While headed back from the east side of town along the Limon Sub this weekend, I passed a quartet of locomotives used for switch duties along Smith Rd. 3 of the 4 were lease units. It made me realize that I'm seeing more and more lease units while railfanning these days. I've been wondering what the advantage is, though.
If a railroad owns it's own power, it has to take care of the maintenance costs for that power. If it leases, the lessor has to cover those costs and make a profit at the same time, so I would guess that it would be more expensive in the long run for the railroads. I understand where it would be advantageous for railroads to use leased power during upswings in traffic, but why does it seem like there's a lot of leased stuff right now during a lull?
-ChrisWest Chicago, ILChristopher May Fine Art Photography"In wisdom gathered over time I have found that every experience is a form of exploration." ~Ansel Adams
Leasing does a couple of things for a company. It provides an asset which it doesnt have to carry on it's balance sheet. In other words, you dont own the equipment, so you dont have up front money on the books. Granted you have a monthly expense, often in the form of a legal obligation for a number of months (or years), but the actual capital used by the railroad (which are capital intensive) are used elsewhere.
A second benefit for leasing is you can enter into various term lengths, thus matching your needs to the requirements.
In downturns, more equipment is available for leasing and thus the monthly terms and conditions become favorable. For instance, a major grain processor found the lease rates for cars to be extremely attractive the past two years. Thus, instead of purchasing new cars, they leased. Within the past month, the new rates for leased cars have jumped dramatically; the result is that new cars may be purchased.
Leasing offers other benefits, but those are the primary ones.
Ed
Some of those rascals will be turning Armour Yellow shortly as UP has worked hard at purging the 567 powered fleet and now has need of 645 powered roadswitchers (for tractive effort, that can be eco-upgraded as opposed to end cab switchers)...BNSF doing something similar with rebuilt "GP-39" units in GP30 & 35 carbodies)
CopCarSS . . . I passed a quartet of locomotives used for switch duties along Smith Rd. 3 of the 4 were lease units. . . .
What models or sizes/ no. of axles/ HP ? Were they smaller HP units that had been sold off by the Class I's some years ago - and are now being leased back to fill the niche and need for small road units and switchers, that the recent GE and EMD production doesn't ?
The degree to which the lessor vs. the railroad is responsible for maintenance is negotiable - most likely the long-term overhauls are the lessor's responsibility, but the day-to-day fuel, lube oil, sand, water, and misc. running repairs such as filter changes, traction motor shorts, etc. are likely the leasing railroad's responsibility, the same as for their own units. So the 'out-of-pocket' operating costs to the railroad may not be all that different - and the lease costs may not be all that much more than the railroad's own cost of capital.
There may also be tax benefits, esp. in this recession when the railroad may not have as much net income or profits to use to offset the depreciation charges for those units. That was a big reason for leasing back in the 1960's - 1980's, because the leasing company did have other income it could use those charges against, thereby reducing the net cost to the railroad, at least in theory. If jeaton visits this thread after income tax season ends later this week, he would be a better source than me to confirm or refute and explain that aspect of it further.
- Paul North.
Paul:
They are a collection of GP-38's, derated GP40's and GP49X's ...almost all EMD leasers plus a smattering of Helm units. Very common at both UP(DRGW) North Yard and also BNSF(CB&Q) Globeville/38th Street Yard. In jointline areas, it's tough to figure where and who's railroad they belong to. There also are a few LLPX wandering around too.
Gotta wonder if the rack setting on the leassers has been modified for altitudes above 4000 feet. On old Santa Fe, normally aspirated GP-7s, GP 38s et al were almost never seen in Colorado. Turboed GP20 and GP39-2s were common, plus the errant GP30/35 unit escaping from Kansas or Texas were mor common.
In Pueblo, we had a slug set (1312/119) that was normally aspirated with a different rack setting so the thing could breathe under load on the Pueblo Hump.(Elev 4650' +/-)
What about "Equipment Trusts". Was that a type of lease? I remember most power and cars had plates on them, something like "Subject to Equipment Trust of the First Shyster Bank of Allentown...". I haven't noticed any of these plates lately. Guess computers took care of that.
Hays
Well, for one the railroad can get rid of the power when the lease expires. Instead of having to try and sell/scrap the locomotives. I imagine that sometimes railroads need power for a pre-determined amount of time, so instead of buying new power they just lease power from a leasing corporation.
Justin
The road to to success is always under construction. _____________________________________________________________________________ When the going gets tough, the tough use duct tape.
Origonally there were Equipment Trusts or Equipment Leases. These were like you buying your car on time or leasing a car. As time moved on, locomotives and equipment got more and more expensive, then leasing was a big time money decision...you were using one company's money and another company's locomotive. Next came leasing locomotive by locomotive by day, week, month, year, or longer. With that locomotive fleet owners whose sole business is leasing by the unit or the fleet.
