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Equipment Leasing

Equipment leasing is a fixed-income, self-liquidating, hard-asset, bond-alternative investment designed to generate sheltered, passive distributions that are fully sheltered the first six years and 30% sheltered thereafter. Unsheltered distributions can be further sheltered using passive losses from elsewhere.

Business Plan

Goal: Triple the equipment portfolio’s size by using 50% leverage and the reinvestment of undistributed cash from operations (i.e., self financing) so as to liquidate the portfolio in ten years and have residual value equal to 100% of one’s originally invested capital.

Assumption: 35% residual value of the equipment; 35% of 300% (leverage) =105% residual value.

Liquidity: Provides liquidity of one’s original investment minus distributions and tax benefits already received.

Types of Programs

	Recommended	Not Recommended
Assets	Multiple Assets Long-lived Equipment	Single Asset
Diversity	Multiple Industry Lessees Multiple Locations Multiple Types of Equipment	Single Industry Lessees
Credit Support	Creditworthy Lessees (75% Rated Investment Grade Lessees by Moody)	Questionable Credit Lessees
Lease Type	Combination of: Operating, Full-payout Leases (100% cost recovery), and High-payout Leases (90% cost recovery)	Operating Leases (Do not fully pay cost).
Leverage	Moderate (i.e., 50%) (Designed to be an income generator, not a tax shelter).	High (i.e., 80% +) (Designed to be a tax shelter).

Hedge Against Rising Interest Rates & Inflation

Leasing is a way to invest in the growth of the global economy for a CONTRACT-DRIVEN YIELD (vs. a market-driven yield) that is inversely correlated to financial (i.e., paper) assets. When inflation or rising interest rates, for example, erode bond and stock values, hard-assets--like equipment and real estate, normally increase in value.

Types of Leases

A hybrid combination of all three of these Triple-Net Lease types:

Operating Lease: Short term (i.e., 3-to-4 years) leases requiring active management and increased risk to re-lease the equipment and wherein the aggregate rental payments are less than the purchase price of the equipment. The monthly rental rate is greater for more income potential than for a full pay-out lease because the holding-period risk is less for the lessee. This is like leasing a car for 1 year vs. 3-to-5 years.
Full Pay-Out Lease (i.e., recommended offerings): Long-term leases (10+ years) requiring rental payments greater than the cost of the equipment (but less per month than an operating lease) and not requiring active management or re-leasing of the equipment.
High Pay-Out Lease: An operating-type lease that recovers at least 90% of the equipment’s cost.

“Triple-Net Lease” means the lessee pays the taxes, insurance and maintenance costs. A “Hell-and-High-Water Lease” means the lessee must pay the lease rate in any event - whether they use the equipment or not. No equipment is acquired without a signed, Triple-Net, “Hell-and-High-Water” lease in place beforehand.

Lease Terms

Lessee pays for COMPREHENSIVE INSURANCE (including fire, liability and extended warranty coverage) and to assume the risk of loss of the equipment, whether or not insured, including acts of God or war.

Lessees will indemnify and hold the Partnership harmless from and against any and all claims, costs, expenses, damages, losses and liability.

Tax Effect

All gain on the disposition of equipment, if any, will be taxed because of the depreciation recapture rules... unless otherwise sheltered with passive deductions or credits from elsewhere.

The only item of AMT adjustment is the excess of accelerated depreciation claimed on MACRS property over the straight-line depreciation of the 150% declining balance method until switching to straight-line when it would produce a larger deduction.

Risks

Decrease in interest rates could erode value of current leases
Changes in tax laws
No secondary market
Technology advances rendering current equipment obsolete
The use of leverage may magnify losses from a non performing asset

No Capital Calls

An investor’s liability is limited to their original capital contribution

Opinion

“Leasing programs should be 15% of all optimized portfolios to counteract market-driven financial assets.” Financial Planning Magazine (April 1994).