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Wednesday, July 27, 2016
Today's Equipment Leasing Headlines
Monthly Leasing Business Up 47% June from May
Broker/Funder/Industry Lists | Features (writer's columns)
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######## surrounding the article denotes it is a “press release” and was not written by Leasing News nor information verified, but from the source noted. When an article is signed by the writer, it is considered a “by line.” It reflects the opinion and research of the writer.
Monthly Leasing Business Up 47% June from May
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"My June was triple what I did in May. It was a terrific month. I can eat steak!"
"Ascentium Capital set a new company record for lease and loan originations in June ---up 40% over the same period last year.
"Volume increased 12% from May to June."
"Funding and application volumes have been good – not great but still very steady volume. Normally we see some summer slowdown, but not this year. I have been quite pleased with the economy’s resiliency. On another note, credit quality has been very good over the summer."
"Our June originations were up year over year. I don't have the exact numbers, but it appears to be in the range of about 8%. We have not experienced a slowdown in submitted transactions."
"Madison Capital’s business, once again this year, is considerably up month over month. And, we already know July is up over last year. ..The fall is a significant business period. Those best at marketing and those with origination niches will continue to have a good year. I do believe Madison is up, not solely for economic reasons, but as a result of marketing. In short, those with a targeted marketing plan, good vendor business, good referral business, good repeat business, and experienced originators, will see growth in the 2nd half of the year. We expect a “hot” fall and continued originations growth."
"June volume was about the same as last year. Business is holding steady but we worry about the second half of the year. We sense a fair amount of uncertainty amongst small business owners - translating that-we believe many expansion purchases may be postponed until after this circus of an election is over. Second half of the year may not be as strong as we hope."
"We have turned down over $20MM in small ticket volume just this first half of 2016 which is dramatically higher than 2015. All of that was processed without any change in Cobra's standard pricing and primary credit criteria vs last year.
"As half of Cobra's business comes from the indirect broker channel, what we are seeing is a misguided expectation of treating C and D credits as if they were B and C credits from both a pricing and credit perspective.
"I believe the ELFA report dollar volume mostly represents the upper middle and fortune markets based on the composition of the large bank captives and large independents contributing to the survey. YTD volume is still down 7% from 2015 and a lot of that was disproportionately made up by a large increase in May, which is probably not a sustainable trend particularly for the continued soft economy we've been in since technically exiting the Great Recession over 4 years ago. I'm guessing the soft energy markets have a lot to do with the drop in volume this year as most trends in the big corporate markets are moved by a particular fallout in an industry concentration.
“The companies funding the low to mid 8 figure big deals are under the greatest rate compression including even the non-investment grade deals which historically had no such rate compression during and preceding the great recession.
“The upper mid and fortune markets have unsustainable pricing and competitive pressure clearly evidenced by NXT Capital abandoning their fairly recent Equipment Finance Group not to mention the rumblings of Newstar possibly looking to position its equipment finance group as well. I also sense there may be some unrealistic end of term booked residuals that will come home to roost in the next few quarters which all the big lessors will grapple with at some point. Complicating this big deal market is of course the FASB change to take effect in a few years in forcing op leases to the balance sheet which will have a fundamental adverse impact on the traditional signing authority of local managers in fortune companies which will be replaced with a CFO using cash first then bank lines then leasing.
"Having said all that, the sector of the economy of large bank captives represents only about half of our country's GDP producing businesses since it does not accurately reflect what's happening in the jobs producing, lower middle and small business markets. I'm sure the upper and fortune market competitive volume and pricing pressures are even greater than what we have seen from the small biz, B and C space this year where the margins have been fairly stable, and where Cobra and my prior company, Great American Leasing have operated since 1996.
"A consistent adverse trend this year is the number of small biz clients who show up on Cobra's doorstep already infected with unsustainable and hopeless funding by the relationship destructive, online 50% to 100% effective all in rate online lenders. While this is a small piece of the low quality business we have seen this year, nonetheless, it is increasing at an alarming rate and demonstrates that the marginal and less viable, small business operators who survived the Great Recession are literally hanging on by their fingernails and have thrown in the towel in their failed attempts to secure traditional equipment and bank financing with our largest trillion dollar banks who are still only lending a miniscule 1% of their assets to critically important, jobs producing small biz. The online lender blanket lien stacking subterfuge will only guarantee an early death of the marginal small business operators and with it, I fear another black eye once again to our industry and the securitization markets."