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All sorts of financing arrangements are possible and in use. For railroad equipment, a central lien recording mechanism is provided for at the STB. If one were really interested, obtaining a copy of the agreement between the lienholder/lessor and the operating railroad is possible:
This is UP 1995, the C&NW heritage locomotive.
MP173Leasing does a couple of things for a company. It provides an asset which it doesnt have to carry on it's balance sheet. In other words, you dont own the equipment, so you dont have up front money on the books. Granted you have a monthly expense, often in the form of a legal obligation for a number of months (or years), but the actual capital used by the railroad (which are capital intensive) are used elsewhere. A second benefit for leasing is you can enter into various term lengths, thus matching your needs to the requirements. In downturns, more equipment is available for leasing and thus the monthly terms and conditions become favorable. For instance, a major grain processor found the lease rates for cars to be extremely attractive the past two years. Thus, instead of purchasing new cars, they leased. Within the past month, the new rates for leased cars have jumped dramatically; the result is that new cars may be purchased. Leasing offers other benefits, but those are the primary ones. Ed
They cost more that way, generally. If a company buys a locomotive and leases it out, it has to make enough to cover the cost to purchase PLUS make a profit. If the RR buys the locomotive, it has to cover the cost to purchase only, so leasing is generally more expensive than owning. But, if you can't raise the capital, you sometimes are forced to "pay as you go".
If you are doing short term leasing to cover some peak or seasonality in your business, it only pays to lease if your peak matches someone else's valley. If the leasing company owns a locomotive but only finds a taker 6 months a year, they have to cover their cost and profit margin in that six months. Since RR seasonality tends to be the same from road to road, it's generally not cheaper to try to lease to cover your peak.
Sometimes, there are matching peaks and valleys, though. The Conrail/GE leasing company LMS found a fit between Conrail and CN which was the basis for doing the deal.
(We are talking about operating leases here, not equipment trusts or other financing deals where the RR "owns" the locomotive, but has open or closed end capital lease)
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
Alexander Hamilton set up the finances of the United States Government as a Credit and Debt cyclical system. So has American business: operating with other's money betting that the future will pay it off. We buy cars and houses that way in private. Corporate America does the same. Leasing locomotives and cars has been the way railroads have used credit to pay as they go for the equipment, free money for other expenses, and keep dividends in the pockets of shareholders. Other businesses have similar plans in operation. This is why the stock market is important: this is the money to be used to paydown the lease and debt payments that have accrude. When such debt becomes too large, trouble appears as stock prices dip.
henry6We buy cars and houses that way in private. Corporate America does the same. Leasing locomotives and cars has been the way railroads have used credit to pay as they go for the equipment, free money for other expenses, and keep dividends in the pockets of shareholders.
oltmannd [snip] If you are doing short term leasing to cover some peak or seasonality in your business, it only pays to lease if your peak matches someone else's valley. If the leasing company owns a locomotive but only finds a taker 6 months a year, they have to cover their cost and profit margin in that six months. Since RR seasonality tends to be the same from road to road, it's generally not cheaper to try to lease to cover your peak. Sometimes, there are matching peaks and valleys, though. The Conrail/GE leasing company LMS found a fit between Conrail and CN which was the basis for doing the deal. [snip]
Sometimes, there are matching peaks and valleys, though. The Conrail/GE leasing company LMS found a fit between Conrail and CN which was the basis for doing the deal. [snip]
There was some famously similar arrangement regarding early Geeps or road-switchers between either the PRR and/ or the N&W on the one side, and one of the New England potato-hauling roads on the other - either MEC or BAR, maybe B&M, as best as I can recall.
The early 'finance' methods and documents for rail rolling stock were 'equipment trusts', which were also formatted as 'conditional sales', long-term leases, and other variations - pretty much the same as your buying/ leasing a new car. Starting in the 1970's - especially with the 'per diem' freight car ownership, leasing, and rental 'bubble' - those esoteric and peculiar forms were gradually replaced by the more generic 'security interest'. And instead of naming the specific bank as in BNSFwatcher's fictitious example above, they've evolved into the type shown in the photo above. The main purpose is simply to let anyone who might think of lending credit on the strength of a locomotive as collateral know in advance that there's someone else in line ahead of them in priority of pay-offs - pretty much just like a 2nd mortgage or home-equity loan on your house.
In some industries, there is an advantage to leasing newer equipment, in order to keep up with the newest technology, without being stuck with the older technology stuff for a long time. Does that scenario play out at all in the railroad industry?
Thanks to Chris / CopCarSS for my avatar.
