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1. Proposed Environmental Diligence Rules Set Trap for the Unwary
The Environmental Protection Agency (EPA) has
proposed tough new rules that prescribe environmental diligence required to protect purchasers of contaminated property from liability under the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA). See:
42 U.S.C. 9601 et seq. (1980).
*Term to Know : CERCLA is commonly known as
Superfund. Congress enacted CERCLA on December 11, 1980 and renewed it in 1986.
CERCLA provides federal authority to respond to releases or threatened releases of hazardous substances that may endanger public health or the environment. The EPA has the authority to require certain potentially responsible parties to engage in short-term removal of contamination and long-term remediation work at sites on a
National Priority List (NPL). The NPL is an informational list of national priorities among the known releases or threatened releases of hazardous substances, pollutants, or contaminants throughout the United States and its territories.
Impact of Rules
If adopted, the proposed rules will affect virtually every commercial sale or development of real estate in the United States, as well as many related lease transactions. It will require that developers, lenders and lessors of power projects, facility leases and commercial real estate transactions, among others, will have to make all appropriate inquiry for purposes of CERCLA. See:
40 C.F.R. Part 312.
More than 200 comments have been filed with the EPA as of November 17, and the
extended comment period ended November 30, 2004.
*Warning: Unless a purchaser of contaminated real estate strictly complies with these rules, the purchaser may find itself strictly liable for costly cleanup, as the owner of property where a "release or threat of release" of hazardous substances occurs or has occurred in the past.
Controversial Issues
The new rules contain several controversial provisions. They include:
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the scope and requirements of the definition of "environmental professional," in terms of experience, education and professional specialty, as well as a "grandfather" clause for some of those currently practicing in the field, under Section 312.10;
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when, how long and under what circumstances purchasers can rely on environmental assessment work by third parties, under Section 312.20(b), (c);
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EPA’s insistence on using inspection procedures distinct from the
ASTM standards even though federal law requires federal agencies to adopt consensus and industry standards where reasonably possible;
whether the rule provides enough certainty of a defense for purchasers who follow these standards; and
whether the rule will simply force people to physically sample many more properties as a matter of course, increasing the cost and time to economically develop a project. The rule’s emphasis on documenting "data gaps" under Section 312.21(c)(2) may make such sampling the wisest course, especially in transactions where time is of the essence.
*Tip: Compliance with the new rules does not address other important environmental issues affecting real estate, such as the presence of jurisdictional wetlands, and the presence of lead paint, lead pipe, asbestos insulation or tile, and natural radon among other costly concerns. While these other points may not matter from a Superfund perspective, they may make or break a leasing or financing deal. Evaluate all of these issues carefully.
Superfund Defenses - Impact on Transactions
Superfund liability concerns have slowed or stopped many commercial and industrial property transactions since the mid-1980s. In the January 2002 CERCLA amendments, Congress codified or revised defenses to Superfund liability for three classes of property owners:
1. "innocent purchasers" of property under Sections 101(35)(A) and 107(b)(3) of CERCLA,
42 U.S.C. Section 9601(35)(A); and
42 U.S.C. Section 9607(b)(3);
2. "bona fide prospective purchasers" of property under
Sections 101(40) and 107(r) of CERCLA,
42 U.S.C. Section 9607(r);
3. owners of "contiguous property" under Section 107(q) of CERCLA,
42 U.S.C. Section 9607(q).
All three defenses require the owner to have undertaken AAI under Section 101(35) of CERCLA, 42 U.S.C. Section 9601(35).
*Technical Point: EPA must issue rules further defining what AAI means, beginning with 10 statutory factors relating to appropriate investigations of environmental conditions. See: Section 101(35)(B)(iii) of CERCLA,
42 U.S.C. Section 9601(35)(B)(iii).
Steps to Take in Preparation for New Rule
In preparation for the new rule, developers, lessors, lenders, and other real estate professionals should consider taking the following steps:
1. Assure that any environmental consultant on whom you rely meets the definition of "environmental professional" under Section 312.1.
*Warning: Some professionals will not qualify and you should consider other environmental consultants who meet the EPA criteria. For example, a controversy exists over whether architects or personnel certified by the Academy of Certified Hazardous Materials Managers will be considered "environmental professionals."
2. Avoid stale reports prepared for other parties. Developers under pressure to hold down transaction costs may rely on reports issued to third parties.
