BUSRide spoke with a select group of financial thought leaders in the bus and motorcoach industry for a roundtable discussion about bus leasing essentials – when to lease, when to buy, and how to make sense of an increasingly complex topic.
Craig Lentzsch, executive chairman of All Aboard America! Holdings and former president and CEO of Greyhound Lines, Inc., moderated this high-level discussion with the following panelists:
Amanda Carter, national sales manager – Shuttle, School Bus & Coach, REV Group
Gregg Goedde, vice president, ABC Financial Services (a division of
Matthew Hotchkiss, vice president – Commercial Vehicle Group,
Wells Fargo Equipment Finance
Ed Kaye, partner, Access Commercial Capital LLC
David Scoular, director of financial services, Prevost
Craig Lentzsch: Please identify whether or not you currently have a lease product, either operating or capital, available in the marketplace for motorcoaches or smaller vehicles.
Gregg Goedde: We do offer all sorts of leases. TRAC leases, operating leases, FMVs, municipal leases and capital leases – ABC can do them all. I have 25 years of financing experience in the motorcoach industry. The last 22 years have been at ABC where I lead the Leasing Company.
Matt Hotchkiss: Within our commercial vehicle group at Wells Fargo Equipment Finance, we have a bus vertical, so we have six people that go directly to the bus industry – motorcoach, shuttle bus, school bus, and some other passenger transportation vehicles. We’ve been in the bus market at Wells Fargo for 15 years now. We offer TRAC leases, split TRAC leases, capital leases and, on a selective basis, we will do fair market value leases.
David Scoular: At Prevost, I make sure the customers have financing and leasing taken care of. I’ve been in the finance business for 25 years, and directly in the coach business for approximately 20 of those years. We can offer operating leases, capital leases, and loans on all coaches.
Amanda Carter: REV Financial Services is part of REV Group, a manufacturer of 27 different brands of transportation equipment. I am specifically siloed in the bus vertical. We do offer a wide range of leases. We are very much interested in fair market value leases, specifically for our brands, but we look at others as well. I have 20 years of experience in equipment financing with an emphasis in specialty vehicles.
Ed Kaye: We are a re-startup specialty finance company. I and my two partners each have about just less than 30 years of experience in specialty vehicle finance with a concentration in motorcoaches. My One of my partners, Eric Coolbaugh, focuses primarily on motorcoaches, but we also will finance any sort of transportation or livery vehicle for commercial purposes. We offer TRAC leases, operating leases and finance leases. We do not fund FMV leases. We also have a loan product, and we target the small market all the way up to the large coach operators in the United States only.
Lentzsch: Let’s start out with a little bit of an overview of the benefits of leasing versus buying.
Kaye: In the coach industry, in my opinion, there are certain benefits to leasing versus benefits to financing. It really depends on the size of the operator and the coach that they are trying to acquire. One of the benefits is that you can get 100 percent financing. That’s a common benefit that’s often discussed or thrown out there, but the reality is that you can also get 100 percent financing for a loan. An additional benefit arises if you have a predictable payment stream throughout the life of the lease – for that I recommend that readers consult with their accountants.
There could be some tax benefits. Certainly, if there’s a predictable payment stream, and typically on a lease with a reputable lessor, you’re going to know what your options are at the end of the lease. You can either buy it at a fixed price or fair market value price, or you may be able to walk away from it if it doesn’t fit your needs. Basically, the benefits in my opinion are really determined by the coach itself and the customer’s financial priorities.
Carter: It really comes down to what is going to benefit the operator. Do they have a specific contract that is driving the purchase? If so, we can suggest a structure (term) that matches the contract so that their expenses are aligned with the contract’s revenue stream. At REV, the fair market value lease is really where our customers realize a significant cost savings benefit because we’re able to tailor that payment to match their budget. Our dealer network is interested in getting the equipment back at the end of the term, which allows us to provide them the most aggressive FMV structure and manageable payments.
Lentzsch: That makes that product particularly good for contract situations – three year, four-year, and five-year operating contracts where you match your liability to the revenue stream from the contract – then you can walk away at the end, so you really know what you’re going to make in a contract.
