Equipment Leasing and Finance – An Industry Overview
What Is Equipment Finance?
“Equipment Finance” is a general and sometimes confusing term used to describe a type of financial product (in investor terms), collateralized credit extension (in lender terms) and a means of selling or acquiring personal property and fixtures to be used in business (in vendor or lessee/borrower terms). “Equipment Leasing” is a type of equipment finance developed in the mid-to-late twentieth century in which the investor or lender purchases an item of equipment and provides it to the user in a transaction that is styled as a lease but bears many characteristics of a loan.
Equipment leases may be true leases, in which the lessor and not the lessee bears the risks and rewards of equipment ownership despite the lease. In a true lease, the lessor will either take back the equipment when the term ends and sell or lease it to a third party, or will sell the equipment to the lessee for something more than a nominal amount pursuant to a purchase option set at the inception of the lease. For most federal and state income tax purposes, this amount must be the equipment’s “fair market value” or a pre-agreed sum that is intended to reasonably approximate the projected equipment value at the end of the lease term. For state law (Uniform Commercial Code or “UCC”) and bankruptcy law purposes, the pre-agreed purchase option price must not be “nominal,” but it is unclear whether the actual expected value of the equipment is relevant in defining that term.
In many transactions, the agreed purchase option price will be $1.00 or another obviously nominal amount. These transactions are variously described as “conditional sale” leases or “financing”, “security” “buck-out”, “lease-purchase” or many other denominated leases or as “leases intended as security agreements.” It should be obvious that a transaction in which the lessee makes payments that cover the price of equipment with an implicit interest factor and then owns the equipment at the end of the term automatically or for a token amount operates very much like a loan. On the other hand, transactions in which the lessor does not recover the full cost of the equipment during the term, or in which the lessee cannot keep the equipment at the end of the term unless it buys the equipment for its actual value are more like rental arrangements.
In recent years, the equipment finance industry has experienced the growth of a third type of transaction, the Equipment Finance Agreement, which does not purport to be a lease at all, but is clearly a loan-type transaction. These “EFAs” are basically note and security agreement forms that generally follow the terms and economics of other equipment finance products.
Equipment Finance is not equipment-secured lending
Equipment Leasing and Finance is very much like lending secured by personal property, but there are several distinctions. Equipment Finance usually offers 100% financing. Traditionally, Equipment Finance focuses more on the collateral value and less on the lessee/borrower’s credit than straight lending. This means that use, maintenance and end-of-term provisions are more carefully drafted but financial covenants and restrictions on general business practices of the lessee/borrower are not as common.
The equipment finance business accounts for upwards of $6 billion of equipment acquisitions and is the second most-used means of acquiring business equipment in the United States. Unfortunately, very few lawyers are experienced in Equipment Finance and the skills used in other fields do not always translate to proficiency in this unique practice.
Elsewhere in this web site, we describe our practice in terms of types of transactions and types of equipment. We will try to explain some of the issues and definitions involved but PLEASE BEAR IN MIND that there are many, many variations on these terms and different professionals use markedly different language in describing our industry. For example, many lessors and lessees use accounting terms operating leases and capital leases when addressing legal and tax issues or confuse the tax rules with UCC issues.
Much of what follows is amplified in articles and case discussions on our site.
The industry and our experience
Large ticket, middle-market and small ticket lease transactions — This refers to deal size. Most lessors consider small ticket to be less than either $100,000 or $250,000 and large to begin at $5 – 10 million. Small ticket and middle market deals are predominately form-driven and often back-leveraged (discounted after closing) while many large ticket transactions are heavily negotiated, written for specific transactions and leveraged by having the lender at the table during the negotiations.
Vendor lease programs — These include private label programs where the lessor acts as if it were affiliated with the vendor. Vendor lease programs may be maintained by a captive (affiliated) vendor company or by an independent bank or leasing company. There are many variations and the priorities of the vendor to increase sales and qualify as a true sale for accounting purposes must be weighed against the lessor’s desire for security.
