Marlin Business Services (NASDAQ: MRLN) dba Marlin Leasing versus Resource America, Inc. (NASDAQ: Rexi) dba LEAF Financial Corporation are pricing lease payments so low with the profit supposedly to come at the end. Some residuals are "Fair Market Value" and others rely on the "Evergreen Clause" of extra payments. Investors should consider this strategy as placing too much value on end of lease transactions.
The copier market space (which reportedly makes up 85% of the LEAF Financial Moberly, Missouri division monthly volume) is winning deals because they are buying deeper and priced much lower. The higher residuals are a must to make this work in this strategy. The loss of customer good well, perhaps even copier dealer goodwill, comes after the original term is over, and there are changes there.
There are not only the loss of customer and vendor at the terms end, there is the danger that the copiers are obsolete, especially as more and more documents are being converted to computers and the trend is toward Cloud computing. There are also potential liabilities to lessors regarding the assigning liability for disclosure of private information stored on digital copiers. And perhaps as important, as more and more states now are hearing the abuse complaints and may be adopting making it mandatory for lessors to inform the lessee when the original term expires anywhere from 90 to 30 days in advance.
As more of these assets come off lease and as demand continues to weaken in the used copier market, LEAF and those who use this device to win leases with a lower monthly payment, relying on the extra payments at the end, may realize tremendous losses at the end of the lease.
The lease payment is not the most important item many businesses look at in leasing, particularly when it comes to financing a copier. It can be similar to leasing a vehicle, what to consider in addition to the monthly payment is the value at the end. The difference with leasing a copier, is equipment leasing is not regulated as to what must be disclosed or accomplished. The vehicle lessor generally has a “blue book” number or dollar figure, but what is most important, informs the lessee before the end of the contract, letting them know their options in advance. Often it is spelled out. In equipment leasing, particularly abused in copier leases, only five states require the lessor to inform the lessee when the lease about the end of the original lease term. (1)
The end may also have several others tricks for those who have not read the leasing contract or understand what may happen.
The fact is, many leasing companies do not inform the lessee when the lease ends, and perhaps worse, have an Evergreen clause in the contract that continues the contract when the lessee does not inform the lessor (often by certified mail) 90 days, and sometimes 120 days, before the end of the contract. It means they continue the lease payment. If you do not notify them in writing, the lease continues.
Its in the contract. Its legal in 45 states.
ACH or invoices in these circumstances will not warn you, and many don't lessees don’t count the payments, trusting the leasing company or the party they assigned the payments to that they won’t “over bill.” This “trick payment” requirement applies to $1.00 and 10% purchase options, and is more prevalent in "fair market value" options when the lessee must return the equipment at the lessee expense. This means not the manner in which the copier was received, but actually shipped to the destination chosen by the lessor (“in good working order.") If copier located in California, it could be back to Missouri at the lessee’s packaging and shipping costs. Some even charge a restocking fee of one month, such as LEAF (7).
In $500,000 and $1 million dollar leases the staff attorneys work on the contracts and options at the end,often negotiating six months in advance about a “fair market value” or continuing the lease at a different “rate.” Doesn’t happen in leasing a copier.
The advantage to the lessor in the equipment leasing is the pricing can be "upside down," very low, as the incentive to enter into the transactions as the actual profit is when the original term expires. It may not even be a “true lease” or “operating lease” that meets both IRS and Accounting definitions. The lessor relies on the extra payment or “balloon payment” at the end for their real profit.
The Equipment Finance and Leasing Association (ELFA) has been fighting changes in states that want to change the law. They claim they are for "transparency" but believe making it mandatory for the lessor to notify the lessee regarding the termination of the lease is an "undue burden," especially the "expense of a certified letter." (2)
On the ELFA web site, they state: "ELFA believes that all contract terms, including automatic renewal terms, should be properly and adequately disclosed and cautions against legislative attempts to dictate contract provisions between a lessor and lessee. (3) This applies at the beginning, meaning it is up to the lessee to contact the lessor about the termination, and not the responsibility of the leasing company.
The responsibility then is to the signer of the lease to not only read the entire contract (yes, read the contract,) but as important to understand and remember and prepare for the procedure for purchase or return of the equipment. The notice of termination then is the responsibility of the lessee---otherwise extra lease payments will be required, sometimes 90 days, sometimes twelve months mandatory.
33.12% of Marlin Leasing's business is copies. (4). In Marlin’s third quarter filing, page 42, it was stated 81.4% of residual assets were related to copiers:
"As of September 30, 2011, approximately 65% of our leases were one dollar purchase option leases, 33% were fair market value leases and 2% were fixed purchase option leases, the latter of which typically contain an end-of-term purchase option equal to 10% of the original equipment cost. As of September 30, 2011, there were $33.9 million of residual assets retained on our Consolidated Balance Sheet, of which $27.6 million, or 81.4%, were related to copiers. No other group of equipment represented more than 10% of equipment residuals as of September 30, 2011 and December 31, 2010, respectively."
page 42 (5)
The profit, in my opinion, for the company has primarily come from the automatic renewals:
|Net Profit||Lease Renewel income||net of depreciation|
|First Quarter, 2010||$1.2 million||$1.9 million||$1.8 million (1)|
|Second Quarter, 2010||$1.2 million||$3.9 million||$2.5 million (2)|
|Third Quarter, 2010||$1.4 million||$1.9 million||$1.8 million (3)|
|Fourth Quarter, 2010||$1.8 million|
|First Quarter, 2011||$1.2 million||$2.0 million||$1.9 million (4)|
|Second Quarter, 2011||$1.5 million||$2.3 million||$2.7 million (6)|
LEAF Financial Corporation copier division is out of Moberly, Missouri, the former Dolphin Capital, purchased by Resource American, Inc. on November 26, 2007 (6a), and is their "copier division." Page 2, Section 5 has the terms and conditions about the end of lease, including the one month restocking fee:
"LEASE EXPIRATION AND RENEWAL: Unless you notify us in writing at least 90 days prior to the expiration of the Lease, or any renewal term, of your intention to return the Equipment to us or to exercise the purchase option indicated above, this Lease will automatically renew for successive 90 day periods at the same month LEAF Payment...If you elect to return the Equipment to us, it must be returned to the location that we designate within 90 days of your providing notice or return. Your obligation to pay rent will continue until the Equipment is returned to our designated return location. You are responsible for all expenses incurred in returning the Equipment to us and agree to pay us a Restocking fee equal to one additional Lease payment if the Equipment is returned for any reason." (7)
It appears the recent availability of $125 million new capital will cost LEAF 6% plus covenants, which is expensive money and requires end of lease extra payments or fair market value residuals to offer low rates to top credits. It may be a poor
gamble if more states outlaw Evergreen clauses or copiers become quite obsolete due to the use of cloud comuting in recording documents.
(Consumer in Illinois--- may affect commercial, especially a proprietorship, partnership or personal guarantee)
(7) LEAF Contract (paragraph 5, top of second page, left)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.