*Warning: As a lender or lessor, do not rely on reports issued to other persons such as a prior owner or developer. Require that reports be addressed to you and that you update each report to a date as near as feasible to your closing date. A report over six months old is suspect unless updated. The new rule may not provide statutory protection if the old work was wrong or is outdated. See: Section 312.20(b), (c). The update costs may be significant, but well worth the higher level of certainty that the report qualifies you as a lender for statutory protection.
3. Consider sampling of suspect property early in negotiations.
The rule requires more documentation of data gaps. These data gaps arise frequently when the parties in interest possess only incomplete, old records and have unreliable witness interviews.
*Tip: Commercial parties may start due diligence studies late in negotiations because they don’t want to pay for studies until they agree on commercial terms. See: Section 312.21(c)(2). If you face a compressed time period to close your deal, plan to sample as a matter of course. Such action could save you weeks of delay.
4. Check
real property lease language to require tenant cooperation with on-site visual inspections under Section 312.27 and with interviews of current and former occupants of the property in question under Section 312.23(b). If multiple tenants occupy the property, the "major occupants" must be interviewed, as well as those "occupants likely to use, store, treat, handle or dispose of hazardous substances, pollutants, contaminants, petroleum and petroleum products and controlled substances [drugs] or those who have likely done so in the past." For example, at a strip shopping mall, these occupants would include dry cleaners, photofinishers and auto repair shops, as well as large anchor tenants.
*Warning: If no inspection takes place, then the due diligence probably does not constitute all appropriate inspection or AAI under the rule and the purchaser may receive no liability protection from CERCLA. The mere refusal of a voluntary seller to provide access to the subject property does NOT constitute an unusual circumstance warranting waiver of the visual inspection requirement, so tenant cooperation is crucial. See: Section 312.27(c).
In drafting lease language and in reviewing lease renewals, those responsible for these leases should help assure that the leases require tenants to cooperate with environmental professionals in conducting their due diligence. Otherwise, an ordinary tenant may block a sale of valuable property. From the tenant’s perspective, it must have the right under its lease to demand that any outside consultant entering the property comply fully with trade secrecy, national security, worker safety, minimal business interruption rules and other legitimate obligations.
5. Accept
no inconsistencies between appraisals and environmental statements affecting property values or provide reasonable explanations. Any deviation between the two sources of information on property values may require prospective purchasers to consider whether the purchase price of the subject property reasonably reflects the fair market value of the property, if the property were not contaminated. See: Section 312.29(a). A lower purchase price and fair market value may be appropriate due to the presence of hazardous substances. See: Section 312.29(b).
*Tip: This consideration should be documented. In other words, if the purchaser negotiates too low a purchase price that might raise factual issues under the rule about whether undisclosed contamination exists.
The EPA has promulgated a controversial rule that greatly expands the concept of all appropriate inquiry under CERCLA. If adopted, after consideration of hundreds of comments, real estate, project development, leasing and lending professionals will have to take extra steps to meet the new tighter due diligence requirements set forth in the new rule. These requirements create unexpected pitfalls for project and transaction documents, real estate appraisals, reliance on third-party environmental reports, sampling of contaminated land, and current environmental consulting relationships. An era of higher environmental due diligence now appears imminent, and no one who holds a stake in environmentally sensitive projects will be exempt.
I would like to thank
Russ Randle, one of Patton Boggs’ environmental partners, for contributing this article.
2. U.S. Ratifies Cape Town Convention
After
clearing the U.S. Senate last summer, the U.S. finally completed a 10-year effort to encourage worldwide investment in aircraft equipment. It did so at the end of October 2004 by formally ratifying the
Cape Town Convention. The treaty establishes a comprehensive international framework to protect security and leasing interests in international registration of aircraft, engines and helicopters.
The Wall Street Journal summarizes the value of the treaty as follows: "In a nutshell, the so-called Cape Town Convention will make it easier for creditors to call in the repo man, even when the plane is located in some countries where that is an impossibility now. The protections it offers likely will attract more capital …." See: Global Treaty Aims to Reduce Risk of Investments in Jetliners, The Wall Street Journal (S.W. Ed.), Page C:2, Col. 1 (Nov. 15, 2004).
Even though the significance Cape Town Convention has not hit the radar of many leasing and finance companies, 29 countries have signed the treaty. Five countries have ratified the treaty, including the U.S. The Cape Town Convention " enters into force" when eight countries ratify it. The U.S. action could spur the ratification by other countries, which can’t come soon enough for the airline manufacturers and volume-hungry lessors and lenders.
