Welcome to the October 2004
edition of Business Leasing News.
From: David G. Mayer, a business transactions partner
of the law firm of Patton Boggs LLP and author of the book, Business Leasing for Dummies ® (BLFD). The book is
out of print, but a few copies are still available; so if you want
to find a copy, please search the web today! Thanks for buying my
book for three years.
This
e-newsletter offers timely, concise information and analysis backed
by supporting research. Please contact Business
Leasing News (BLN) to provide us with your
feedback. Thanks for taking your valuable time to read BLN-which
does more than just report the news.
The
national media's negative comments about leasing just won't stop.
In
a controversial article published on the front page of The Wall
Street Journal last month, the writer describes off-balance
sheet leasing as playing a "shadowy role" in the Enron debacle and
asserts:
Despite
the post-Enron-drive to improve accounting standards, U.S. companies
are still allowed to keep off their balance sheets billions of
dollars of lease obligations that are just as real as financial
commitments originating from bank loans and other borrowings.
The
practice spans the entire spectrum of American business and
industry, relegating a key gauge of corporate health to obscure
financial-statement footnotes.... See: Page A:6, How Leases Play
a Shadowy Role in Accounting, The Wall Street Journal
(S.W. Ed.), Pages A:1, Col. 4 (Sept. 22, 2004).
*Comment: The comparison of leasing, as a whole, to the
Enron disaster is misplaced. Enron allegedly failed to comply with
accounting rules for consolidation of entities, income on sale
recognition and disclosure when it used special purpose entities
(SPEs) to finance the sale of assets and recorded large profits that
were ultimately reversed. The SPEs were capitalized with
approximately 3 percent equity and 97 percent debt. In my
experience, Enron's approach is by far the exception, and not the
rule, on how the leasing industry structures its transactions, as
discussed in detail by the Equipment
Leasing Association (ELA) in 2002 in Financial Accounting for Equipment
Leases, ELA Press Release (Feb. 27, 2002). Members
only. Moreover, footnotes are anything but obscure or hidden in
financials. Footnotes constitute a part of these statements and help
present the entire financial picture of a company. It is well known
in the $208 billion per year leasing industry that 80 percent of
businesses use leasing for many reasons other than to use
off-balance sheet accounting. Benefits include lowering the cost of
capital, reducing the risk of obsolescence for the lessee, and
averting a cash drain on the lessee's bank account by providing 100
percent lease financing for qualified lessees and assets.
The
article also said that Donald Nicolaaisen, the chief accountant for
the Securities Exchange Commission (SEC), has indicated that leasing
is one area of accounting that merits review. More specifically, the
SEC expects to issue a report around November 2004 that contains the
Sarbanes-Oxley recommendations. This report will have implications
for new standard setting or rulemaking by the Financial Accounting
Standards Board (FASB) and additional disclosure requirements by the
SEC.
One
day later, a The Wall Street Journal article reported that
the FASB expected add lease accounting, including Financial
Accounting Standards No. 13 (FAS 13), to its agenda for overhaul. On
the same day, FASB member, Ms. Leslie Seidman, told the 250 ELA
members attending the annual accounting conference that lease
accounting is likely to appear on FASB's agenda soon.
The
parallel body in Europe, the International
Accounting Standards Board (IASB)
also plans to revamp accounting for leased assets. IASB expected to
launch its plan in late in September. See: Group to
Alter Rules On Lease Accounting, The Wall
Street Journal (S.W. Ed.), Page C:4, Col. 5 (Sept. 23, 2004).
Sir David Tweedie, the Chairman of the IASB, suggested that its
guideline, IAS
17, that roughly corresponds to
FAS 13, enables companies
to evade disclosure and encourages an approach that puts form over
substance.
*Technical
Point: convergence of FAS 13
and IAS 17 is expected to occur to make the standards more uniform.
See: FAS 13 vs. IAS 17, They're different, and will have to be
reconciled, ELT Magazine, page18 (Sept.
2004).
The
interest of FASB and IASB in altering lease accounting is not new.
FASB announced in April 2004 that it would undertake a joint research project with IASB concerning
leasing. The IASB also
discussed an IASB paper in April 2004 about accounting for leases based on the "asset-liability" model.
This standard analyzes contractual rights and obligations and
identifies resulting changes to assets and liabilities on the
balance sheet of the reporting parties. By contrast, FAS 13 is a
"risk-reward" standard that determines off-balance sheet treatment.
