While not a new idea, a sale and lease-back transaction — where the owner of an asset sells the asset and then leases it back from the buyer — might make sense for some fleets today. The transaction functions as a loan, with the payment taking the form of a “rent.” The lease arrangement is made immediately on completion of the sale, defining the term and payment amounts.
Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor. A lease-back arrangement is useful when companies need the asset in order to operate but also want to free up cash for other investments.
Here are some examples of when a purchase and lease-back arrangement makes sense for companies:
When new truck sales hit a record pace and used inventory is still low, a company may want to consider a purchase lease-back. Exiting the asset while the market is still solid is a way to manage total operating costs prior to a used truck market correction, and reduces residual risk.
If Company A purchases Company B, which has assets on full-service leases, but Company A did not want the full-service lease structure because it it has its own maintenance shops. A purchase lease-back can be structured, with the equipment purchased and then leased back to Company A, effectively eliminating the operational problem with outsourcing maintenance.
Through various acquisitions, a company ends up with assets covered under a hodgepodge of financing programs, such as full-service leasing, fair-market value leasing, and a terminal rental adjustment clause (TRAC) lease. The company can use purchase lease-back to consolidate all of the financing under one structure that's best for the company's goals.
An acquiring company may find that some of the assets it acquired do not fit its trade cycle. Using purchase lease-back, assets deemed too old can be disposed of, the fleet refreshed, and the average age of the fleet brought down.
In today’s market, if a company picks up a great deal of new business and needs more equipment, given order board backlogs, it would be next to impossible to get new equipment soon enough. A company may have to buy used equipment to meet the demands of its new customers. Using a purchase lease-back, the terms of the lease on the used equipment could be set up to coincide with the delivery of new trucks when they become available.
While purchase lease-back has value in these and other scenarios, it does not always make sense. If it is going to be too expensive to buy out an asset and write it down to an acceptable residual in the identified disposal period, then purchase lease-back is not a good option. Also, if interest rates spike to 8% or 9%, then the math doesn’t work for a purchase lease-back. because it would be too expensive to refinance the asset.
Ultimately, purchase lease-back can help fleets with the life cycle management of their assets. For example, if a fleet has assets that range from six years old down to one year old, and has a target five-year replacement cycle with a purchase lease back, this is what would happen:
The six-year-old assets would be sold
Short-term leases would be put in place for the assets that are four to five years old
Five-year leases would be put in place for assets that are one year or newer
New equipment would be brought in to replace the six-year-old assets
The end result is the fleet now has set up asset replacement cycles that are in-line with their goals and offer an immediate cash savings.
Today’s market conditions make purchase lease-back an attractive option for some fleets, whether they need an infusion of cash, are trying to solve an operation issue, insulate themselves from negative swings in residual value, or are trying to achieve asset life-cycle goals.
About the Authors: Patrick Gaskins is senior vice president of sales and operations, Capital Equipment Solutions, for Corcentric (formerly AmeriQuest Business Services). He has over 25 years of experience as a financial services professional in the transportation industry. Mike Hamilton is senior vice president of Sales, Capital Equipment Solutions, for Corcentric. He has over 38 years of experience as a financial services professional in the transportation industry and has been with Corcentric since 2008.
This article was authored and edited under the guidance, style, and standards of HDT’s editors to provide useful information to our readers.