*Tip: Showing its support for the Cape Town Convention,
Export-Import Bank of the United States continues to offer a
one-third reduction of its exposure fee (in connection with approvals issued through September 30, 2005), to any buyer in a foreign country that has signed, ratified and implemented the treaty and the related aircraft protocol (including certain optional provisions). See:
Exim Bank Promotes Ratification of Cape Town Convention,
Business Leasing News (March 2003). The Export-Import Bank supports the financing of U.S. goods and services by assuming credit and country risks that the private sector is unable or unwilling to accept.
Interested parties have promoted the Cape Town Convention. As countries consider ratifying the treaty, more advocacy can be expected. For example, the
American Chamber of Commerce European Union issued a position paper last summer in support of the treaty. It wrote: "Cape Town will provide economic benefits to a wide range of European interests—airlines, manufacturers and their suppliers, passengers and investors. In short, prompt European action on Cape Town will enhance European competitiveness in the aerospace sector. It will also ensure the EU acts in parallel with other nations, including the US…."
Lessors and lenders have hesitantly invested in aircraft assets for some time due to difficult economic conditions for airlines. For general aviation, the markets have begun to pick up and offer considerable potential in the next seven years. See:
Dynamic Growth Projected for Business Aircraft, BLN Article 3.
For both airlines and general aviation, the Cape Town Convention promises to help answer a question that U.S. investors often ask: Can I get my aircraft back in a default? If the treaty works as expected, the answer may finally be a resounding "Yes," leading to increased investment and growth of aviation interests worldwide.
3.
Dynamic Growth Projected for Business
Aircraft
It has taken years for business aviation to shake off the doldrums and at least two years to ignite sustainable growth. Some experts now believe that business aviation is poised for explosive growth over the next seven years. See:
Corporate jets make a comeback,
USA Today, by Chris Woodyard, Page 3B, Col. 2 (Nov. 11, 2004)
In its November Business Jet Monthly report, UBS Investment Research said:
Our Business Jet Market Index came in near an all-time high in November, indicating that the business jet recovery is very much alive and well. The index rose to 65, with a score greater than 50 representing incremental strengthening conditions. Respondents noted an improved pricing environment as well as increased customer interest, although high inventories remain a negative. …[W]e remain positive on the business jet recovery and …believe of all the areas within commercial aerospace, the business jet market is likely to recover earliest and with the steepest trajectory. See: Page 3 of Report (by subscription only).
According to
Forecast International, manufacturers will increase the number of
business jet deliveries percent between 2004 and 2011. Manufacturers report a backlog of 1,500 aircraft, thanks largely to the fractional share programs that consume about 40 percent of the new aircraft. The
fractional programs sell shares from 1/16 to 1/2 undivided interest of an aircraft that entitles the owner to commensurate use of the purchased aircraft or others like it. See:
Market Remains Strong for Aviation Turboprops, Forecast International Press Release (Oct. 21, 2004).
The
General Aviation Manufacturers Association reported that sales have increased 10 percent this year over last year with deliveries of 392 new jets as of mid-November. See:
General Aviation’s Strong Recovery Continues, GAMA Press Release (Oct. 28, 2004).
Time has a way of healing wounds and dissipating guilt. After the alleged corporate abuses of the past few years, executives now feel less concerned about using corporate jets. While some people see them as executive toys, corporate jets improve productivity, maintain executive availability and minimize travel time for executives.
Bonus depreciation has made acquisitions of jets more attractive by speeding up the deductions associated with purchases or leases of business aircraft, driving down the cost and improving near-term cash flow.
Tip:
Bonus depreciation expires for most assets December 31, 2004, but certain corporate aircraft remain eligible for another year thereafter. See:
Bonus Depreciation Expires Soon Except for Qualified Aircraft, Business Leasing News (Oct. 2004). Although bonus depreciation encourages acquisitions of aircraft, the Jobs Creation Act of 2004 may have somewhat offset that incentive by cutting back the amount of deductions a company can take when its corporate executives uses the company plane for personal reasons. See:
Case & Comment:
Jobs Act Ends Sutherland Lumber Aircraft Deductions,
Business Leasing News (Nov. 2004).
With an array of different jets available in or coming to market, including an emerging class of " very light jets" or
VLJs, business travel is becoming much more attractive and increasingly affordable for senior executives. Some of the VLJs will cost less than $1.5 million and travel a high air speed. It now remains to be seen if the growth materializes and increases the deal volume of banks, leasing companies and other financial institutions that finance or lease the aircraft.