It evaluates which reporting entity has the true attributes of an
owner (that is, the party taking the down-side exposure and
receiving the up-side benefits of ownership).
Even
the ELA concedes:
Change
is coming! FASB, ASB (UK) and IASB (International) all have
indicated that changes are coming to lease accounting within the
next several years. The changes will effectively put more on the
balance sheets. Special Announcement, ELT Enews Daily,
ELA (Sept. 23, 2004).
Change
is Coming
While
change is almost certainly coming to accounting for leases, no one
will quickly or easily cast aside FAS 13. FAS 13 has been in effect
and amended many times since 1976. The Wall Street Journal
article on September 22, 2004, taking a brief reality check, quoted
FASB Chairman Bob Herz as saying:
Any
attempt to change the current accounting in areas where people have
built their business models around it become extremely
controversial--just like you see with stock options.
Similarly,
Sir David Tweedie said, in a speech to the European Parliament on
September 22, 2004, that IAS 17 is "useless," and that changing it
is "...going to be a very big deal."
FASB
and SEC Require Disclosure Now
Before
uprooting FAS 13, it is worth noting that FASB has already improved
disclosure and reduce any potential for abuse of financial
reporting. It did so, in part, by issuing two interpretations. The
first one is commonly known as FIN 45 (Financial
Statement No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others). The other one is called FIN 46(R)
(Interpretation 46(R), Consolidation of Variable Interest Entities
(revised December 2003)-an interpretation of ARB No. 51). FIN
46R left leveraged lease accounting intact and FASB did not find it
necessary to alter FAS 13. See: FIN 46R Clarifies Off-Balance
Sheet Issues, Business Leasing News (Feb. 2004).
Under
FAS 13, FASB created rules for determining whether a lease
constitutes a capital lease. If a lease meets or satisfies any of
four criteria in Paragraph 7 of FAS 13, the lessee must treat the
lease as a capital lease and record the lease on its financial
statements like any borrowing. On the other hand, if the lease does
not meet or satisfy any of these tests, a lessee need not disclose
it in its balance sheet, but must describe the lease transaction in
its footnotes.
The
most important of the four basic tests arises under Paragraph 7d of
FAS 13. It says that if the present value of the rentals or other
minimum lease payments equals or exceeds 90 percent of the fair
value of the leased property, that lease constitutes a capital
lease. Conversely, if the parties structure a lease to fall short of
90 percent, the lease will, assuming no other test is met for a
capital lease, constitute an operating lease. As an operating lease,
the lessee is treated as the user of the leased property for a set
time, but not as its owner. As a mere user of property, the
transaction will not appear on the balance sheet of the lessee as an
asset or liability.
The
potential for a razor sharp division between qualifying as an
off-balance sheet lease at 89.9 percent and not qualifying as an
off-balance sheet lease at 90 percent (that is, being treated as a
capital lease) creates a fertile basis for criticism of FAS 13.
However, the rules have generally worked well for over 27 years for
typical transactions. Even synthetic leases continue to function well in multi-asset lessor companies,
banks or other financial entities, See: Synthetic Leases
Revisited: Are They Dead or Alive?, Business Leasing News
(Oct. 2003).
No
one should be able to hide an operating lease as suggested by The
Wall Street Journal. FAS 13 requires that minimum rental
payments for the next five fiscal years must be disclosed in a table
in the footnotes. The lessee must also disclose lease terms,
including residual guarantees. Footnotes offer a clear view of the
lessee's use and possession of an asset for a term in exchange for
paying rent or other consideration.
*Technical
Point: Paragraphs 16 b, c and d
of FAS
13 set forth in detail the
disclosure required in footnotes for operating leases.
In
2003, the SEC implemented rules under Section 401(a) of the Sarbanes-Oxley Act of 2002 described in its Release 2003-10. This rule requires
disclosure in a separate part of the "Management Discussion and
Analysis" of SEC reports. The SEC has said that the "MD&A" must
include "all material off-balance sheet transactions, arrangements,
obligations (including contingent obligations), and other
relationships of the issuer with unconsolidated entities or other
persons, that may have a material current or future effect on
financial condition, changes in financial conditions, results of
operations, liquidity, capital expenditures, capital resources or
significant components of revenues or expenses." This rule mandates
disclosure of significant off-balance sheet leases by management in
a very important segment of SEC-required reports. Consequently,
significant off-balance sheet leases will be evident to all who read
financials not only in detailed footnotes of a balance sheet, but
also in the MD&A.
