Lease Sales Handbook May 22, 2014

What is a lease?

• A contract that transfers the right to use equipment to the customer (lessee) in return for periodic rent payments to the lease company (lessor).

Operating Lease vs. Capital Lease

• Operating Lease (or tax lease)

– larger purchase option at end of lease term.

– off balance sheet financing as it is not listed as an asset, nor as a liability, but footnoted as a lease expense.

– payments are expensed as they are made by the customer (lessee).

– leasing company (lessor) retains ownership and depreciates the equipment on their books.

Operating Lease vs. Capital Lease

• Capital Lease

– Bargain purchase option (ie: $101)

– Accounted for as an asset and liability.

– Customer (lessee) qualifies for depreciation either through Section 179 or standard schedules.

Leasing Advantages

• Payments may be tax deductible as an operating expense.

• Preserves bank lines of credit – important for 2014.

• Requires no additional collateral beyond the item leased.

• Lower up-front costs.

• A convenient source of alternative financing.

• Offers flexibility to structure payments to match revenue stream.

• Keeps equipment – and debt – off the balance sheet.

Questions

“What’s the Interest Rate?”

There is no stated interest on a lease agreement – it’s not a loan.

Why? Leases are rental agreements with the option to buy - not a principle and interest contract.

If you computed the cost of a lease payment stream in an amortization schedule as compared to a conventional loan, the cost of a lease is very comparable to conventional financing.

Cost may vary due to the higher risk of leases stemming from lower down payments, slower pay-down with higher purchase options, and flexible payment options.

Questions

“Why should I do a lease if it’s more expensive than a loan?”

Lower up-front costs preserves cash for their operation

Time value of money on the tax savings from expensing the payments in a shorter period of time vs. standard depreciation. Makes leasing a more cost effective option in the long term.

Lower fixed payments over the term of the contract allow for better cash flow and budgeting over the term of the contract.

Flexibility and Convenience

Questions “Can I pay off my lease early?”

Yes. Northland will hold the customer to the full term of lease payments within 6-months of lease inception or if the contract is in default. After the first 6-month period we discount the remaining rental stream and add 1% fee and allow customers to pay off early. Reminder that the RBFS fee is added to the cost of the equipment and is included in early pay-offs.

Extra payments: Since a lease is a contract of payments any additional dollars

added to a payment are simply applied to future payments. Trade-Ups are when a customer trades their equipment into a newer or different

piece of equipment and they continue to lease the new piece. This option is a very affordable way to change out of equipment vs. paying off and starting new as many of the costs involved with early termination can be eliminated or deferred into the new contract.

Questions

“I like to own my equipment and not comfortable with leasing.”

What’s important is the most effective and efficient use of the equipment.

• Regardless of whether you lease or own - what is the best vehicle to acquire and utilize my equipment in the most efficient and profitable way possible?

Leasing allows customers to acquire equipment off balance sheet thereby showing less leverage on their operation.

Changes for 2014

• Unless the Congress makes changes in the current tax code, the current limits are:

Section 179 Accelerated Depreciation is currently capped at $25,000

50% Bonus Depreciation on new equipment is no longer in effect.

Standard 3, 5, and 7-year depreciation schedules as the new norm.

Farmers and businesses who have depleted depreciation schedules in recent years thru S179 and bonus depreciation could potentially have a large tax problem.

How can leasing help?

Short term leases will allow farmers and businesses to expense their equipment over shorter terms verses a 7-year depreciation schedule.

Leasing becomes a bridge between taking the large depreciation expense thru S179 in the past and the reality of longer 7-year schedules they are facing today.

Customized agreements to balance cash flow and tax needs.

Success Story

• Problem: In November 2013 a Customer paid cash for $250,000 on a UAN

Applicator and a Planter expecting to accelerate his depreciation through Section 179. However, a month later in December he realized that MN tax law only allowed him to accelerate up to $25,000 leaving him a large tax liability.

• Solution: We set the equipment up on a 2-year lease and refunded him his

$250,000. He paid $95,0000 lease payment up front and used his remaining $155,000 balance to pre-pay inputs for 2014 from the Retailer Partner.

• Result: Customer was able to expense both the lease payment and inputs

totaling $250,000 for a large reduction in his tax liability for 2013.

Thank You

Questions?