*Comment: Having spent a large portion of my time in financing and leasing business jets, I still see large amounts of money chasing few good deals (at least for large cabin aircraft). Margins remain extremely slim as competition for volume of large ticket transactions continues to escalate. Yet, I see many players making their numbers in 2004 by syndicating transactions, completing smaller transactions, increasing cross-border transactions and moving down market in credit exposure. With such strong projections for growth, 2005 should surge to a new high in aviation sales, leasing and finance.
4.
Case & Comment: Stillwater v. CIT – Lender’s Security Interest Wins Over
Purported Sale to Lessor
In a contest for equipment sale proceeds, a bank with a first perfected security interest in equipment prevailed over a supposed purchaser of the equipment. The purchase constituted an unperfected secured loan to the seller by the lessor rather than a true sale of the equipment to the buyer. See:
Stillwater National Bank and Trust Company v. CIT Group/Equipment Financing, Inc., 10th Cir., Nos. 03-5087, 03-5088, 03-5123, 03-5136 (Sept. 13, 2004).
Facts:
This case involves an appeal from a District Court ruling that The CIT Group/Equipment Financing, Inc. (CIT) purchased equipment subject to a lease in the ordinary course of business, free of the perfected security interest of Stillwater National Bank and Trust Company (Lender). Lender entered into a security agreement with Sabre International, Inc. (Sabre) covering the equipment in dispute. Lender perfected its security interest by filing a financing statement. Sabre, as lessor, subsequently entered into a nine-month lease of the equipment with Preussag-Wasser und Rohrtechnik GmbH, as lessee (Lessee). Lessee had an option to purchase the equipment. Sabre assigned this lease to CIT and transferred title to CIT under a bill of sale. Sabre agreed that if Lessee defaulted or failed to purchase the equipment, Sabre would make the lease payments or purchase the equipment from CIT at a price equal to the "unpaid principal balance plus accrued interest." CIT apparently did not file any financing statements. CIT’s agreement with Sabre also stated that Sabre "hereby grants to Assignee (CIT) a security interest in the Subject Equipment." Lessee finished its lease and purchased some, but not all, of the equipment. CIT demanded that Sabre purchase the equipment, but Sabre did not do so, and ultimately filed for bankruptcy. In a lawsuit by Lender, CIT argued that, as the purchaser in the ordinary course of business, it should be entitled to proceeds derived by separate sale of the equipment by a court appointed receiver for Sabre. Lender argued that it had a prior perfected security interest in the equipment and should be entitled to the proceeds.
Issue: Did the agreement between Sabre, as owner/seller/borrower, with CIT, as the buyer/assignee, constitute a sale or a secured transaction?
Outcome: Reversing the District Court, the Appellate Court ruled that the arrangement between Sabre and CIT was a mere security interest and not a sale. The required repurchase obligation imposed on Sabre represented "a separate and independent secured transaction." As a consequence, the Lender won the right to the equipment proceeds because it filed and perfected its security interest before CIT entered into its unperfected secured transaction with Sabre. Had the court decided that CIT purchased the equipment, Lender would probably have lost its bid for the proceeds and CIT, as the owner, would have received such proceeds.
Law: The court said that
Article 9 of the Uniform Commercial Code (UCC) applied to the retention of title by CIT and the repurchase transaction between Sabre and CIT. Further, the sales rules of the UCC, Article 2, did not apply where the sale effectively provided in substance for a security interest. See:
UCC Section 2-102 and
UCC Section 2-401. Regardless of the intention of the parties, the court pointed out that, under Section 9-102 of the UCC, the substance of the transaction as a security interest controlled over the form of an assignment and sale. In sharp language, the Appellate Court said that the District Court ignored the substance of the deal and reversed its ruling.
*Comment: The courts tend to look closely at substance over form, trying to ascertain the true character of a transaction. When documents contain requirements that may evidence a security interest, a related sale transaction could be disregarded and treated as part of a secured transaction, as occurred in this case. In any transaction involving a retention of title, lenders/buyers should consider the following:
the application of Article 9 to your transaction in consultation with counsel.
Conduct due diligence in any sale transaction that includes completing appropriate lien and title searches to identify any conflicting liens on the equipment to be purchased/financed.
Obtain a release of any such lien in writing and make appropriate UCC filings to clear the lien from the UCC record.
File a financing statement, at least on a precautionary basis, and express your intention in writing that the transaction is intended to be a sale, but should it constitute a security interest, then the UCC filing will be deemed to perfect the security interest. See:
UCC Section 9-505.