Other
rules and guidelines require disclosure, as does common sense when
dealing with lenders, lessors and rating agencies. Most of these
financial players know the score. They can and do interpret
footnotes in financial statements and other data in making credit
and other business decisions. Little, if anything, about lease
accounting escapes them.
Leasing
Industry Braces For Change
Despite
the existing requirements for useful and detailed disclosure of
leases in balance sheets, a clear preference seems to have developed
at FASB.
*Trend
Point: FASB seems to be turning
away from the "rules-based" model of strict adherence to specific
guidelines to determine whether a transaction is recorded on a
balance sheet. This change arguably results in a situation where the
form of the lease transaction entitles a company to treat the lease
as an off-balance sheet obligation when the substance of the
transaction leads to the opposite approach - reporting the lease as
a financing on-balance sheet. Instead, FASB is moving toward IASB's
"principles-based" model. That model calls for the use of conceptual
statements of accounting to drive decisions based on substance over
form. Consequently, companies and their accountants would rely on
fewer strict rules, use greater discretion in assessing off-balance
sheet arrangements, and supposedly book transactions with a clear
mandate to put substance over form. The likely result: more on
balance sheet reporting of leases.
The
battle over off-balance sheet leasing has not yet started in
earnest. While The Wall Street Journal article may evidence
one adverse view of off-balance sheet leasing, its writer is not a
lone critic of FAS 13. IAS 17 is also primed for change. Although
the potential outcome of this change could severely and negatively
impact leasing as it is conducted today, leasing will survive as a
viable means to acquire capital assets. It may just be that, in the
future, leases will appear more prominently in financial
statements.
2. Wind Energy Tax Credit
Revived, Gives Boost to Ailing Wind Power
Industry
The expired production tax credit for building renewable
energy resources received a new vote of confidence from Congress. It
emerged in an unlikely place as Section 313 of the
Working Families Tax Relief Act of 2004 (H.R.
1308)after Congress
detached it from last year's stalled energy bill. Signed by
President Bush on October 4 as Public Law No. 108-311, the law seems
particularly timely and important in the face of $50 plus per barrel
oil prices.
Section 313 extends for one year the 1.8 cents per
kilowatt-hour tax credit for all facilities placed in service on and
after January 1, 2004 and on or before December 31, 2005. The
much-needed credit may provide the impetus to finish or initiate an
estimated $3 billion of new wind power projects that have stalled
due to lack of the wind credit. The credit enhances the economics
required to build and finance wind power plants. See: Wind Tax Credit Breezes Through
Congress, by Ken Silverstein, Fitch Risk (Sept. 27,
2004).
*Tip: To take
advantage of this wind credit, consult your tax counsel to assure
that you place your qualifying project in service at the appropriate
time.
The
expiration of the production tax credit has imperiled alternative
energy development. See: Wind Power Imperiled as Production Tax Credit
Expires, Business Leasing
News (March 2004). As of
August 2004, fewer than 30 megawatts of new wind power had been
installed in 2004 compared to 1,687 megawatts of new wind power
projects in 2003. See: Lack of tax break slows U.S. wind power
projects, 30 MW to date from 1,687 in 2003, Global Power
Report (Platts-McGraw Hill), Aug. 26, 2004.
The states understand the importance of renewable energy, as
they have led the push for it until this point. See: As budget-busting deficits increase with no end in
sight, the federal government has often relied on leasing to hold
its costs down for acquisitions of needed capital assets and stretch
its limited budget dollars. No time seems more appropriate than now
for the federal government to expand its use of leasing to acquire
needed capital assets.
*Example: In an
attempt to consolidate and reduce the cost of IT systems, the Bush
administration announced last month that information technology
centers would be established to provide service to many government
agencies that should not have, or cannot afford to purchase, their
own systems. The plan would involve leasing software and technology
assets to address agency requirements in financial management, human
resources, case management for law enforcement agencies and health
care management. In taking this step, the administration intends to
increase IT efficiency and free up agencies' financial resources for
other projects. See: OMB's
new goal: Leased IT systems, by Karen Robb, Federal Times
Online (Sept. 13, 2004).
Federal Agencies That Lease Assets
Most federal agencies as diverse as the Department
of Defense and the National Institutes of Health have the authority
to enter into leases for capital assets including real, personal and
even intangible property (including certain IT assets). Vendors or
their leasing resources, which may be captive finance and leasing
companies, can offer leasing solutions to these federal
agencies.