#### Press Release ##############################
“The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $1 trillion equipment finance sector, showed their overall new business volume for June was $10.0 billion, up 3 percent year-over-year from new business volume in June 2015. Volume was up 47 percent month-to-month from $6.8 billion in May. Year to date, cumulative new business volume decreased 7 percent compared to 2015.
“Receivables over 30 days were 1.4 percent, an increase from the previous month and up from 1.02 percent in the same period in 2015. Charge-offs were 0.65 percent, up from 0.33 percent the previous month.
“Credit approvals totaled 78.1 percent in June, up from 76.5 percent in May. Total headcount for equipment finance companies was up 3.0 percent year over year.
“Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) for July is 52.5, steady with the June index of 52.3.”
#### Press Release #############################
Interim Rent: Proper Accounting Function for
Interim Rent is Legal in Most States that Have Considered the Matter
In re Edison Brother Store, 207 B.R. 801 (Bankr. Del. 1997)
Historical Application of Interim Rent
Some bright leasing executive figured out that because the interim rent was less than one of the stated monthly payments, the revenue would not reduce the balance on the equipment lease, and was therefore, 100% pure profit (except for cost of funds). It didn’t take long for lessors to figure out that increasing the time period of interim rent beyond the one month period would a windfall to the lessor. Enter the doctrine of quarterly payments.
The lessor’s sales pitch goes something like this:
What the salesperson doesn’t tell the lessee is that the lessor will charge the lessee interim rent for the period between funding and the first payment, which could be as long as 89 days. The salesperson also doesn’t tell the lessee that the interim rent payment will not be credited against the account and does not reduce the lease balance.
The lessee gets a standard lease document which contains an interim rent provision, generally pays no attention to it, and signs the lease. When the lessee figures out that it just threw three months’ worth of payments down the drain, the lessor points to the provision which the lessee signed, and it’s all over but the crying.
In the Amplicon case referenced above, the lessee claimed that the interim rent provision was unfair. A heartless Wisconsin Federal Judge simply ruled that the issue was a matter of contract, and since the provision was clear and unambiguous, it would therefore be enforceable. It’s hard to disagree with this logic, because if the lessee doesn’t read or understand a commercial lease agreement, is it really the lessor’s duty to explain the minefields in the lease document?
The Legality of Interim Rent—Interim Rent Upheld
Cases interpreting interim rent have been kind to the practice of interim rent.
In the Edison Brothers case above, the lessee claimed that interim rent was merely a device to increase the lessor’s yield. The Court disagreed, holding that it compensated the lessor for the lessee’s use of the equipment from installation until the date of the first payment.
In the All Luminum decision, the lessee argued that since the lease had a 7% yield, the 8th Circuit should essentially re-write the lease to lower interim rent to an interest only number. The court declined to do so.
Interim Rent Provisions Struck Down
The lessee claimed that the lessee was promised by a salesperson that the quarterly payments would be all that would be owed, and no other payments would be collected. When the lessee received an invoice of $930,000 for interim rent, it offered to pay the lessor interest only on the obligation but balked at paying the huge interim rent amount. When the lessor refused the offer, the lessee sued.
The lessor filed a motion to dismiss. In considering the motion, the Court was troubled by the large interim rent provision. The court was further troubled by the nature of the transaction, an Article 9 lease, essentially a loan of money, yet the lessor expressed the obligation in the financial terms of a lease. The court noted that “If the parties had used documents tailored to the nature of the transaction—the lending of money—and had included a clause specifying that interest was payable at a specified rate for the period from the date the funds were advanced to the beginning of the quarterly period, [the lessee] would have nothing to complain about.” Consequently, the Court denied the lessor’s motion to dismiss. Although not covered by the opinion, the interim rent provision in the lessor’s lease is a little vague in my opinion.