*Warning: Don’t accept form over substance. Expect a court to determine whether a purchase or lease transaction really constitutes a secured transaction. The Stillwater case illustrates that the scope of secured transaction law can reach beyond what a lessor may expect when structuring and documenting their transactions. Carefully analyze each transaction and take the steps to protect your interests, such as making routine UCC filings to avoid a loss or expensive dispute with respect to your transaction.
Thanks to our partner,
Jeff LeForce, a member of our Bankruptcy Group, for sending this case to me.
5. Leasing 101:
What is an
"Aircraft"?
Asking this question may seem silly—after all,
everyone knows what an aircraft is, right? Before you quickly say "yes," consider the answer to this question under the Federal Aviation Act of 1958, as amended,
49 U.S.C. 40101 et seq., (Public Law 85-726, 72 Stat. 749) (Act). The Act determines whether a secured party obtains a perfected security interest in a civil aircraft; so knowing exactly what an aircraft is may make the difference between having a perfected security interest or not.
An "aircraft'' means "any contrivance invented, used, or designed to navigate, or fly in, the air" under Section 49 U.S.C. 40102(a)(6). That seems simple enough; but where does the aircraft end and other components or collateral related to an aircraft begin? For secured lenders and lessors, this question is crucial to perfecting a security interest.
The term "aircraft" does not mean an "aircraft engine" or "propellers." Under Section 49 U.S.C. 40102(a)(7), an "aircraft engine" means "an engine used, or intended to be used, to propel an aircraft, including a part, appurtenance, and accessory of the engine, except a propeller." A "propeller'' includes a part, appurtenance, and accessory of a propeller under Section 49 U.S.C. 40102(a)(36). Finally, under Section 49 U.S.C. 1403(c), a "conveyance" refers to a bill of sale, contract of conditional sale, mortgage, assignment of mortgage or other instrument affecting title to, or interest in, property. Any grant of a security interest or lease constitutes a conveyance. For these definitions and more, see:
FAA Definitions.
A question about perfecting security in aircraft arose in the bankruptcy case, In re AvCentral, Inc., 289 B.R. 170 (Bankr. D. Kan. 2003). In that case, a secured creditor filed its security interest (for recordation) against a DC-9 aircraft with the Federal Aviation Administration (FAA). The twist was that the owner of an aircraft intended to "part out" the aircraft (that is, disassemble it and sell its parts as inventory). However, at the time of the transaction, the aircraft was still whole and was an "aircraft" subject to the filing requirements of Federal law. See: 49 USC § 44107(a)(1). The secured party made the proper filing under federal law at the FAA to perfect its security interest rather than under the Uniform Commercial Code (UCC). Why is that so? Article 9 of the UCC defers to federal law requirements for conveyances to perfect a security interest in civil aircraft. In other words, the Act exclusively controls the filing of conveyances against civil aircraft and preempts the effect of the UCC. See: UCC
Section 9-311(a)(1) (state law defers to federal law including the Act) and Section
49 U.S.C. 44107 and
49 CFR Part 49 (both on procedures for filing conveyances at the FAA). In the case In re AvCentral, compliance with the Act is equivalent to and replaces the need for a filing under Article 9 of the UCC. See:
Philko Aviation v. Shacket, 462 U.S. 406 (1983) (Act preempts state law).
*Tip: As a secured creditor (including a lessor in a disguised financing), a filing at the FAA may not perfect your security interests in all assets related to an aircraft. Rather, if the collateral is a "UCC asset", you must file in accordance with state law to perfect your security interest. For example, filing at the FAA will not perfect a security interest in books, logs and maintenance records, certain parts that are not accessions to the airframe and operational codes or other non-aircraft assets, such as fine china, furniture or high tech toys on board or related to an aircraft. Avoid making errors in deciding whether property is aircraft and non-aircraft collateral. As a precaution, file UCC financing statements and the "conveyance" documents at the FAA. Consult counsel to get this process right, including close evaluation of the nature of your collateral or other property, to determine the proper way to perfect your security interest in that collateral.
Thanks to our partner,
Jim Chadwick, the head of our Dallas Business Transactions Group, for sending the In re AvCentral case to me.
6.
BLN Briefs: StateTax Systems Obsolete; Colorado Passes Renewable Energy Initiative
State and Local Revenue Systems Become Obsolete.
The Brookings Institution issued a report recently entitled:
Are State and Local Revenue Systems Becoming Obsolete?