Why Federal Leasing Sells
Deficits have constrained capital or procurement
budgets of federal agencies. Consequently, agencies have sought
other means to acquire assets for their operations. Leasing fits in
a "bucket" of expense under an agency's operations and maintenance
budget. By contrast, a procurement budget requires extensive efforts
to budget and buy assets with related cost "scoring" under complex
government rules. By including a certain amount of annual operations
and maintenance costs in their budgets, agencies often can acquire
the same assets they may otherwise be unable to purchase immediately
by making a series of year-to-year payments through leasing.
Leasing also provides the federal government with
the following options to control the disposition of the
assets:
Lease to Ownership Program (LTOP) - An
agency makes lease payments with automatic ownership at the end of
the lease term;
Lease with Option to Purchase (LWOP) - An
agency makes lease payments and retains the right to exercise an
option to purchase the asset at the end of the lease term;
or
Lease or Rental - An agency leases or
rents an asset for a fixed term and can either renew the lease or
return the asset at the end of the lease term.
*Warning:
Lessors should use caution and consider federal leasing only for
those assets that the agency determines essential to its needs for
the entire lease term. Federal leases typically require a funding
reauthorization and/or lease renewal each budget year (October 1 to
September 30). Agencies may not allocate or even request funding for
less than essential assets. Further, federal agencies enjoy special
powers under the Federal Acquisition Regulation (FAR). The FAR
provides the rules used by agencies to acquire supplies and services
with appropriated funds. See: 48 C.F.R. §1.000 et seq., including any applicable
agency supplement to the FAR. For example, the government can (i)
refuse to renew a lease, (ii) terminate a lease for default or
cause, (iii) fail to continue a lease because it does not get
necessary appropriations, or (iv) terminate a lease for convenience.
The "termination for convenience" provision allows the government to
exercise its right to completely or partially terminate performance
of work when it is in its own interest to do so. See: See: FAR Part 52 including FAR 52.249, FAR 52.212-4(l) or a similar clause.
GSA - Major Player in Federal
Leasing
The General Services Administration (GSA) plays a
major role in federal leasing today. The GSA established a program
for leasing under long-term government contracts with commercial
firms to provide access to over four million commercial services and
products. The GSA lists these vendors as its GSA Schedule
contractors, and GSA also refers to its lists as "Multiple Award
Schedules" and "Federal Supply Schedules".
A federal agency or other eligible organization
acts as a customer of the GSA and selects equipment or other needed
items only from the GSA Schedule. Then the agency decides whether it
gains advantageous pricing and budgeting by leasing or purchasing
the equipment or other item. The "contracting officer," who is the
federal government's primary acquisition representative (along with
a program officer), generally compares the leasing terms offered by
leasing companies qualified to participate in the GSA Schedule as
well as those offered by the GSA Schedule equipment
sellers.
*Technical
Point: To complete the lease-buy analysis, the
contracting officer uses the guidelines under Section 13 of OMB Circular A-94, to determine the economic
impact of leasing versus purchasing. This circular covers goods,
equipment, buildings, facilities, installations, and land for large
and small ticket leases. In determining whether to lease, the
contracting officers consider life cycle costs, economic life,
purchase price, taxes, services, residual value, and certain imputed
costs such as property taxes and insurance.
Federal Leasing - Opportunity and
Risk
The federal government has enormous needs for
equipment and other capital assets. Although many agencies have run
out of cash for procurement, they still have the option to lease.
The option to lease looks like a growing opportunity for the leasing
industry and the federal government remains one of the best credit
risks on earth.
*Tip: Federal
leasing involves unique skills, analysis and approach. As a lessor,
find qualified counsel that includes government contracts lawyers
who can help you traverse the complex terrain of the FAR and other
contractual rules the government builds into its contracts. Gain a
full understanding of the federal government's special powers so
that you can weigh the risks and rewards of leasing or financing to
the federal government.
I would like to thank one of our government
contracting/leasing partners, Michael Guiffré, for editing this
article.
4. Case & Comment: Dragnet
Clause Rules in Pride Hyundai, Inc. v. Chrysler Financial
Co.
By recognizing that a dragnet clause "created a new dynamic
between the parties," the court in Pride Hyundai, Inc. v. Chrysler Financial Co.,
369 F.3d 603 (1st Cir., May 27, 2004), established valuable
precedent for secured lenders and lessors.
