PARTNERING FOR SUCCESS Lease/Purchase Products for Governmental Agencies Bob Chapple/Karen McManus Caterpillar Financial Services Corporation

Agenda Tax Leases/Governmental Lease Purchase – Bob Chapple Lease vs. Buy – Karen McManus

Tax Leases

When Applicable Looking for long-term rental Off Balance Sheet Treatment Increase Bonding Capacity Improve Cash Flow/Working Capital Manage Equipment Owning and Operating Cost

Limitations Stronger credit customers Limited Early Payoff Customer Responsible for PPT No Equity Buildup No Down Payment or Trade Equity

FMV Lease Operating Lease/Long Term Rental Lowest Possible Monthly Payment Terms Months Tax benefit retained by Lessor Purchase for FMV at end of lease term, Rent month to month or Return to CFSC in the condition as spelled out in the Application Survey

CVO Lease Same Benefits as FMV Predetermined purchase option at end of lease term Purchase or Finance Option At end of lease term can return to CFSC or rent month to month but option reverts to FMV

Window Lease Provides benefits of CVO and FMV Lease but with Early Purchase Option(EPO) Flexibility to purchase asset at predetermined date(s)/option amount(s) Minimum EPO term of 24 months – 12-month intervals

Lease Comparisons 48 month CVO with a 24 month EPO Should customer not exercise EPO, end of term option is same as CVO Customer rate is quoted as an implicit rate; interest rate implies ownership Typically CVO payment is 1% higher than comparable FMV

Governmental Lease Purchase

>Benefits: Provides below market interest rates 100% financing available to qualified customers Ability to cancel contract without penalty (on the last day of the appropriations period), if funding is not approved for the following year > Length: months > Purchase Option Alternatives: Binding purchase at a predetermined amount Trade with dealer based on predetermined buyback set forth by the dealer > Tax Benefits: Retained by Lessor. Savings are passed on to customer through lower interest rates > Payment flexibility: Monthly, quarterly, semi-annual, and annual payments are available Key Point: May choose CFSC balloon as low as $1 or a Dealer balloon of up to 100% of the dealer buyback (will require a copy of the dealer’s buyback arrangement with the Muni customer). Non-appropriations clause applies.

Additional Documents Governmental Lease-Purchase Agreement

Additional Documents Request for Minutes Opinion of Counsel 8038G Lessee’s Authorizing Resolution

Governmental Solutions Lease v. Buy

BUY Pay cash or finance price over a period of time You are the owner of the equipment At some point you look to trade-in or sell Non-Appropriations Clause

LEASE Pay for use of equipment over period of time with option to buy at end of term The leasing/finance company is the owner of the machine At the end of the lease you look to return and replace equipment or buy it Non-Appropriations Clause

ADVANTAGES Lease Buy Cash Flow? Control Maint. Costs? Flexibility? Total Ownership Cost?

-Example- Need a Grader? Sale Price of $186,000 5 year lease vs purchase (60 month term) hours usage per year

CASH FLOW CAT Motor Grader (1,500 hrs per yr)

CASH FLOW CAT Motor Grader (1,500 hrs per yr)

ADVANTAGES Lease Buy Cash Flow? Control Maint. Costs? Flexibility? Total Ownership Cost? X

CONTROL MAINTENANCE COSTS CAT Motor Grader (1,500 hrs per yr) *Maintenance fee may vary by Dealership *

CONTROL MAINTENANCE COSTS PACKAGED SOLUTIONS Match warranty with the term of the lease Add in service agreements from the Dealer to budget maintenance & repair costs Bid a maximum repair cost for term Warranty CSA

ADVANTAGES Lease Buy Cash Flow? Control Maint. Costs? Flexibility? Total Ownership Cost? X X

FLEXIBILITY Leasing 1. Return equipment to dealership at end of term 2. Replace with New equipment 3. Purchase or refinance machine 3. Look to profit from reselling equipment for higher than committed return option Finance (Purchase) 1. Have to trade-in or resell equipment

ADVANTAGES Lease Buy Cash Flow? Control Maint. Costs? Flexibility? Total Ownership Cost? X X X

TOTAL COST CAT Motor Grader (1,500 hrs per yr)

ADVANTAGES Lease Buy Cash Flow? Control Maint. Costs? Flexibility? Total Ownership Cost? X X X X

ISSUES Option/Residual represents Fair Market Value Calculate implied interest rate to make sure it is reasonable Read return conditions carefully (I.e. hourly usage, undercarriage/tire wear requirements, etc.)

Benefits Leasing preserves cash flow Leasing provides lowest total cost for equipment use Leasing can help project and control maintenance costs Leasing allows flexible ownership options Leasing insures fleet is new and updated Leases can be tailored to meet specific needs Leasing eliminates residual risk Leasing allows 100% financing Provides planned equipment replacement of customer’s fleet Leased equipment may not have to be bid (see state regs)