Lease/Purchase
Products for
Governmental
Agencies
PARTNERING FOR SUCCESS
Bob Chapple/Karen McManus
Caterpillar Financial Services Corporation
Agenda
•Tax Leases/Governmental Lease Purchase – Bob
Chapple
•Lease vs. Buy – Karen McManus
Tax Leases
When Applicable
•
•
•
•
•
Looking for long-term rental
Off Balance Sheet Treatment
Increase Bonding Capacity
Improve Cash Flow/Working Capital
Manage Equipment Owning and Operating
Cost
Limitations
•
•
•
•
Stronger credit customers
Limited Early Payoff
Customer Responsible for PPT
No Equity Buildup
• No Down Payment or Trade Equity
FMV Lease
•
•
•
•
•
Operating Lease/Long Term Rental
Lowest Possible Monthly Payment
Terms 24-60 Months
Tax benefit retained by Lessor
Purchase for FMV at end of lease term, Rent
month to month or
• Return to CFSC in the condition as spelled
out in the Application Survey
CVO Lease
• Same Benefits as FMV
• Predetermined purchase option at end of
lease term
• Purchase or Finance Option
• At end of lease term can return to CFSC or
rent month to month but option reverts to
FMV
Window Lease
• Provides benefits of CVO and FMV Lease but
with Early Purchase Option(EPO)
• Flexibility to purchase asset at predetermined
date(s)/option amount(s)
• Minimum EPO term of 24 months – 12-month
intervals
Lease Comparisons
336DL, amount to Finance $225,000.00, 48 month term
Payment
Implicit Rate
Option
FMV
$3,220.33
5.75%
FMV
CVO 24 Month EPO
$3,252.86
$3,252.86
5.75%
5.75%
$113,400.00 $167,000.00
48 month CVO with a 24 month EPO
•Should customer not exercise EPO, end of term option is same as CVO
•Customer rate is quoted as an implicit rate; interest rate implies ownership
•Typically CVO payment is 1% higher than comparable FMV
Governmental Lease Purchase
Governmental Lease Purchase
>Benefits:
•Provides below market interest
rates
•100% financing available to
qualified customers
•Ability to cancel contract without
penalty (on the last day of the
appropriations period), if funding is
not approved for the following year
> Length:
•24-120 months
> Purchase Option Alternatives:
•Binding purchase at a predetermined amount
•Trade with dealer based on predetermined
buyback set forth by the dealer
> Tax Benefits:
•Retained by Lessor. Savings are passed on
to customer through lower interest rates
> Payment flexibility:
•Monthly, quarterly, semi-annual, and annual
payments are available
Key Point: May choose CFSC balloon as low as $1 or a Dealer balloon of up to 100%
of the dealer buyback (will require a copy of the dealer’s buyback arrangement with the
Muni customer). Non-appropriations clause applies.
Additional Documents
Governmental Lease-Purchase Agreement
Additional Documents
Opinion of Counsel
Request for Minutes
8038G
Lessee’s Authorizing Resolution
Governmental Solutions
Lease v. Buy
BUY
• Pay cash or finance price over a period of
time
• You are the owner of the equipment
• At some point you look to trade-in or sell
• Non-Appropriations Clause
LEASE
• Pay for use of equipment over period of
time with option to buy at end of term
• The leasing/finance company is the
owner of the machine
• At the end of the lease you look to
return and replace equipment or buy it
• Non-Appropriations Clause
ADVANTAGES
Lease
•
•
•
•
Cash Flow?
Control Maint. Costs?
Flexibility?
Total Ownership Cost?
Buy
-ExampleNeed a Grader?
• Sale Price of $186,000
• 5 year lease vs purchase (60 month
term)
• 1200-1500 hours usage per year
CASH FLOW
EXPENDITURE
$186,000
CAT Motor Grader (1,500 hrs per yr)
$200,000
$160,000
$120,000
$41,358
$80,000
$24,840
$40,000
$0
Cash (1yr)
Finance (5yr)
Lease (5yr)
CASH FLOW
Finance vs. Lease
CAT Motor Grader (1,500 hrs per yr)
$200,000
$160,000
$105,264
Option
+
Final Lease
Payment of
$24,840
$41,358 finance
$120,000
$80,000
$40,000
$1
2
$24,840 lease
3
Year
4
5
ADVANTAGES
Lease
•
•
•
•
Cash Flow?
X
Control Maint. Costs?
Flexibility?
Total Ownership Cost?
Buy
CONTROL MAINTENANCE COSTS
COST PER HOUR
$80
$60
$70.74*
CAT Motor Grader (1,500 hrs per yr)
CAT Motor Grader (1,500 hrs per yr)
$40
$20
$0
1
2
3
4
5
6
YEAR
LEASE COST
MAINT. COST
*Maintenance fee may vary by Dealership
CONTROL MAINTENANCE COSTS
PACKAGED SOLUTIONS
• Match warranty with the term of the
lease
• Add in service agreements from the
Dealer to budget maintenance & repair
costs
Warranty
• Bid a maximum repair cost for termCSA
ADVANTAGES
Lease
•
•
•
•
Cash Flow?
Control Maint. Costs?
Flexibility?
Total Ownership Cost?
X
X
Buy
FLEXIBILITY
Leasing
1. Return equipment to dealership at end of
term
2. Replace with New equipment
3. Purchase or refinance machine
3. Look to profit from reselling equipment
for higher
than committed return option
Finance (Purchase)
1. Have to trade-in or resell equipment
ADVANTAGES
Lease
•
•
•
•
X
Cash Flow?
Control Maint. Costs? X
X
Flexibility?
Total Ownership Cost?
Buy
TOTAL COST
TOTAL COST OF OWNERSHIP
CAT Motor Grader (1,500 hrs per yr)
$250,000
$200,000
$228,546
$186,000
$206,790
$150,000
$100,000
$50,000
$Cash
Finance (5yr)
Lease (5yr)
ADVANTAGES
Lease
•
•
•
•
X
Cash Flow?
Control Maint. Costs? X
X
Flexibility?
Total Ownership Cost?
Buy
X
ISSUES
• Option/Residual represents Fair Market Value
• Calculate implied interest rate to make
sure it is reasonable
• Read return conditions carefully
(I.e. hourly usage, undercarriage/tire wear
requirements, etc.)
Benefits
•
•
•
•
•
•
•
•
•
Leasing preserves cash flow
Leasing provides lowest total cost for equipment use
Leasing can help project and control maintenance costs
Leasing allows flexible ownership options
Leasing insures fleet is new and updated
Leases can be tailored to meet specific needs
Leasing eliminates residual risk
Leasing allows 100% financing
Provides planned equipment replacement of customer’s
fleet
• Leased equipment may not have to be bid (see state regs)