In these times of COVID 19 / Coronavirus and the subsequent fall out many companies of all sizes are experiencing a tightening of the belts and squeezing cash and costs out of every tangible asset they have in their inventory. One way to do this is thru a sale-leaseback of railcars.
A sale leaseback can be summarized as follows: Your company sells its railcars to a finance or railcar operating company (Lessor) who in turn agrees to lease the railcars back to you (Lessee) for an agreed to monthly payment over a fixed term. In the railcar world most sale leasebacks or done under a net lease where the Lessee remains responsible for maintenance, taxes and property insurance for the railcars just like they would if they owned the assets outright.
Seven Big Advantages of a Railcar Sale – Leaseback
- Capitalize on the value of your equipment and free up operating cash. Sure, it is nice to own (or have them leveraged) all your assets but if you don’t have the cash to continue or grow operations then it’s all a moot point. Besides railcars are generally the core competency of railcar Lessors and banks and investment firms that specialize in railcar assets and not so much for companies in general.
- Balance sheet and cash flow scrutiny. Generally, the value of a sale leaseback is partially held in the perceived value of the rail equipment along with the new Lessee’s balance sheet and credit. By placing some value on the longevity and usability of the equipment in other applications you get some relief on balance sheet and cash flow scrutiny.
- Get a tax break. If you lease equipment instead of finance it you get to consider the lease as part of your cost of goods sold and it is deducted 100% just like any other operating cost. Contrary if you finance your equipment you can still deduct it over time depending on the tax depreciation schedule you adhere to. Although you will most likely have to wait several years to recoup the value represented by the depreciation schedule. Given the present times and continually changing tax codes and laws we want to qualify any remarks made here, with, go see your accountant or internal tax expert prior to making the decision based solely on tax breaks.
- Strengthens the balance sheet. By converting the equipment cost from a depreciable asset on your balance sheet to an operating cost you remove it entirely from your balance sheet and do not take a depreciation charge. The stronger balance sheet results in better credit rating thus lower the overall costs of borrowed funds to support the main business venture.
- Use the cash to propel your business forward. With a new source of cash that is more than a depreciable asset on your books you can invest in your core business. Whether this is a new processing machine, technological advancement or equipment upgrade yielding a more productive work environment you will have the cash to proceed
- Transfer railcar obsoletion risk. Face it, equipment becomes obsolete as new and more advanced equipment replaces it over time as technological breakthroughs occur. The risk of the likelihood of a railcar becoming obsolete is no longer your concern. This means that after the term of your lease is up, you are not locked into a potentially obsolete railcar, just ask owners of 70-ton single door boxcars if they’re happy owning this car type.
- Finance equipment upgrades. One spin on traditional sale leaseback transactions is to include the cost of select railcar upgrades or inclusion of deferred repair. In this case the valuation is of the railcar after it’s went thru a repair shop with the agreed to upgrades or modifications being complete.
Consider that if you put one dollar of capital into continuing to own a railcar when there’s other internal opportunity to grow or shore up your company you’re probably not evaluating the situation properly or you’re in a very lucrative industry.
A Couple of Disadvantages to a Railcar Sale – Leaseback
Although there are compelling reasons to consider a railcar sale leaseback there also are a few not so compelling reasons to do the deal.
These are summarized as follows:
- Loss of an asset on the balance sheet. Railcars are long lived assets and are reflected as such on the balance sheet. Depending on where they are at in their depreciation / amortization schedule this could have a significant impact to the balance sheet.
- Turnback costs may be transferred to you. At the end of the lease there are general turnback costs associated with a net lease. These costs which are mainly mechanical and empty repositioning related could become your operating costs.
Tealinc, Ltd Specializes in Rail Transportation Solutions. Want to visit with us about a sale-leaseback send a note to webmail@tealinc.com or call at 720-733-9922.