FACTS: An automobile dealer, Pride Hyundai, Inc. and
affiliates (Pride), entered into "retail" financing arrangements
with Chrysler Financial Co. (CFC) in which CFC financed individual
installment purchase contracts for customers of the dealership. CFC
required Pride to establish a reserve that CFC could then charge to
protect CFC's returns against defaults and early prepayments by
Pride's customers. Subsequently, CFC expanded the relationship with
Pride and entered into a "wholesale" inventory financing. In that
transaction, CFC made advances against vehicle inventory called a
"floor plan arrangement." The floor plan documents contained a broad
grant of a security interest, which, in part, read as
follows:
Debtor hereby grants to Secured Party a first and prior
security interest in and to each and every Vehicle financed
hereunder . . . . The security interest hereby granted shall
secure the prompt, timely and full payment of (1) all Advances,
... and (6) each and every other indebtedness or obligation now or
hereafter owing by Debtor to Secured Party including any
collection or enforcement costs and expenses or monies advanced on
behalf of Debtor in connection with any such other indebtedness or
obligations.
*Term to Know: This
provision contains a "dragnet clause." See Leasing 101 below: "What
Is a Dragnet Clause" for more on this topic.
The second wholesale financing arrangement contained a grant
of a first priority security interest in virtually all of Pride's
assets, including vehicles, to secure all debt incurred by Pride to
CFC, no matter when it was incurred. The clause, therefore, covered
all of Pride's obligations under the retail arrangement too,
including the reserve account payments, even though the retail
deal constituted a different type or class of debt and existed
before the parties ever entered into the wholesale financing
containing the dragnet clause.
Pride and CFC had strong disagreements over time. Pride
defaulted on its obligations and negotiated various settlements with
CFC that ultimately failed. Eventually, Pride found a new lender to
pay off CFC. Not surprisingly, to close the new deal the new lender
required CFC to release its first priority security interest in
Pride's assets. CFC insisted, as most secured lenders would expect,
that Pride must fund the reserves arising out of the retail
financing before CFC would provide the release. Pride disagreed that
CFC had the right to hold up Pride's new loan deal and defaulted on
the CFC loan.
Pride insisted that it never granted, or intended to grant, a
security interest to CFC under the retail financing where CFC only
required Pride to maintain reserves for defaults or prepayment. CFC
argued that the dragnet clause secured all of Pride's obligations
under both the retail and wholesale agreements. CFC made it clear
that Pride would not receive CFC's release of the blanket security
interest until Pride funded the retail agreement reserve. On August
9, 2001, Pride filed suit against CFC alleging, among other things,
that (1) CFC violated the covenant of good faith and fair dealing
and (2) CFC tortiously interfered with prospective contractual
relationships.
ISSUES: Was the grant of security by Pride under the
dragnet clause valid under Section 9-204 of Revised Article 9 (RA9) of the Uniform Commercial Code (UCC)? Even if
valid, did the dragnet clause, as applied in the Pride case, violate
the standard of good faith under RA9-102(43)?
LAW: Effective July 1, 2001, approximately six weeks
before Pride commenced its case, RA9 became effective in almost all
states, including Massachusetts where the Pride dispute occurred.
Consequently Massachusetts law, including RA9, applied to this case.
The changes in RA9 determined the outcome of the case for CFC. See:
RA9-702(a) & (c) (transition rules).
First, RA9 contains a modified version of Section 9-204, the provision that deals with
dragnet clauses. Like its predecessor, RA9-204 explicitly permits
the use of dragnet clauses. It states that "[a] security agreement
may provide that collateral secures . . . future advances or other
value, whether or not the advances or value are given pursuant to
commitment." Under former Section 9-204, the statutes said
"collateral may secure future as well as past or present advances if
the security agreement so provides." While the UCC language remained
similar in RA9, the drafters significantly changed the comments to
RA9-204.
*Technical Point: UCC
comments explain the intent and operation of the UCC provisions.
However, states rarely, if ever, adopt the comments as part of the
enforceable UCC provisions.
Comment 5 to RA9-204 says that determining the obligations
secured by collateral is solely a matter of construing the parties'
agreement. The comment also states that the drafters intended to
reject cases decided under former Article 9 that applied other
tests, such as whether a future advance or other subsequently
incurred obligation was of the same or a similar type or class as
earlier advances and obligations secured by the collateral. While
the comment is not binding, it is highly persuasive of how the UCC
should work. Had former Article 9 been in effect, the class
distinction between Pride's wholesale and retail financings may have
prevented the dragnet clause from protecting CFC. However, under
RA9, CFC benefited by the rejection of case law and focused on the
clear language of the financing contracts.
