As with other financial commitments, it’s much easier to get into an equipment lease than to get out of it. Exiting a lease early, if your lessor allows it, may cost more than the asset is worth. But transferring your lease to another party can, under the right conditions, be relatively painless. Still, there are rarely free lunches; it may still take a cash incentive to get a new lessee – if you can find one – to consider assuming your lease.
There’s another party to consider, of course. The lessor needs an incentive to let a lessee off the hook, says Jeffery Taylor, a certified public accountant in Bountiful, Utah. Finding a more credit-worthy customer is one such incentive.
Matching current and prospective lessees under terms agreeable to the lessor is the purpose of online marketplace LeaseTrading Inc. (www.leasetrading.com). In addition to bringing buyer and seller together, LeaseTrading helps negotiate the trade with leasing companies and credit institutions, both online and in real-life.
The Norwalk, Conn.-based company has demonstrated the process works in the automobile sector, but the concept is still unproven in the trucking sector, admits President Michael Penfield. He expects the trucking market to grow, however, a LeaseTrading aligns with more leasing companies.
With LeaseTrading, a current lessee lists asset information and lease terms. Then, a prospective lessee places a bid, and the parties negotiate a cash payment, typically to the new lessee. Once terms are settled, credit and logistics arrangements are made online.
Finally, the asset and lease documents are transferred. Use of LeaseTrading is free for both the “seller” and “buyer” until a deal is cut. LeaseTrading charges a transaction fee – a small percentage of the remaining lease payments – to the party offering the lease for transfer. LeaseTrading is set up to handle transactions involving tractors, trucks, trailers and construction equipment, as well as medical and office equipment and automobiles.
“Most leases transfer pretty well,” Penfield says. “Most of the time it’s a question of economics, but nothing structural in the lease.”
And in trucking, the economics aren’t great. With greatly depressed values for on-highway tractors in particular, finding a cash incentive that works for both the existing and prospective lessees appears difficult. For example, in late November the smallest effective incentive sought by a bidder was almost $8,500, and a couple of offers were as high as $35,000. By comparison, in the automobile market several vehicles listed on LeaseTrading received bids with effective cash incentives of less than $1,000. A few even involved cash incentives paid to the existing lessee.
Beyond finding a mutually acceptable cash incentive, you might think that the big hurdle is lessor acceptance. Given that the original lessee is legally bound to make payments through the end of the term or until the lessee buys out the lease, the lessor would seem to have little to gain in the process. In reality, lessors are very willing to work through LeaseTrading, Penfield says.
“What we do best is work with the lessors,” Penfield says. “If the credit of the lessee they’re working with is bad or getting worse, they want to trade to a good credit to avoid expenses. They are very eager to work with us if the credit of new lessee is solid.”
Assuming you can find acceptable terms, you should make sure that transferring a lease won’t create new problems. Even if you find a new lessee and your lessor approves the transaction, trading your lease could have adverse tax consequences, says Jason Johnson, a certified public accountant at Carroll and Company, a full-service accounting and financial firm in Orem, Utah.
If your lease is accounted for as a capital lease, meaning your company is taking the depreciation on the equipment, transferring the lease could leave you with a large tax gain, Johnson says. “If it’s a five-year lease and you transfer after two years, you may still owe over 50 percent of the value on truck, but the asset may be depreciated down to nothing.”
Taxes aside, negotiating lease transfers online is an option and one that may get a fairer test once truck supply and demand grow a little closer together.