The report has implications for the tax burden on equipment financing and leases. The report argues that the U.S. economy is changing from a producer of goods to a provider of services. The U.S. is rapidly becoming a "knowledge-based economy" that creates and uses intangible assets. State and local tax systems generate revenue based on the production of goods. As the production of goods declines, state and local governments can’t generate sufficient tax revenue to keep pace their expenses. To compensate, state and local governments increase the type and amount of their taxes. For example, they may want to impose new taxes on services and electronic commerce. In effect, the state and local tax system is so "out of syn" with the direction of the economy that it has become obsolete.
*Warning: Equipment lenders and lessors should remain alert to rapid increases in state and local sales and use taxes as well as new taxes on other aspects of their transactions. Don’t assume that the tax burden in any state or locality remains the same from transaction to transaction. Check the tax initiatives and legislation at each location where equipment is sold, delivered or located to avoid unexpected tax liens or tax bills.
Colorado Passes Renewable Energy Initiative. For the first time in U.S. history, Colorado voters (not the legislature) approved an initiative called
Amendment 37 that requires utilities to obtain 3 percent of their electricity from renewable energy resources by 2007 and 10 percent by 2015. For differing views on Amendment 37, see:
Pros & Cons. Colorado joins 17 states with minimum clean energy standards and may set a national precedent for the required generation of renewal energy such as wind power and solar power. See:
Colorado Voters Pass Renewable Energy Standard, Renewable Energy Access (Nov. 3, 2004).
*Opportunity Point: One news sources stated: "Wind farms in Colorado may be one of the more logical sources of renewable energy that utility companies will be tapping into once Amendment 37 receives final approval from Colorado's legislature." Opportunities to finance and lease wind farms should be close behind the finalization of Amendment 37. See:
Amendment 37's passage to change state's energy sources, Colorado Rocky Mountain Collegian
(Nov. 16, 2004).
7.
Reader Feedback; Recent Publications; Training Offered; Correction
Reader Feedback
One reader e-mailed from Italy : "Dear David, I am an avid reader of your excellent Business Leasing News monthly newsletter. Although US cross-border leases are … all but defunct, your US law-based approach and analysis can be usefully applied to other jurisdictions. Thank you for that!
I have unsuccessfully tried to purchase
your Business Leasing for Dummies. I have visited every online bookstore one could think of, and even asked friends who live in London and New York. Absolutely to no avail! It is obviously a measure of your spectacular success, though it leaves me without what looks like an invaluable authority in the field. Therefore, I should be most grateful if you could suggest how I could obtain a copy of your book. Many thanks."
Another reader reflected on my Founder Comment in November, entitled "Freedom From Want" :
"Hi, David, thanks for another great newsletter! Your note on Freedom from Want is a great reminder at this time of year—when we are facing the challenges of fourth quarter and also wanting to remember the many kindnesses we have already received this year. I enjoyed seeing you at the ELA—keep up the good work! All the best,…"
A reader from Canada commented by e-mail : "David - A quick note to also thank you for your great newsletter - My firm is a Canadian full service leasing brokerage, but your newsletter is always food for thought, and the U.S. / CANADIAN border is a healthy one as you know .
Also, I have been unable to crisply locate a website to purchase your book,
which I want to do—can you steer me towards the right site. Thanks/regards…"
Finally, a reader who has great finance experience but is new to business side of leasing e-mailed: "Hello David, I am new to the business side of leasing, having formerly represented lenders and lessors in-house for several years. I've found the technical advice and commentary in BLN to be invaluable to me in my new role as head of …Structured Finance Division. Thank you for providing this useful service."
Thanks so much for your support. It appears that the inventory of my books, Business Leasing For Dummies, after three great years, is running out or is gone. To all of my readers, keep looking, especially on Amazon or, who knows, even on E-Bay. Sorry, at the moment, that I don’t know of a store or site that has the book. If you have ideas for topics or other comments and suggestions, just click on my name in BLN, and send me an e-mail or call me at the number set out below under my name. Remember, we practice what we write and we would like you to think of Patton Boggs LLP to serve as your legal counsel, making available to you all of our resources, including the knowledge and insight we have gained from publishing BLN for 36 consecutive months!
Recent Publications
Here are two feature articles I wrote that were published in August 2004:
LNJ Leasing Newsletter, by David G. Mayer (August 2004).
Bankruptcy Court Provides Guidance on True Leasing of Software , ELA ‘s
Equipment Leasing Today, by David G. Mayer (August 2004).
Training - Substance the Easy Way!