Second, RA9 changed the concept of "good faith." Previously,
the applicable definition contained in Section 1-201(19) only
imposed on parties a duty of "honesty in fact in the conduct or
transaction concerned." See: former Section 1-201(19). The
amendments provided that, for RA9 purposes, "[g]ood faith means
honesty in fact and the observance of reasonable commercial
standards of fair dealing." See: RA9-102(43).
*Warning: Confirm that the
applicable law of your case has a statute similar to the
Massachusetts version of RA9-102(43). Good faith could be defined
like the definition in former Article 9 under UCC Section 1-201(19).
OUTCOME: CFC won the day on all points. The court
affirmed the District Court and ruled in summary as
follows:
Given the clear and unambiguous language of the dragnet
clause in the wholesale financing agreements, the lack of any
evidence of a violation of the duty of good faith, and the absence
of other special circumstances rendering such an interpretation
unreasonable or against public policy, we hold that the dragnet
clause did apply to the contingent debt arising out of the retail
financing agreements.
Pride and CFC entered into negotiated contracts with clear
language granting CFC the first priority security interest under a
dragnet clause. Although the lender, CFC, held the stronger
negotiating position, the court found that the clear contract
language trump the borrower's subjective intent, any course of
dealing between the parties, and industry practice that suggests a
restricted use of the dragnet clause. In essence, because Pride
could have negotiated with CFC to enable Pride to bring in their
new lender, the actions by CFC did not constitute commercially
unreasonable practices.
*Comment: This case offers
some very powerful tools for lenders and lessors. However, the
extent to which lenders and lessors may use a dragnet clause is
unknown. In any event, lenders and lessors might obtain the same
kind of results as CFC if you:
Draft clear, unambiguous language in
written contracts that grant broad, commercially reasonable,
negotiated security interests. Clear language generally should win
the day over arguments about contrary subjective
intent.
Balance the use of a dragnet clause
against the standard of acting in good faith in a commercially
reasonable manner. Even with stronger negotiating power, lenders
and lessors can act in a commercially reasonable fashion and gain
the benefit of the dragnet clause.
Apply the dragnet clause in different
types of deals. For example, it may be feasible for a secured
guaranty to include an enforceable dragnet clause by which the
guarantor collateralizes its obligations under loan agreements or
leases. Alternatively, a lender that also leases equipment to its
borrower may include a dragnet clause in its loan agreement to
protect the lender against lease defaults by its
borrower/lessee.
The Pride decision is not a carte blanche opportunity for
lenders or lessor's to abuse dragnet clauses. Debtors will surely
continue to test them in future cases, and perhaps courts will
strike down some of the clauses that violate a state's public policy
or constitute commercially unreasonable provisions under the facts
of a case. However, for the moment, the Pride case opens the door to
reasonable but wide applications of this fundamental type of
collateral provision.
"Dragnet clauses purport to secure all of a debtor's
obligations to a creditor, regardless of whether those obligations
arise prior to, concurrent with, or after the instrument
containing the dragnet clause itself."
In other words, a dragnet clause can grant a security interest in
assets to collateralize an existing loan of any type-secured,
unsecured, personal or real property loans. In addition, the dragnet
clause may capture other past or future obligations of the debtor.
Also known as an "anaconda" or "all monies" clause, a dragnet clause
is more than a future advance provision in which security granted
today acts as collateral for loans made later after the debtor meets
conditions to borrow on a line of credit or other working capital
loan agreement.
For example, a guarantee may grant a security interest in all
assets of the guarantor to support the payment of the guarantee for
current, past or future guaranteed debt. In the real estate area, a
dragnet clause refers to a mortgage that secures all debts that the
mortgagor (debtor) may at any time owe to the mortgagee (lender).
Real estate could secure obligations under a lease or loan unrelated
to the real estate. Dragnet clauses have been controversial because
the debtor may complain that he or she did not intend to secure all
the types of obligations or loans described in the dragnet clause
(that is, the clause drags various types of obligations into the net
of collateral security).
6. BLN Briefs: IT
Managers Buy Instead of Lease; Bonus Depreciation Expires
Soon
IT Managers Buy Instead of Lease. Companies
realize they will often not return computers and servers to lessors.