TRAC, first amendment, service contract and synthetic leases — There are many types of leases, including terminal rental adjustment clause leases which for federal income tax and many states’ legal purposes are true leases despite requiring the lessee to backstop minimum equipment residual values at the end of the term; first amendment leases in which the lessee must either purchase or extend the term at the end of the lease term; service contract leases are predominately large ticket deals in which the lessor provides equipment under a service arrangement at the end of the term but the term may also apply to bundled service contracts where the lessor collects for maintenance and other services as well as lease rentals and synthetic leases which are actually loans styled as leases for accounting purposes only.
Equipment finance agreements — As discussed above, these are note and security agreements that are tailored to mirror equipment lease provisions in loan terms. There are advantages in limiting lessor liability and certainty of tax and other treatment.
Traditional loan financing — Lending differs from equipment finance, but there are obviously many similarities. We handle secured and unsecured loans for our clients.
Progress payment, interim funding and construction loans — Pre-fundings and funding equipment construction or acquisitions over time are very tricky and we go to great lengths to educate and protect our clients.
Leveraged lease structures, including cross-border transactions — We have experience in literally billions of dollars of complex financings including many large ticket aircraft, railcar and facilities leases. Many of these transactions involve overseas lessees.
Sublease and inventory structures — Many lawyers miss the significance of financing equipment that will be rented or subleased or otherwise qualifies as inventory for UCC purposes.
Assignments, Participations and syndications — We are very active in the secondary markets, with a wide range of discounting, brokering, syndicated and participated leases and loans.
Motor vehicles (including trucks, tractors and trailers) — Movable equipment has unique issues: titling, accessions, owner-operator finance, insurance, liability protection among them. This is a major area of our practice.
Manufacturing, utility and construction equipment — This is a traditional source of leasing activity, with many individual complexities.
Hotel and commercial FF&E — We have represented major hotel chains and those providing financing to them.
Aircraft and vessels — A key area of the business, we use local professionals where necessary and maintain a working knowledge of FAA, maritime and other laws.
Railroad rolling stock and subway trams — One of the oldest and historically most active types of equipment finance, we have participated in many millions of dollars of locomotive, railcar and city transportation systems in the U.S. and abroad.
Electric generation, water treatment and other facilities — We have financed infrastructure and facilities for domestic and foreign locations.
Warehouse and funding lines — In addition to non-recourse lending, we handle lessor recourse lines for both lender and borrower.
Refinancings, back-leveraging, lease assignments, sales of interest and other structure or party changes — We handle all aspects of the evolution and growth of lessors and changes in both transactions and portfolios. Sales of portfolios and companies require knowledge of both the industry and mergers and acquisitions law and we have been active in these areas for many years.
Multiparty use arrangements and financings for operators and drivers — Many trucking firms and other companies require special, creative structures for owner-operators or users of equipment. We offer experience in this work.
Debt fundings and portfolio acquisitions — Clients sometimes make major changes or require assistance in transitions. We offer practical counsel as well as legal sophistication.
Mixed goods and services transactions — Bundled transactions combining services and equipment financing are particularly challenging. We offer creative solutions to protect the financer as well as advice to vendors.
Gas compression equipment — We have represented a key player in this niche.
Ambulances, fire engines and other municipal assets — Municipal and tax-exempt lessee leases present unique challenges, requiring creativity as well as experience.
Representation of bank, captive and independent equipment financers and lessors — Unlike many firms, we have experience representing many types of lessors and lenders, including vendor captives as well as banks and independent lessors.
Representation of funders and brokers in creating broker programs — With particular reference to small ticket and middle market financings, there is an active need for quality representation in protecting parties to brokered transactions. As former counsel to the national brokers’ association, we have unique sophistication in this area.
Computer, telecommunications and other high-tech equipment — The special needs of technology finance require counsel who have years of work in this practice niche. We have represented both value added resellers and finance companies as well as users and vendors.
Satellite transponders — What can we say? We did one!
Medical equipment, including CT scans and facilities — Probably the fastest-growing area of the business throughout the early 21st century. We have created per-click programs as well as traditional leases.
“Green” industry equipment — Energy-saving devices and items on the cutting edge often require creativity and our wide ranging experience give us the ability to provide solutions.