Carter: Exactly, so they’re able to tailor that expense with
Scoular: FMVs are great for contracted business. When you need to get out of the coach or replace it, or replace the shuttle bus in their position, those are great times for the FMVs. After being in the finance business for 20 plus years, we’ve seen a lot of change. When we first started, loans and leases were really different. I think now it’s blurred a little bit because you can do 100 percent financing on a loan basis nowadays. Some of the benefits between lease and loan are kind of blurred. The big benefit, obviously, is if you’ve already used up all your depreciation benefit on a loan basis in purchasing, you can still get a coach before the end of the year at a lower monthly payment. You still have the opportunity to do that. You just passed a depreciation benefit back to the banks and the leasing companies, but you can benefit with the lower payment. The FMV operating leases are definitely good for contracted type business. It matches up well.
Lentzsch: On a motorcoach lease, let’s just pull a number, say seven years in with normal residual value, what kind of difference in cost is there due to the tax benefits?
Scoular: Obviously, as you get later into the year, that number increases from 65 basis points to, by the end of the year, probably 150 – depending on the leasing company’s tax rate.
Lentzsch: Right, and it’s not necessarily a good idea for an operator to let that tell him or her when to take the equipment. But if an operator can take the equipment in the fourth quarter, they should be shopping around for somebody who’s got the tax benefits.
Hotchkiss: When we’re talking about leases, there are two very different kinds of leases an FMV and a TRAC lease. The motivation for each lease is different. Interest rate, is very important on a TRAC lease while payment – which is driven by the residual – is the driving factor on an FMV lease,
Occasionally I’ll see vendors go to market with an FMV product so they can get an operator to try out their product, so they’ll put it out on a one-, two- or a three- year operating lease. A TRAC lease is really a lease with the ultimate goal of owning the equipment where the finance company is taking the depreciation benefits. That depreciation benefit translates into significant cashflow savings on that financing. If you’re doing a TRAC lease versus doing a loan, you’re probably going to save around $20,000 over the term just in cashflow. Then, of course, you have to compare that to the additional tax you might be paying by passing the depreciation to the lender.
Scoular: In an operating lease, sometimes, for larger companies, you have capital expenditure issues. It’s a chance to use operating leases to get some new equipment versus doing it in TRAC leases, which is really a glorified loan. That’s where they use the operating leases to skirt the capital expenditure issue-sometimes in corporate accounts.
Goedde: I think there’s a little bit of a different approach that our company can and does take with leasing than the others. Being the only privately held distributor and seller of motorcoaches, we work under a different veil and are able to put a little bit more creativity in to what we do.
At ABC, we have our own leasing portfolio that we’re extremely flexible with. We bridge the gap for customers on short-term needs, helping them in particular situations. You could call it an FMV lease, but it’s a “hybrid lease” where we help our customers in their time of need.
When we look at financing a customer or when a customer comes to ABC, we have a very inclusive approach with them. We work with them very closely to help them determine what is best for their company. Is it better to have a TRAC lease that helps monthly cashflow or does a loan and depreciation meet their company needs? We always work with the owners and their CPAs to find the best solutions.
Kaye: We do both new and used vehicles. The majority of the market is not the large, publicly held companies that are buying coaches. The majority of the market is small and middle market entities, and “mom and pop” operators that have one and two units across the country, and those customers have unique needs. ABC is excellent at helping those customers get into product. We try to assist them when we can, as well. Typically, those customers are looking for the most affordable rate that fits into their budget to operate one or two units.
Lentzsch: What is the best way to produce a lease versus
Goedde: At ABC, one of the first things we do is look at the customer’s current fleet, where they’re at in their depreciation currently, and what they have left to depreciate on their existing fleet. We look at what is leased, and what is loaned. I really like to see where they’re at today and where they’re going to be tomorrow, and then couple that with, “Where’s their business going? Where’s their current and future profitability?”
Is it a cashflow or depreciation factor and which of those will fit best for them in the future? I’d like to say that I have a magical formula to figure that out. But as we all know, we work with a variety of customers with varied sophistication in their financial statements, so it can be tricky to really put a hard number on that.
Scoular: We’ve all been in the credit side. You just have to put your credit hat on, and you don’t play accountant, but you kind of play accountant, in your own sort of way. You just have to look and see where they are and what you think they might need. At the end, you go back to them, and let the accountants help dictate a little bit of that too. Those are the guys that are going to have to answer the questions at the end of the year when the tax orders show up. You do some basic analysis of where they are and their frames of depreciation.