More than in the past, lessees and others may opt to buy equipment
rather than lease. Lease end return and penalty provisions also
dissuade companies from leasing. See: Sidebar: IT Switches from Hardware Leasing to
Purchasing, Computerworld (Sept. 27, 2004).
Bonus Depreciation Expires Soon Except for
Qualified Aircraft. Except for certain qualified aircraft, most
bonus depreciation expires December 31, 2004. Specifically, bonus
depreciation remains effective, with exceptions, for property that
is acquired by a taxpayer: (1) after September 10, 2001 (for
purposes of the additional 30-percent first-year depreciation
allowance), or (2) acquired after May 5, 2003 (for purposes of the
additional 50-percent first-year depreciation allowance), and placed
in service before January 1, 2005 (or, in the case of certain
property, placed in service before January 1, 2006.) See: Leasing Gets a Bonus From New Depreciation
Regulations, Business Leasing News (October
2003). However, Section 212 of the American Jobs Creation Act of 2004extended bonus
depreciation for certain qualified aircraft. The aircraft must (1)
be new, (2) cost at least $200,000 and include a deposit of the
lesser of 10 percent of the cost or $100,000, (3) be subject to a
binding contract before December 31, 2004, and (4) be placed in
service before December 31, 2005.
*Action Item:
Although certain bonus depreciation will survive after
this year, if you want to benefit from it, act now to lease or buy
equipment that qualifies for bonus depreciation. Note that as a
general exception some larger aircraft, with a cost in excess of $1
million and/or production periods of more than two years, may
qualify for an extended placed in service date of January 1, 2006.
Follow the criteria for qualified aircraft closely, including the
placed in service requirements.
7. Reader Feedback; Recent Publications; ELA Convention
Speeches; Training Offered
Reader Feedback
Thanks to all the readers of BLN for their
comments about the September edition. One reader
e-mailed: "Your review of the BankVest case is the best I've
seen so far." The BankVest case appeared in BLN's Case & Comment section in September
2004.
Recent Publications
Here are two feature articles I wrote that were
published in August 2004:
Beating True Lease Challenges: A Lessor's
Guide to Structuring and Defending True Leases, LNJ Leasing
Newsletter, by David G. Mayer (August 2004).
Bankruptcy Court Provides Guidance on True
Leasing of Software, ELA 's Equipment Leasing Today, by
David G. Mayer (August 2004).
Upcoming Speeches at ELA Annual
Convention
On Tuesday, October 26, 2004, I will lead a panel
at the 43rd Annual Equipment Leasing Association Convention,
entitled "Back to the Future: True Lease Opportunities and
Structuring." The panel is scheduled for 10:30 a.m. to 12:00
p.m. and is repeated from 2:00 p.m. - 4:00 p.m. The Conference
will be held from October 24 - 26th, at the Marriott Desert Springs
Resort and Spa in Palm Desert, California. For more information and
registration, click on ELA Convention.
Training - Substance the Easy Way!
To help improve your business operations, deal
processing and risk management, I offer private training seminars
tailored to your specific needs at your designated location. My
interactive and informative training includes topics I cover in BLN.
I customize the format and content for your specific training needs
- no canned programs.
After one of my private
training sessions, here's what one of the company's senior managers
said: "David, thanks again for an excellent presentation. You
helped us tackle a complex, but important topic. Your expertise is
first-rate and you are an excellent teacher to boot-that's a rare
combination."
Feel free to call me at (214) 758-1545 to discuss
the possibilities.
I
am a part of the Patton Boggs LLP Business Transactions Group in our
Dallas office. Patton Boggs LLP is a law firm of about 400 lawyers
located globally in multiple locations. The firm has extensive
capabilities in over 50 distinct areas of legal practice that
include leasing, secured transactions, personal property financing,
securitizations, syndications, power project regulatory, development
and finance disciplines, mezzanine financing, bankruptcy, real
estate, public policy, litigation, intellectual property and
technology law, and much more.
The
leasing and secured transaction practices regularly involve the
buying, selling, financing and leasing of real and personal property
of all kinds, including business aircraft, energy, facility,
production, power plant, technology and health care assets. We also
structure, negotiate and close secured transactions of all kinds,
tax-exempt and federal leasing arrangements, and corporate and
portfolio acquisitions, among a full range of financing and
acquisition transactions. Despite the improving economy, we continue
to assist our clients with troubled deals and bankruptcies,
including repossessions, lift stay actions, true lease contests,
deficiency litigation, workouts and forbearance arrangements.
