September 2014

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Page 41 of 59

40 | www.cedmag.com | Construction Equipment Distribution | September 2014 Rental How Can This Be? 1. Transforming an Apparent Lease into a Loan. The answer can be found in the Uniform Commercial Code ("UCC"). As the bankruptcy court noted, UCC ยง 2-103 provides that a [putative] lease will be deemed a "disguised security agreement" (in effect, a "loan secured by collateral") if, among other things, it is not subject to termination by the lessee (customer), and . . . the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consid- eration [for example, a $1.00 buyout] upon compliance with the lease agreement (remember, this issue did not exist with respect to Schedule 1 because it called for a "fair market value" buyout). 2. Determining Whose Loan is Superior. After the court determined Schedule 2 was really a "disguised loan" rather than a lease, it had to decide whose loan (the owner's or the bank's) took priority. Ordinarily, a "purchase money security interest" in specific equipment (like the interest of the owner) would be superior to the bank's more general "blanket lien" interest. But, unfortunately for the owner, UCC Article 9 required the owner to file its UCC-1 Financing Statement of public record within 20 days after the customer took possession. Failing that (the owner didn't file its UCC-1 until the 23rd day), the interest of a "prior perfected security interest holder" (i.e., the bank) wins. (Remember, the bank had previously filed its "blanket lien" on all of the customer's property). What's To Be Learned Moving Forward? Buyout options and rent-to-own arrangements are becoming much more common in the equipment industry, as sellers and customers continue to look for the most attractive financing alternatives. But, as the above story highlights, offering buyout options of any kind can be perilous for equipment owners. Here are a few things equipment owners/lessors should bear in mind before entering into these agreements: 1. Dollar Buyouts. A lease with a dollar buyout option will virtually always be deemed a "disguised financ- ing" (meaning the customer will be considered the owner from the date of taking possession). This isn't necessarily always a bad thing, but it likely won't be viewed as a true "operating" lease from either a legal or a tax perspective. If you do offer dollar (or other nominal consideration) buyout options, take the necessary precautions, and always file a properly completed UCC-1 Financing Statement immediately (typically, at your Secre- tary of State's office). 2. Market Value Purchase Options. A lease with a market value buyout option stands a better chance of being viewed as a true operating lease, but remember, the UCC includes several other factors (such as a lease term that extends through the remain- ing economic life of the equipment) that could transform an apparent operating lease into a "disguised financing" (loan) arrangement. 3. Short-Term Lease/Option Models: Using an ordinary short-term (e.g., hourly, daily, weekly or monthly) rental agreement and simply offering to apply a percentage of the rent paid to the ultimate purchase price has become a popular model for many dealers and rental operators. A fair amount of caution is still warranted ("Don't Get Burned on Buyouts" continued from page 38) (800) 875-0326 www.directcapital.com WITH OUR TEAM SELLING APPROACH, YOU SELL THE EQUIPMENT AND WE STRUCTURE THE DEAL. (800) 875 0326 Close Sales Faster With Financing Programs for new & used heavy construction equipment t$Pmpetitive rates t8JEF$SFEJU8JOEPX t'MFYJCMF5FSNT t'BTU3FTQPOTF t'JSTU$MBTT4FSWJDF (continued on page 42)

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