More Than Just Numbers: Leasing Can Be a Funny Business
by Bill Bosco July/August 2016
Bill Bosco explores the lighter side of leasing. He shares a few amusing anecdotes from his leasing career to remind us that there’s more to leasing than formulas and number crunching.
Bill Bosco, Principal, Leasing 101
When I started in the leasing business in 1974 I didn’t even know how to spell ITC, lease payments were determined by looking them up in a book of financial tables and we used SOMD (sum of the months’ digits) calculations for lessee payoff quotes. I wondered jokingly why we did not use all of the months’ digits rather than just some of the months.
As I learned more about selling in the leasing business, I appreciated the marketing gift Shakespeare gave us when he had Polonius say, “Neither a borrower nor a lender be” in Hamlet. Was this another reason for customers to lease?
As my career progressed, I cracked open a fortune cookie to read: “It is a wise man who knows whether it is better to lease or buy.” Knowing the complexities of the leasing business, I fully appreciated the wisdom of that cookie.
Back in the days when big bank leasing businesses had annual sales conferences in nice warm places to play golf and tennis between some business planning, we had a 1990 kickoff conference. We were celebrating a successful 1989 and planning for a better 1990. In fact, the conference theme was targeting new markets and products for the 90s, spearheaded by a new head of our leasing business. The new head was a middle market lender without much leasing experience.
My responsibility in the business group was new product development and sales support. Since the synthetic lease product was emerging as a popular new product, I had my analyst develop an Excel spreadsheet that our sales people could use in the field that would automatically structure a synthetic lease residual guarantee given the asset cost, term, end position strike price (or “TRAC” amount) and the deal’s yield rate, assuming a present value of 89.90% of the asset cost.
When looking to name the product, my analyst suggested “the 89/90” product. I agreed it was a great name. My new product team had a session at the conference to present the 89/90 synthetic lease product structure and lessee benefits, training the staff on the accounting rules for operating lease classification and how to sell the product but also how to use the handy “89/90” Excel spreadsheet. The presentation was well received by the sales staff, and as it wrapped up I asked, “Any last questions?” One hand went up in the back of the room; it was the new head of our group. I acknowledged him, and he said, “Bill, what will we call the 89/90 product next year?” A hush fell over the crowd followed by a little titter of laughter. I tried to answer politely that the name related to the targeted PV of the lease payments for operating lease classification and the name would still be appropriate next year.
Beware the Inexperienced Parachuter
In a similar vein, years ago, the then-president of the ELFA told me he called a contact at a large member company asking if he could meet with his new boss to see what the ELFA could do for them. The contact — an old leasing pro — said it was OK to come but said the president shouldn’t bother to ask about equipment finance issues. He explained that the parent company had parachuted the new boss in as the business head. Since he had no leasing experience, he had no knowledge of leasing issues.
I guess it is a common problem in large organizations where the leasing business is just one of many businesses. I experienced quite a few new bosses parachuting in, not knowing the business and making damaging decisions. They are mostly all unemployed now, but sadly so are the “little people” in the business — all good, hard workers.
Here is my observation, on a sad yet ironic note. The leasing business is full of examples of well-oiled small-ticket operations, small groups of highly-experienced equipment experts or structuring experts, businesses built on a unique product or market, successful managed risk takers, business models that are unique — all innovations created by someone from the past and strengthened by experienced management and staff over time. Then the punchline: senior management puts in new, inexperienced bosses and continues to pay them six-figure annual bonuses for somebody else’s results. In fact, the new managers change what was working as noted above. My best bosses came up through the ranks and knew the details as well as the big picture.
We had a grumpy old ex-bank head of credit for our division. All large deals had to be approved by him. Naturally, in my product development role, I often had to co-present new structures and types of deals to him with the sales and credit people on the deal team. He once said to me “Bosco, next week I expect you will bring me a bowling alley lease to approve!” I replied, “If a customer of the bank wants to finance a bowling alley, you bet I will!”
While working at a foreign bank leasing company, I pitched a leveraged lease to a client of the bank. It was a U.S. subsidiary of the foreign bank’s client. I went on the call with our ex-pat SVP and a junior guy who would translate my oral presentation as everyone except me spoke the language of their country and none spoke English well. We were presenting to the CEO of the U.S. subsidiary along with a junior guy on the customer’s staff who was furiously taking notes. I poured over the complex leveraged lease structure charts with all the boxes and arrows showing the lessee, the lessor and the leveraging debt.
As I presented the deal, the translator spoke alongside me. There was only one question that the CEO asked my SVP during the whole presentation, and it was not translated for me. After we left, my SVP — who had a good sense of humor — said, “Bill, do you know that the only question the CEO asked was, ‘In this diagram, who is the lessee?’”
Just For Fun
Lastly, here is a joke with some real people inserted in it that I turned into a leasing story. My mom came from a small town near Scranton, PA. In the 1950s, three of her brothers started a roofing company with just themselves and a pick-up truck. It has now grown to be one of the largest roofing companies in northeastern Pennsylvania. I go there to visit whenever there are weddings and funerals, which is often, as the family is large.
Once, at a wedding, I saw my favorite uncle, Leo, God rest his soul, and I asked him how he was doing. “Not so well,” he said. I asked what was wrong and he said they were trying to sell an old pick-up truck with 250,000 miles on it and could not get anything for it. He said, “Billy (he called me Billy until the day he died), you work for a big leasing outfit in New York City, right? You get lots of trucks back off lease and then have to sell them. Can’t you give me some advice to help sell our truck?” I said, “Gee, I’m just an accountant and uh … the only thing I can think of is to roll back the odometer.” At the next wedding, I saw him and said, “Hey, Uncle Leo, how are you doing? Did you sell that pick-up truck?” He said, “Heck no, it’s only got 50,000 miles on it!”
Global economic and political changes are affecting equipment leasing and finance markets in diverse geographies. In our interconnected economy, it pays to understand what is happening globally and to look at emerging opportunities.
Kenneth P. Weinberg, Shareholder, Baker, Donelson, Bearman, Caldwell & Berkowitz
Usury laws vary from state to state, which can make a lease or loan more complicated when the lessor is in one state and the lessee in another. Kenneth Weinberg discusses how this has played out so far in the courts, with favorable rulings for a lessor often depending not only on who files first, but where they file from.