If
I, or any other lawyer at Patton Boggs LLP, can help you with your
legal or business challenges, feel free to call me call me at (214)
758-1545 or e-mail me at dmayer@pattonboggs.com for information
about any of these areas or the many others available at Patton
Boggs LLP, or to discuss anything I have written in Business
Leasing News. We welcome the opportunity to build a relationship
with you!
When
she started at her company in 1997, the real players in the industry
hardly noticed her company. Over a few years time, she accomplished
a legendary turnaround of the company from staid to the dynamic,
from a modest earner to five years of consistent year-over-year
growth. She built her company's brand into a powerhouse in a crowded
and competitive field. The CEO is Rose Bravo, the leader of Burberry
Group. She demonstrates impressive business acumen that applies
across industries and professions and provides some important
guidance for the leasing industry as it approaches the 43rd Annual
Convention of the Equipment Leasing
Association. The Convention will be held
October 24-26 in Palm Desert, California at the Marriot Desert
Springs Resort.
In
an interview for The Wall Street Journal, Ms. Bravo discussed
some of the challenges and methods by which she transformed Burberry
Group from the boring raincoat maker to a plaid super-luxury
retailer. In the course of doing so, she has dramatically increased
its market presence and built an even more valuable brand. See: Plotting Plaid's Future, The Wall Street
Journal (S.W. Ed.), Page B:1, Col. 6 (Sept. 9,
2004).
As
we approach the ELA's 43rd Annual Convention, the interview struck a
cord with me. The theme of the Convention is "Breaking Out." As
described on the ELA's convention
site:
We
innovate, we adapt, we keep our eyes on the goal and, with a
little help from the economy, equipment leasing breaks out. But
it's not all open field running before us. The flexibility and
resilience that got us this far remain indispensable on a changed
playing field.
The
challenges before the equipment leasing industry seem no less
difficult than those Ms. Bravo faced and conquered. The convention
will offer useful programs and unparalleled networking that can help
you accomplish in your business or profession what Ms. Bravo has
accomplished in hers.
What
did she do that applies to us? How did she build her bottom line and
brand despite tough competition, like we experience in our fields?
Here are a few of ideas that I developed from her example and
interview:
Surround yourself with great people, valuing each member of your team and
what they do and say.
Reinvent yourself every day, always thinking about how to enhance the
unique value you offer your customer or client, constantly applying
creativity and innovation to your tasks.
Maintain your core customer while pursuing new ones, learning from your
mistakes and delivering a product or service that differentiates you
from the competition.
Execute, execute, execute. Don't worry where you will get the next idea or
opportunity. In the end, quality, speed, experience and results sell
like nothing else. Put your product and service out in the market at
your highest and best level without compromise.
As
we approach convention time, think about ELA's theme-Breaking Out.
Ms. Bravo demonstrated how Burberry could break out of a pattern of
slow growth into successive years of dynamic progress and earnings.
Will you attend the ELA Annual Convention and plant the seeds so
your organization can do the same?
I
hope to see you at the ELA Annual Convention! I will be speaking
there and would very much like to meet you. It would be a privilege
to hear your ideas and, perhaps, share some of my own.
Have
a great October and do feel free to e-mail or call me!
Thanks
to the BLN Staff
I
extend a special thank you to my editors at Patton Boggs LLP for
their comments on this edition, Atwood Jeter, Adrian McCoy, Sheila
McCoy and our primary web site review partner, Jeff Turner. The
technical team, consisting in part of George Barber and Winston
Jackson, provides you the easy-to-use e-mail navigation and artistic
appearance of BLN. Claire Campbell, our Chief Librarian provided
research for BLN.
PLEASE
FORWARD THIS E-MAIL TO OTHERS.
You may, for this purpose, disregard Patton Boggs' distribution
restriction at the bottom of this email.
David G. Mayer
Founder and
Publisher Patton Boggs LLP 2001 Ross Avenue Suite
3000 Dallas, Texas 75201 (214) 758-1545 (phone) (214)
758-1550 (fax) E-Mail: dmayer@pattonboggs.com
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Thanks.
Disclaimer:
BLN information is not intended to constitute, and is not a
substitute for, legal or other advice. Comments, tips,
warnings, predictions, etc. in BLN provide general insights
only. You should consult appropriate counsel or other
advisers, taking into account your relevant circumstances and
issues. The Disclaimer linked here also shall be
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BLN does not endorse or validate information contained in any
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represent the views of Patton Boggs LLP, but rather those of
David G. Mayer.