I don’t think that the Underwriters case is necessarily an aberration, as bad facts make bad law. The salesman may have misrepresented the transaction and the lessor’s documents were not terribly clear. It should be noted that the case settled a little over 90 days after this decision was rendered, so a compromise must have been reached.
Lessons for the Equipment Lessor
First, let’s be honest here—quarterly payments and an interim rent provision is not for the convenience of the customer—it is almost 100% pure profit. If the lessor socks a lessee with 89 days’ worth of interim rent, do you think the lessor will get that repeat business from that lessee?
Second, if your company is drafting an interim rent provision, make it clear and unambiguous, so a high school senior could understand the provision. For those judges who defer to contractual provisions, this may carry the day.
Third, if a complaint regarding interim rent is received, have in place a structure to elevate the complaint to somebody who understands litigation and risk. Since the interim rent is almost 100% pure profit, the lessor can afford to be magnanimous.
Fourth, sales personnel should obviously not misrepresent the contents of a lease, nor make contradictory statements about the intent of the lessor or the effect of a particular clause. I’ve often thought that sales conversations should be recorded so the issue of misrepresentation can be settled once and for all.
Finally, lessees should obviously read contracts before signing them, and quite frankly, the issue of interim rent and quarterly payments is such a loaded issue, that red flags should be raised.
The bottom line to interim rent is that the vast majority of lessors use it for its intended purpose—to compensate the lessor for the time period between funding and the first schedule payment, usually 29 days or less. However, when quarterly payments are coupled with interim rent, the lessor’s profit and risk increases significantly.
Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California
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Leasing Industry Ads---Help Wanted
Sales Make it Happen
Don't Save Your Best Shot
Depending on the situation, in addition to using Merchant Cash Advance as with Channel Partner or Rapid Advance for a Line of Credit, you need a longer term to get a lower monthly payment or the situation doesn't fit. You need to come to the table with what will gain you an approval. Don't negotiate with your credit department as it will affect the next deal you bring them. You also may not get your lessee to agree.
Think beforehand what will make your credit grantor buy your deal. Put your hat on as if you are a credit decision maker. Sit across the table and say if someone brought you this, what would make you most comfortable to approve it. Get this agreed in advance with your customer. Don't let the sale cool down or a competitor steal your deal. Don't go back and forth. Most of all, don’t save you best shot, but know the credit and what you need to do to put the deal together.
Many "C" and "D" credit require this. Also see if getting a 10% purchase option at the signing of the lease may make a difference to the credit grantor.
In the early 1970's, it was most common for most leases to be written first and ten percent (the ten percent the purchase option paid in advance.)
In ‘hard” credits, it is not uncommon for a lessor to require a ten, or twenty-five, and sometimes a fifty percent deposit. Usually there is not any interest earned on this deposit to the lessee. Often the deposit is not held for the full length of the lease, but a specific time limit and other requirements, such as a history of payments made on time or financial criteria. The deposit is an incentive to obtain a credit approval on the lessee and equipment.
My advice: go in strong to the credit grantor. Get as much as you can get to make the first decision a “yes,“ not a “maybe” or “if” answer. If you go in with more security deposits or additional collateral, you may win the deal with the credit department.
Several “story credit” companies have such requirements. Perhaps your credit decision maker may consider the “abundance of caution,” as bankers call this action.
Often a third-party vehicle dealer is used for both the appraisal and vehicle condition report. The lessor may utilize a "blue book" and sight inspection by a leasing officer or dis-interested third party, such as an auto dealer not involved in the transaction.
In the past we have written several of these leases, trading pink slips for collateral substitution. This is more common with new tow truck operators or sub-contractors in the construction industry. It also works with small ticket transactions where the owner pays cash instead of credit with their suppliers.
Normally, the guarantor is a "blood relative." Sometimes it is a corporate guarantor, such as from a corporation out of the state, often foreign, who has started a "presence" and new corporation in the United States. In California, we have several leases guaranteed by a Canadian, Israel, British, or Finnish parent corporation. We also have leases from out of state corporations, such as one guaranteed by the Texas Corporation parent or former corporation who sold one of their companies to their employees in an ESOP plan.