Paul_D_North_Jr CopCarSS . . . I passed a quartet of locomotives used for switch duties along Smith Rd. 3 of the 4 were lease units. . . . What models or sizes/ no. of axles/ HP ? Were they smaller HP units that had been sold off by the Class I's some years ago - and are now being leased back to fill the niche and need for small road units and switchers, that the recent GE and EMD production doesn't ? The degree to which the lessor vs. the railroad is responsible for maintenance is negotiable - most likely the long-term overhauls are the lessor's responsibility, but the day-to-day fuel, lube oil, sand, water, and misc. running repairs such as filter changes, traction motor shorts, etc. are likely the leasing railroad's responsibility, the same as for their own units. So the 'out-of-pocket' operating costs to the railroad may not be all that different - and the lease costs may not be all that much more than the railroad's own cost of capital. There may also be tax benefits, esp. in this recession when the railroad may not have as much net income or profits to use to offset the depreciation charges for those units. That was a big reason for leasing back in the 1960's - 1980's, because the leasing company did have other income it could use those charges against, thereby reducing the net cost to the railroad, at least in theory. If jeaton visits this thread after income tax season ends later this week, he would be a better source than me to confirm or refute and explain that aspect of it further. - Paul North.
While I am not a CPA and do not have expertise in the details of corporate tax provisions, I can present a general idea of how tax provisions come into play. I don't intend to suggest that the pure financial play is the only basis for the lease vs. buy decision and many good reasons for leasing have been presented in the posts on this thread.
Lets suppose that I have a company in need of a $1 million machine and I either have the cash or can borrow the cash to make the purchase. At the same time the tax code has a provision that will let me write off 50% of the purchase price as an expense in the year I buy the machine. If I have a potential $500,000 or more of taxable earnings for the year, I can take tax credit and avoid, let's say, a $50,000 tax bill. Even though I will now only have the remaining 50% of the cost of the machine to write off over the remain life of the machine, that gives me $50,000 cash now to invest in some other area for at least a year, possibly at a rate of return even greater than that generated by my new machine.
On the other hand, if my taxable earning are way below the potential tax credit coming from the purchase of the machine, then my tax savings aren't so great and the credit is of limited or no value. On the other hand, maybe a leasing company can use the tax benefit and can offer financialy attractive lease terms.
The tax element is only one aspect of the financial calculation. Other factors will include the my cost of capital, opportunity costs (can the cash invested be used elsewher and generate a greater return) and the potential salvage value of the machine at the end of its useful life. Finally, these and other factors will be employed in a discounted cash flow analysis that will provide an indication of the best choice.
By the way, using accelerated write offs for capital equipment is not just for big players. Small businesses can use Section 179 of the federal tax code to write off up to $250,000 in capital expenditures in the year of purchase. I have employed that strategy in my own small business on expenditures for computers, other office machines and furnishings. The tax code has effectively helped me grow my business.
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I think someone should repeat a remark made earlier...so I guess it is me. We are talking, and misinterpreting remarks because of two different "leasing" concepts and eras. Initial "leasing" was large purchases of cars and locomotives through "lease" and "trusts" in which the huge sum of money was borrowed or otherwise negotiated through banks, insurance companies, and other lending and financial institutions. Today's leasing arrangements seem to be a bit different in two ways. One the manufacturer or his representitive will do the lease arrangement so that the one leasing the equipment deals with only the manufacturer for both the equipment and the money; often it involves manufacturer warrenty work and mainenance agreements. Second is the more common today, and the one I think the question was framed under, whereby the railroad will "lease" units on an as needed basis with no intent on purchase. Thus if a railroad is suddenly short of power, it can turn to a leasing company for the needed power. Or if there is a short time need for the power for a particular contract, power is leased just for that contract period. There are probably other scenerios, too. But the point is the different lease programs and needs being discussed here.
It should be noted that EMD no longer has any affiliation with GMAC, and the financial meltdown turned GE Capital into a millstone around General Electric's neck when they got into CDOs and other dodgy financial instruments.
Murphy Siding In some industries, there is an advantage to leasing newer equipment, in order to keep up with the newest technology, without being stuck with the older technology stuff for a long time. Does that scenario play out at all in the railroad industry?
Depends on how you define lease... almost all of the new big units are leased. they will run the tar out of them for 20 years, then pitch them back to the lessor; and start the cycle over again.
I agree. GE made some really bad moves: GE Capital, NBC, and MSNBC, and caving in to Eliot Spitzer/Andrew Cuomo on the Hudson River PCB "clean-up", among them. Maybe "Uncle Jack" wasn't that smart after all. Seems like the new fellow isn't doing any better. Disclaimer: I don't own any GE stock, but love their locomotives!
I've not had luck with GE appliances save one once. But don't go blaming Spitzer and Cuomo on the Hudson River clean up. Blame GE: they made the mess, they were responsible for the contamination and loss the river, the wild and human life along the river suffered. As for NBC, well, let's face it owning all that glimmer, glamour, sex, and violence while raking in all the dough ain't all that bad. They got there value out of it...
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