Leasing 102

"$1 Purchase Options"

by Mr. Terry Winders, CLP

What separates a $1 P.O. Lease from an installment loan?

The OCC and the Federal Reserve separates a Lease from a loan (including a $1 P.O.) for the following reasons.

1. A lease requires a non-cancelable term. A loan is cancelable
2. The accounting for Capital Leases ($1 P.O,) leases is different under GAAP requirements
3. A loan usually requires down payments, financial restrictions, or additional collateral. Leases do not contain any of these requirements.
4. Servicing a lease requires following for monthly sales tax, and annual property tax that does not exist in a loan.
5. Documentation for lease transactions requires documents not used in lending such as. Purchase orders, vendor invoices, sales tax remittance forms, acceptance forms and others.
6, Lease Insurance requires the lessee to purchase and provide "Liability" coverage in addition to the "Loss Payable Clause.
7. Lease documentation (master lease agreement) has requirements for equipment maintenance and return conditions not found in lending.
8. Lease documentation contains strong language and many defaults not found in loan documentation such as: equipment location; if location changes then sales tax changes. This requires a lease accounting package that can create location reports on multiple assets to insure proper tax remittance, or a default if equipment does not follow manufactures required maintenance schedule plus other requirements not found in traditional loan documentation.
9. Late charges on lease's are usually 5% of the payment or have a Minimum not found in Loans.
10. Lessee's use $1 leases to control costs if they are not using GAAP accounting

In short a lending department does not have the tools or the training to account for or handle an equipment lease regardless if the UCC decides it is an article 9 transaction.

Case law will only determine if the lease meets legal or tax standards and when I called the OCC and the Federal Reserve for references they both said that they have never challenged $1 P.O. leases.

Mr. Terry Winders 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