Hotchkiss: My simple answer to that is always this: if you don’t need accelerated depreciation, let the finance company take it and get the benefit of that accelerated tax deduction through a lower interest rate. You really have to have your CPA or tax advisor do forward projections on where you’re going to save the most money. Is it going to be on a TRAC lease or is it going to be on taking that accelerated depreciation?
Scoular: I’m guessing we’re going to assume that we’re matching term for loa , like 84 20 leases, because the flip side of it is what are you going to do with the coach at the end of the term? What’s your plan with being a coach? Because if you’re going to buy, there may be sales tax issues coming at the end on a lease versus a loan. You also need to know what you’re doing at the end. Assuming we’re all talking about the same kind of structures on a lower lease basis.
Lentzsch: Allow me make a quick summary here. First of all, being the finance guy in the room, basically you want to do the analysis based upon future after-tax cashflows each way. Secondly, what is the residual value or the realizable value of the coach at the end after tax? This may include recapture if it’s a loan. Then finally, I would discount those cashflows at the marginal costs or incremental costs of borrowing, not at the costs of capital because it’s a financing decision.
What’s the optimal structure for a motorcoach operator’s equipment lease? That’s kind of a loaded question.
Carter: The most requested term I’ve seen since joining REV is the 84/20 structure, be it a loan or a TRAC (again dependent upon what tax structure best benefits the customer). Some customers provide longer runs with significantly higher annual mileage requirements, so we sometimes scale to a shorter 72- or even 60- month term.
Hotchkiss: I take the conservative approach when I advise my clients on this question regardless if it’s a lease or a loan. That is the shortest term possible that you’re comfortable with from a cashflow perspective. Just like your mortgage, the longer you finance a product, the more interest you’re going to pay over the term of that contract. 84 months to a 20 percent residual or balloon is a typical structure for a motorcoach, but if an operator can get away with 72 months instead and they’re still comfortable from a cashflow perspective, then I think that’s the best way to go. They are saving money and they are going to own assets free and clear sooner. That will ultimately contribute significantly to cashflow and will help them build a stronger balance sheet. It’s going to give them the ability to liquidate if they ever need to do that, so from my conservative thinking, that’s how they should think about how they finance their equipment.
Scoular: If their cashflow can handle a shorter term, that’s the best way to go. I mean, it really comes down to cashflow comfort from a customer standpoint.
Kaye: We’ll do 84 to a 20 percent residual, but we’ll also do that on nearly new coaches and on some used coaches as well. The older the coach, obviously the shorter the term, and also the lower the residual at the end for the loan or lease. We try to make a decision on what works best for the customer’s cashflow so that they’ll be able to afford the monthly payment.
Goedde: From our side at ABC, we, again, given that we have our own portfolio try to be conservative and flexible in our approach. Lenders need to be accurate in their approach. Structures and terms should be based on credit, geographic region, specifications on the coach, mileage, etc. Each of these items affects the future value of the coach and need to be taken into consideration when determining terms and structure.
We even get to the point where we understand our customer’s maintenance profile. What condition of coach are we going to get at the end? At some point in the term operators want to be able to get into upgraded equipment. If we don’t structure it right up front, they’re not going to be able to do that.
Lentzsch: Mileage and maintenance. Do you have mileage limits in your leases and do you have detailed maintenance standards or do you just go with ordinary wear and tear?
Kaye: On most leases we don’t have a mileage restriction just because it’s not market. Unless, that is, it’s for a specific contract where the lessee will tell us up front that they’re only going to operate the coach for X amount of miles per year, and we negotiate a price accordingly. Generally, there’s no mileage restriction on any coach leases that we fund, similar to the loan product. With respect to maintenance, we have a general maintenance clause in our documentation. We found after 2008, maintenance was a real issue, particularly for small, medium-size operators. It severely impacted the value of the coaches, so we’ve tightened up some of the language in our contract regarding maintenance and it gives us the right to inspect the collateral. This is if we have an inkling that something’s going on with the company, and we decide we need to go in there and make sure that the vehicles are being maintained. Maintenance is critical to us, and when we can, we like to go visit our customers and kick the tires and make sure the coaches are operating the way they’re intended to.