To help improve your business operations, deal processing and risk management, I offer private training seminars tailored to your specific needs at your designated location. My interactive and informative training includes topics I cover in BLN. I customize the format and content for your specific training needs—no canned programs.
After one of my private training sessions, here’s what one of the company’s senior managers said: "David, thanks again for an excellent presentation. You helped us tackle a complex, but important topic. Your expertise is first-rate and you are an excellent teacher to boot—that’s a rare combination."
Feel free to call me at (214) 758-1545 to discuss the possibilities.
Correction
One of BLN’s readers caught an error in the November edition in our lead article entitled: Jobs Act Reduces Tax-Exempt Leasing, But Offers Potential Alternative Structures. We, of course, try to get everything right, but sometimes we go amiss. The astute reader said: "David, Thank you for sending me the latest edition of Business Leasing News. I wanted to point out that on page 4 of the effective date section that the effective date for FTA approval in the final agreement was changed to January 1, 2006 from the original January 1, 2005 date. This change was made at the last moment by the conferees and is included in P.L. 108-357." We agree, and thanks to this reader and to each of you who help keep our text and analysis as correct and useful as it can be! The correction was made immediately in the posted article on
BLN’s Web Page.
8.
About Patton Boggs LLP and My Law Practice
About Patton Boggs LLP and My Law Practice
I am a part of the Patton Boggs LLP Business Transactions Group in our Dallas office. Patton Boggs LLP is a law firm of more
than 400 lawyers located in five offices in the United States and internationally in Doha, Qatar. The firm has extensive capabilities in over 50 distinct areas of legal practice that include leasing, secured transactions, personal property financing, securitizations, syndications, power project regulatory, development and finance disciplines, mezzanine financing, bankruptcy, real estate, public policy, litigation, intellectual property and technology law, and much more.
The leasing and secured transaction practices regularly involve the buying, selling, financing and leasing of real and personal property of all kinds, including business aircraft, energy, facility, production, power plant, technology and health care assets. We also structure, negotiate and close secured transactions of all kinds, tax-exempt and federal leasing arrangements, and corporate and portfolio acquisitions, among a full range of financing and acquisition transactions. Despite the improving economy, we continue to assist our clients with troubled deals and bankruptcies, including repossessions, lift stay actions, true lease contests, deficiency litigation, workouts and forbearance arrangements.
If I, or any other lawyer at Patton Boggs LLP, can help you with your legal or business challenges, feel free to call me at (214) 758-1545 or e-mail me at
dmayer@pattonboggs.com for information about any of these areas or the many others available at Patton Boggs LLP, or to discuss anything I have written in Business Leasing News. We welcome the opportunity to build a relationship with you!
A Message From the Founder,
David G. Mayer
An Industry With Doubts and Promise
This issue marks the end of the third full year of writing
Business Leasing News. It’s hard to believe that the time has passed so rapidly. Thank you for reading and expressing your appreciation of BLN.
On reflection, it seems appropriate to offer a year-end message about my view of the direction of the leasing industry. My message is based in part on a few of the articles in the 36 consecutive monthly editions of BLN and the
2004 State of the Industry Report, produced by the
Equipment Leasing & Finance Foundation.
I see an industry with doubts and promise. The industry has doubts whether it can find the new, young talent to provide new leadership and continuity in the near future. While we talk about capital investment, leasing’s true capital exists in the people who participate in the industry every day. The leasing business has doubts it can overcome the commoditization of its products as transactions evolve from true leases into secured loans. I see concerns about whether leasing will ever again be able invent new, high margin products and services that can withstand increasingly frequent legislative, regulatory and accounting challenges. I see persistent criticism in the media of leasing transactions that has tarnished leasing’s positive business image. However, little doubt exists that leasing has evolved into a mature industry with many talented, dedicated and experienced professionals.
None of these doubts suggest that leasing will shrivel up and go away. To the contrary, many bright people in this business will find ways to grow and thrive. However, there will be winners and losers in this period of change. The big winners in leasing in the coming years will likely be the banks that use their low cost funds to win business and build strong cross-marketing programs to find opportunity in their internal customer base. To be successful, leasing experts in a bank must educate and develop trusting relationships with the appropriate bankers. They must imbed their leasing products in a receptive customer base in the banks. Finally, money talks. The banks must pay bankers well to encourage them to offer leasing products and services to their customers. The bank advantage may be somewhat offset by the impact of the
Basel II Accord. The Accord may increase the financial cost of leasing financial products and operations offered by banks (due to risk mitigation costs) or even curb certain types of lease transactions.
