity buildup Cat Financial takes depreciation and passes it on to customer in the form of a lower rate. Lowest payment, less contract flexibility, some early payoff restrictions Cat Financial pays PPT then invoices lessee Lessee treats unit strictly as a rental – no discussion of rate should be had with customer. Cannot show equity therefore no trades accepted Uneven Rents Test Does the sum of the rents exceeds $250K? The maximum advance rental in the form of a trade-in or advance rentals can not exceed the Uneven Rents test guideline of 10% of the sum of the annual payments for the transaction to maintain the tax eligibility. The transaction price should be at the selling price referenced on the dealer purchase agreement . In addition, CFSC should treat all leases that are part of the same transaction, or a series of related transactions, with the same Lessee as a single lease for purposes of IRS Code 467. Therefore, if a multiple unit transaction is quoted as one deal, booked on or about the same day and has the same customer then the deal has to be priced as a non-tax lease if the sum of the rents exceeds $250K. Or, if an advance payment, in the form of trade-in or advance rentals, exceeds the ten percent (10%) guideline of the Uneven Rents Test then the transaction must be booked as a Non-Tax Lease.
- For the customer who desires the lowest possible payments and generally plans to return the equipment to Cat Financial at the end of the lease term. Option to return or purchase at lease end. No stated option – FMV – priced at 105% of RV – provides lowest monthly payment No equity buildup Cat Financial takes depreciation and passes it on to customer in the form of a lower rate. Lowest payment, less contract flexibility, some early payoff restrictions Cat Financial pays PPT then invoices lessee Lessee treats unit strictly as a rental – no discussion of rate should be had with customer. Cannot show equity therefore no trades accepted
- Slightly lower rate on FMV FMV pmt equates to approx. 99% of the CVO pmt