Finance: Equipment Leasing: A Viable Financing Option for Marine Industry

Monday, November 24, 2003

By James W. Mignogna

In recent years maximizing budget dollars has become an increasing concern for many businesses. Fortunately marine assets have long, useful lives, but the debt required to finance their acquisition often creates a strain on the operator's balance sheet and cash flow.

According to the Equipment Leasing Association (ELA), 8 out of 10 businesses in the United States lease some kind of equipment. However, fewer know that leasing, accomplished through a bare-boat charter, is also a smart business decision for obtaining vessels.

Because marine assets have long lives, lease payments can be relatively low. Companies can use these cost-savings to improve day-to-day cash flow or to gain a competitive edge by passing the cost-savings along to customers.

Cost-savings depend on the lease structure. Leases can be structured to fully repay the purchase price of the vessel and automatically transfer ownership to the operator at the end of the lease, or a "lessor" (the leasing company) can invest its own funds in the asset. This kind of structure, known as residual-based leasing, can significantly reduce the monthly payments due each month. It may also give the operator the flexibility to walk away from the equipment at the end of the lease if it no longer suits the operator's needs.

For income tax purposes, leases can be structured with either the lessor or the lessee as owner of the vessel. Both structures provide the operator with tax benefits. A lessor can work with the operator and its financial advisors to properly structure the lease to achieve the company's balance sheet management, tax planning and financial goals.

The Benefits Add Up

Some of the other recognized benefits of leasing vessels include:

• Tax treatment The IRS does not consider certain leases to be a purchase but rather a tax-deductible overhead expense. Therefore companies may be able to deduct the lease payments from corporate income. No matter how a lease is structured, the lessee receives tax benefits. For some companies, however, the deduction of the entire lease payment may be greater than those deductions, such as asset depreciation and interest expenses, available for an asset financed by loan. Companies who aren't full tax payers may find they cannot use the tax benefits of ownership efficiently at this time; this might include benefits gained from President Bush's recent tax cuts. Instead, those unused benefits can be traded to a leasing company in return for lower monthly payments.

• 100 percent financing Since an equipment lease often does not require a down payment, the entire cost of the vessel can be financed, allowing the lessee to save on out-of-pocket cash expenses.

• Flexibility Operators can add on to the lease for costs, such as mandated vessel modifications or updated equipment requirements, with relative ease.

• Asset management A lease provides the use of equipment for specific periods of time at fixed payments. The leasing company assumes the risk of equipment ownership and is responsible for the disposition of the asset if the operator no longer needs or wants the equipment at the end of the lease.

• Speed and ease Leasing can allow you to respond quickly to new opportunities by minimizing documentation and red tape. Most leasing companies sign a master bare-boat charter with the vessel user so that new schedules can be added easily as more equipment is acquired.

• Improved cash flow Since payments are lower, day-to-day cash flow may be improved. In addition, even used vessels can be refinanced by the operator through a sale and lease-back structure, to provide monthly cost-savings or to raise needed cash

• Flexible end of term options Depending on how the lease is structured, the lessee may be able to return the equipment, purchase the equipment or renew the lease at the end of the lease term.

Questions to Ask

After identifying an interest in leasing, the next step is choosing a lessor and the best lease option. There are a variety of leasing structures, and it's important to evaluate which one is the best fit for your company's tax planning and financial goals. To aid companies with the leasing process, the ELA has developed the following list of 10 questions to ask before signing a lease. These questions take into account the "before, during and after" stages of a lease.

Before

1. How am I planning to use this vessel?

2. Does the leasing representative understand the marine industry and how this transaction helps me to do business?

During

3. What is the total lease payment, and are there any other costs that I could incur before the lease ends?

4. What happens if I want to change this lease or end the lease early?

5. How am I responsible if the vessel is damaged or destroyed?

6. What are my obligations for the vessel (such as insurance, taxes and maintenance) during the lease?

7. Can I upgrade or add equipment under this lease?

After

8. What are my options at the end of the lease?

9. What are the procedures I must follow if I choose to return the vessel?

10. Are there any extra costs at the end of the lease?

The ELA has developed a website called Lease Assistant (www.LeaseAssistant.org) to provide additional information about leasing, including answers to commonly asked questions and a search engine for finding lessors.

James W. Mignogna is senior vice president and national sales manager for the commercial leasing services unit of Key Equipment Finance. Prior to joining the company in January 2002, Mignogna served as senior vice president of business development and national sales manager for Mellon U.S. Leasing. He had previously held various senior level roles with national responsibility at Comdisco Electronics Group and Equitable Life Leasing. Mignogna can be reached at 720-304-1085.

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