What railcar leasing alternatives are available to your company? The best way to determine your railcar leasing alternatives is to ask relevant questions of your railcar supplier. We have outlined a host of these questions below and provide guidance on their answers. If you have other examples and would like to contribute to our knowledge bank we’d appreciate your feedback.
A list of questions?
Is a railcar full-service lease a better alternative than a net lease? Is a full-service lease really a full-service lease? Why would a net lease be a better alternative for me and what makes is so? How about term of the lease, what are my options there? How long should I lease the railcar to get the best deal? How does a lease fit with my shipping requirements? What are the primary details that I need to be concerned about in the lease? What are the details that aren’t in the lease that I should be aware of? What am I not asking that I should be?
And the list goes on with whatever host of questions that you can add as well.
Full-Service Leases. Generally, when one thinks of full service, one thinks of full-services leases in the same context of those days when you’d pull into a service station and an attendant would fill your gas tank, check the oil and belts and wash your windshield. Those days have changed and so have not so full, full-service leases. Full-service leases should really be classified as modified full-service leases. Albeit not specific to any one Lessor the majority of the terms of a modified full-service lease hold the Lessor responsible for Association of American Railroads (AAR) and Federal Railway Administration (FRA) mechanical repairs. Property taxes are generally covered by the Lessor and Ad Valorem taxes may or may not be covered by the Lessor. Maintenance of the gates, hatches, pneumatic operating system, corrosion, any customer or loading and unloading damage, cleaning and graffiti removal, and liability insurance remain the responsibility of the Lessee.
In this case the Lessor runs the maintenance program on the railcars. The Lessor sends the railcars to their railcar repair shop(s) of choice, rightfully so as they want to use a qualified railcar repair shop that they are comfortable with to get the work done timely and with the quality desired. The upside is the Lessee doesn’t have to worry about doing any of the management of the railcar to or from the railcar repair facility or the actual inspection and repair process. The downside is that without lease rate abatement for shop time the railcar has a good chance of getting lost in the system. So even with rent abatement you’ve got an asset out of commission not moving product. A hidden cost that sometimes occurs is an out-of-route charge for empty freight presented by the handling railroad. If a railcar repair shop is out-of-route of the normal movement of a railcars’ general traffic lane it’s possible the railroad will charge the Lessee (or rebill thru the Lessor) for this mileage. Empty freight mileage varies across the United States, Canada and Mexico but generally runs between $3.50 and $5.75 per mile.
Net Leases. A net lease is pretty straight forward. The Lessee pays the AAR/FRA maintenance, insurance and ad valorem taxes. The Lessee under the full-service lease is already responsible for a host of Lessee maintenance items (see above modified full service lease). The main difference in these two types of leases in that in the full-service lease scenario you pay a premium for the transfer of risk to the Lessor and in the net lease scenario you generally get to keep the difference in this premium and what is actually paid.
Net lease structures have the advantage of putting the Lessee in charge of their own destiny. Maintenance management of the railcars becomes one of the Lessee’ area of opportunity. In this scenario the Lessee gets to pick and qualify railcar repair facilities and thru monitoring the fleet become more involved in the movement of their railcars which creates a better view of the shipment cycle and creates proactive opportunities to compel the railroad to move their railcars in a timely fashion.
With a net lease you have the option of managing your railcar maintenance program and your shipment management program yourself or you can outsource the program to a third party. There are advantages to each. If the program is internal to your operations provided human and technical resources are available you can add the job into an existing position or create a position to raise the awareness of the overall rail shipment through out your organization. If you choose to outsource the maintenance and movement responsibility you have a host of professional service organizations that can provide immediate expertise.
Tealinc provides this service for our Lessee’s. We have the technical expertise, years of experience and contacts throughout the industry to be effective. We have found that for a railcar type there’s between a 15% to 25% premium built into full-service leases. Our efforts return this premium annually to our Rolling Stock Management Agreement (RSMA) customers, which are the majority of our railcar lease customers. We don’t have anything against full-service leases, just that they cost the Lessee more in the long run. Our modus operandi is to save our customers money. A full-service lease generally costs more than a Tealinc net lease with a RSMA.
Lease Term Structure. How to structure a lease term to get the maximum value for the investment is always a challenge. There’s a trade-off between type of railcar, term and commitments of the lease. The number one consideration has to be how many railcars do you need, when do you need them and how long do you need them for?
I have spent over thirty years directly planning for private and railroad controlled fleets and leading the planning for organizations or advising on the componentry of fleet planning. I find the model that works best is to define your business in term and risk segments. Long term low risk business should result in long term lower priced leases. Long term high risk business should result in short to medium term moderately priced leases. Whereas short term high or low risk business will result in higher priced lease rates. The long term business will result in your company being able to make a solid long term commitment to your Lessor. You should get a better price for that. Whereas if you have a long term high risk business segment you’ll want to hedge your lease term in case the business goes away and you no longer have a need for the railcars, expect to pay a bit more money for this option. And for the short term there’s many considerations on the Lessor side such as cost of investment and returns, empty repositioning transportation costs, amount of time the railcars will remain out of service between Lessee’s, etc. all of which make a short term lease structure a bit more challenging.
What am I not asking that I should be? Depending on your company’s situation here are a few examples that may be relevant:
- What’s the premium I pay for AAR/FRA maintenance in a full service lease?
- What’s the advantages/disadvantages for a managed net lease?
- Do I have the in-house expertise to really manage a fleet of railcars?
- What convinces me that out sourcing my fleet management is the right thing to do?
- How would I categorize my business / business segments?
- Does the lease provide dual indemnity?
- What are my obligations for storage and transportation?
- What turnback obligations will I have?
- If I lease railcars and then find out later that I don’t need all of the railcars I’ve leased what are my alternatives?
- Does the lease document represent my business case?
- And as they say in Ghostbusters, “Who Do I Call?”