Scoular: If I’m doing true operating leases, then yes, mileage is important. There are mileage clauses as well as maintenance standards that we will adjust for a true operating lease. On a typical track lease, tax lease, we aren’t as concerned. Maybe if it’s a line run operator, we might still try to put something in it, but typically, no. It’s really strictly for the true operating lease.
Hotchkiss: If we’re doing a fair market value lease, we will use mileage restrictions and we’ll have a pretty detailed return provision in the lease. However, we typically only do fair market value leases in conjunction with a vendor, so we share in the backside risk with the vendor, and we let the vendor dictate what those terms would look like.
Carter: Annual mileage allowances and maintenance addendums apply to FMV Leases but not TRACs, lease purchases or loans. However, we work with each individual customer to tailor the product to best fit their needs, so the stated allowance varies.
Lentzsch: By the way, the fleet and the character of the fleet is very significant. Are there any particular types of vehicles that you would recommend leasing as opposed to buying?
Scoular: This probably goes more to the shuttle bus stuff because it doesn’t hold its value as well as the coach side. It’s always the U-Haul with the seats versus the coaches. If I’m going to lease something, it’s going to be more of a shuttle bus type thing that I’m going to get in and out of and need to upgrade it a little sooner, because the longevity is not the same as a coach.
Carter: A FMV on a high mileage/heavy usage vehicle is not particularly advantageous for the customer.
Kaye: Let’s understand what we’re talking about here. Leasing is just a financing tool, basically a target. There are very few leases you can just walk away from in commercial transportation.
Goedde: I agree. I think from time to time, a little bit too much emphasis is put on leasing versus buying. For cars you can either get a Ford Taurus for a 36-month walk away lease or pay for it on a five year loan. It’s not quite that simple on the motorcoach side. Banks and manufacturers don’t just take buses back in three years and run them through an auction like cars. It’s a different market. It’s a different mentality. I think the lease versus loan determination becomes more about the use of the equipment and the operator’s effect on taxes. Again, it depends what the operator is trying to accomplish; cashflow or tax savings? On the commercial side you don’t walk away in three years, like on a Ford Taurus. Actually, the obligations throughout the term don’t change a whole lot between a TRAC lease and loan from a commitment side.
Lentzsch: Fundamentally then, it’s not a type of vehicle; it is what the use of the vehicle is going to be, although there may be a slight bias toward the small vehicles for leasing versus financing. Still, fundamentally it depends on the use of the vehicle.
Are there any considerations for an operator that hasn’t leased before to start to do some leasing? Anything in particular they need to be concerned about? Are there any transitional issues?
Goedde: I do a lot of leases just due to geographic location of the customer. In a sales tax state, it’s important to consider a lease to mitigate the upfront sales tax. Sales tax is typically in the 6% range upfront, which is a large expense. By leasing, operators can usually reduce this upfront cost by paying it as monthly rental tax over the time they lease the motorcoach. The state tax basis is a huge driver of whether it’s a lease or a loan.
Hotchkiss: Well, I think part of your question is when it makes sense for a customer to transition from doing traditional loans to TRAC lease or other type of lease. The main consideration is if they’re replacing a vehicle that was on a loan which has been depreciated down below the trade value. If they have, then they have a potential capital gain tax that they have to deal with. If they switch to a TRAC lease, they’re going to have to pay that capital gain tax. If they do a like exchange on another loan, they don’t have to pay it, so if you’re replacing vehicles on a loan, it probably doesn’t make sense to replace them with a TRAC lease. If you’re adding vehicles, that’s probably the time to do it. That’s a better transition point.
Lentzsch: Do you do any leasing to transit agencies? In essence, public-owned, publically operated entities?
Hotchkiss: We do municipal leases, but not necessarily to transit agencies. They rarely have a need because they use federal funds to pay cash for their vehicles. We do a lot of municipal leases to school districts on school buses, however. We also finance motorcoaches on a municipal lease to colleges and universities on occasion. Obviously, that’s a tax-exempt interest deal, so the interest rates are considerably lower.
Carter: REV provides both FMV (walk away) and TELP (tax exempt lease purchase) solutions for transit agencies.