Patrick Gaskins is Senior Vice President of Sales and Operations, Capital Equipment Solutions, for Corcentric (formerly AmeriQuest Business Services). In his role, he oversees the sales and syndications functions of the Capital Equipment Solutions department at Corcentric. He has over 25 years of experience as a financial services professional in the transportation industry.
Asset sale lease-backs are not a new idea. However, it is an idea that makes good sense today. Corcentric’s Patrick Gaskins and Mike Hamilton go over the basics to explain why this strategy might work to your advantage in current market conditions.
Asset sale lease-backs are not a new idea. However, it is an idea that makes good sense today. But before we get into why this strategy works to your advantage, given current market conditions, let’s go over some basics.
The transaction is one where the owner of an asset sells the asset and then leases it back from the buyer. Sale and lease documentation are completed simultaneously. The seller of the assets will become the lessee and the buyer of the assets becomes the lessor. The seller will treat the income from the sale of the asset as normal revenue, which will have income tax implications. The buyer of the assets will have the ability to depreciate the assets under the current 100% bonus depreciation schedule.
Companies consider sale lease-backs when they need to free up cash invested in their assets, but still need those assets for their daily operations.
Here are some scenarios in the trucking industry where sale lease-back makes sense for the owner of the asset.
New truck sales have hit a record pace and used inventory is still low, keeping used tractor values high. Companies should consider a sale lease-back to lock in the assets residual value. Selling the asset while the used market is still solid is a great way to manage total operating costs and reduce residual risk.
Through various acquisitions, a company ended up with assets covered under a hodgepodge of financing programs ranging from full service leasing, fair market value leasing, and TRAC leases. The company used a sale lease-back to consolidate all of the financing under one structure that was more cost-effective and quickly met their asset lifecycle goals.
In today’s market, if a company picked up a great deal of new business, they might find themselves needing more equipment. Given the reality of the order boards today, it would be next to impossible for them to get new equipment in a timely fashion. They may have to purchase used equipment to meet the demands of their new customers. If used equipment has been purchased and the company wants to avoid possible residual risk, they can utilize a sale lease-back to divest some of their residual position.
From these scenarios, it is easy to see the advantage for the company that originally owned the assets. However, a finance company might be wondering what’s in it for them. They may ask, “Why do I want to take on the risks associated with owning used assets?”
The answer: Access to lending volume now versus having to wait six to nine months for equipment to be delivered, given current production backlogs. The market is going to continue to be challenged throughout 2019 with long manufacturing lead times. Even if there is a bit of softening in the order boards, it won’t be until the third or fourth quarter or into 2020.
Most finance companies have funding goals on a monthly basis and do not have goals to do 100% of their funding volume in the June-to-December timeframe. Purchase and lease-back is a good way to access volume throughout the year. And under current depreciation standards, lessors can depreciate 100% of the used asset value in the year it is purchased.
This strategy can also differentiate the lender, but it is not without risks. The risk to the lender is the same as that of the fleet operator who initially owned the asset. To mitigate risks, the lender has to keep a watchful eye on the cost of the asset and needs to make sure they are depreciating the asset value on their books to an acceptable level over the term of the lease.
When executed properly, purchase lease-back deals benefit the fleet by giving them an infusion of cash, and they give the lender volume and quality assets which have a good rate of return. Purchase lease-back offers something for everyone.
Commercial lenders will face many new and unique challenges over the coming months as the full effects of the coronavirus pandemic are felt throughout the economy. For commercial customers, cash flow, liquidity and credit tightening dramatically across industries is the... read more
The CEMC New York Forum focused on the New Age of Customer Experience in Fintech, featuring visionary speakers who shared cases of digital transformation. We are living in the Age of the Customer, and technology is transforming the way lenders... read more