The older credit days of obtaining a guarantee from a best friend are gone. Creditors found when it came to collecting money from best friends, the friendship ended and only the attorneys were paid.
A UCC search and appraisal are often required (informal to formal) to $250 to verify that the equipment is "free and clear" from other blanket liens or specific liens and it is worth a specific value. It is not uncommon for the process to take two to four weeks longer to clear up liens that have not been released or for debtors to be paid off. Often this is also viewed as a "sale-leaseback," meaning a bulk rate filing in a local newspaper for ten days is also required.
So called “hard collateral” equipment also may have a factor in the valuation procedure. Some story credit specialize in this, and even offers a lower rate for additional collateral to make them more comfortable with the transaction.
It sometimes is held at the lessee's bank, but there are many restrictions and procedures in place. It is also not uncommon to find the CD from a "guarantor" or third party, such as a company that will realize the appreciation of the equipment and performance of the lessee with the equipment. Trusts and other entities may also have the ability to pledge a certificate of deposit. Time limit and other considerations may be made, depending primarily on the size of the transaction and situation.
This is common in startups who want to show the cash on their financial statement or not give up stock for the granting of credit. It also may be from a dealer, a customer, a relative, who doesn't want to guarantee, but has cash and will allow it as a source to guarantee the transaction. The cash should be in the lessor's name with interest to the lessee.
These are generally leases where the lessee qualifies for a smaller lease, but wants a large lease and the company is often moving to a major plateau.
Letters of Credit
The letter of credit may also be in a step manner, meaning each year the dollar amount decreases as the lease is paid out. It is most common for the letter of credit to cover the entire stream of payments, not just the cost of the equipment.
Sometimes the letter of credit replaces a personal guarantee, a restriction of the nature of the equipment We completed a $300,000 letter of credit lease with a law firm, utilizing one personal guarantee and none of the other partners. We completed a $75,000 lease with a letter of credit and other equipment as collateral. We like letters of credit more than a cash deposit, but ranked number two because in the leasing business, additional security deposits are more common.
Warrants are a form of stock. This is very common in Venture Backed Leases. A warrant is issued by the lessee, meaning the value of the stock "today" is promised to the lessor with the ability to purchase at any time in the future (there can be time limits, but not common to require). This gives the lessor the advantage that a new company starting out with a stock value of $5 may go to $50, or better yet, split several times, and it multiplies to be worth $125 or more in three to five years. It is an incentive to extend credit to a company not turning a profit or expected to turn a profit for several years. It is also attractive to investors or smaller leasing companies who are willing to extend credit with warrants.
This instrument has become so popular with banks and venture capital groups in the last few years, that the dollar amount considered has gone down to $100,000 (usually the minimum was $500,000).
Equipment, vehicles, and other assets may be free and clear, but often today a second mortgage is not as attractive as it was in the past---but don't overlook it, especially if needed to make the equipment financing go forward.
Many banks still like the real estate as better collateral than equipment.
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Twelve Attorneys Against Evergreen Abuse
The original intention of the Evergreen clause in an equipment leasing contract was to have an alternative to when the lessee did not exercise the residual at the end of the contract. Often the clause calls for an automatic additional twelve months when the residual is not resolved.
In most cases, the lessor notifies the lessee that the residual will be due, often ninety days in advance. However, often there is nothing in the contract that requires the lessor to notify the lessee regarding the expiration of the contract.
Contrarily, many small ticket lessors do not notify the lessee, and automatically continue the lease, often via an ACH or continued billing, which often goes unnoticed until many payments have already been made.
Leasing News would like to see an industry standard that lessees are notified in advance of the expiration of their contract regarding its termination. We support the clause, and the notification requirement is wide open, meaning 90, 60, even 30 days and by telephone or mail.
This list of attorneys agrees with this and will be available to lessees, sometimes able to help them without a fee, or at a reduced rate, in an effort to end the abuse of Evergreen clause leases.
Ronald J. Eisenberg
Ronald P. Gossett
Peter S. Hemar, Esq.
Brandon J. Mark
Barry S. Marks
Kevin E. Trabaris, Partner
Michael J. Witt, Esq.
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