Captive leasing companies won’t be far behind banks in their own markets. They will be successful if they stick to leasing and financing their affiliates’ products, software and services because they possess the most knowledge of their value, performance, utility and residual value, and have the potential to maintain enduring customer relationships despite relatively high finance margins. Captives should not stray away from leasing their own products unless a strategic opportunity compels them to do so.
Independent leasing companies that have competitive cost of funds and structuring capability to find niche products and exploit them will continue to expand their business in leasing. However, they will have to use all of their considerable brain trust to keep up or grow their businesses.
The big losers in leasing of late have been the large ticket, tax-exempt leasing and tax-oriented cross-border players. With the legislative cutbacks on
tax-exempt leasing and potential market hesitation about
off-balance sheet leasing, the large ticket players have generally seen few good deals, and very few rail, infrastructure and aircraft segments, or highly structured tax-oriented transactions due to market cycles specifically. Consequently, they have started to move toward the larger deals in the middle market. In that segment, they may achieve success by adapting their considerable structuring capability and low cost of funds. Realistically, hitting their volume targets like they have in the past will be extremely difficult.
Lessors who choose aggressive volume building over more rational investment decisions may also prove to be losers. Some lessors are doing "crazy" deals with very thin margins, just to put business on the books. Other lessors may compromise credit quality to do deals. These players may get lucky, but they stand to experience significant losses if they don’t play all their cards just right and win their credit gamble. Finally, independent leasing companies with relatively high cost of funds and generalized business products may experience declining fortunes, as bank lessors, captives and other financial institutions with lower cost of funds and aggressive tax pricing to gobble up their market share.
Leasing may have a bright future, but doubts will persist. The industry has weathered adverse changes in tax law and accounting rules, with more likely to come. Funding will remain available to most players, but pricing pressure will continue for many lessors. Earning seems to come from increased operational efficiencies instead of closing enough quality, high margin transactions. Deal volume may expand somewhat, but lots of capital will continue to chase few good deals.
Much of the talent in leasing, though graying, remains hard at work. Credit quality is increasing and defaults have slowed. Leasing is generally recognized as a useful, though sometimes controversial, financial product. Nearly 80 percent of all businesses have, in the past, used leasing, but market penetration may improve only as long as off-balance sheet treatment remains viable. For the moment, the Financial Accounting Standards Board has talked more about reforming lease accounting than taking clear steps to do so.
Despite all the changes and challenges, leasing volume has risen in 2004,
and is expected to rise even more in 2005. The 2004 performance and 2005 expectation stand out as a testament to a strong, mature industry of capable and determined professionals. Though doubt exists today about the future of leasing, I would like to think that the doubt will give way to a new resolve of leasing companies to add value by providing unique financial solutions, including competitive products and services, not just one-off deal support.
Leasing must re-establish its value proposition to distinguish itself as a significant and independent industry rather than a mere appendage of bank or manufacturer product lines. As leases become more of a commodity, transactions in the future may look more like financings than true leases. Ironically, legislative, regulatory and accounting changes seem headed the opposite direction. The current initiatives seem focused on basic principles of true leases—a lasting investment in personal property, rather than a highly structured tax transfer device or method to keep deals of the balance sheet. The players who succeed in leasing in the future will, in part, have to go back to the original concept of modern leasing as set forth in the tax guidelines for leveraged leases under
Rev. Proc. 2001-28 (the successor to Rev. Proc. 75-21).
As you approach the end of 2004, consider the 2004 State of the Industry Report. It will help your organization create a winning business plan for 2005, inform you of opportunities and risks in leasing and, perhaps, displace your doubt with optimism for a promising year in 2005 and beyond.
Have a great Holiday Season and a strong finish to 2004.
Thanks to the BLN Staff
I extend a special thank you to my editors at Patton Boggs LLP for their comments on this edition,
Atwood Jeter, a real estate and wind power associate, Margaret Anderson and Adrian McCoy, our great BLN staff, and our primary web site review partner, Jeff Turner. The technical team, consisting in part of George Barber and Winston Jackson, provides you the easy-to-use e-mail navigation and artistic appearance of BLN. Claire Campbell, our Chief Librarian in Dallas, provides research for BLN. I would like to especially thank George Barber, our Webmaster, who has worked on every issue of BLN and all technical challenges of BLN since its inception in January 2002.
All the
best,
David
David G.
Mayer
Founder
Business Leasing News
Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)
E-Mail:
dmayer@pattonboggs.com
© David G. Mayer 2005
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