Equipment leasing is a fixed-income, self-liquidating, hard-asset, alternative to bond investment designed to generate sheltered, passive distributions that are fully sheltered the first six years and 30% sheltered thereafter. Unsheltered distributions can be further sheltered using passive losses from elsewhere.

In an equipment leasing program, investors pool their monies together to purchase equipment which is then leased to companies and businesses. The equipment leasing program is designed to create a fixed and steady income stream for the investor. Due to the durable nature of much leased equipment, the investor may also generate additional proceeds upon the expiration of the lease if the equipment is leased again or sold.

• Fixed cash flow [not guaranteed]
• Tax sheltered returns
• Lack of stock market volatility
• Hedge against rising interest rates and inflation
• Self-liquidating hard asset
• Longer-term investor objectives
• Limited investor liability
• Portfolio diversification

Private Equity Group provides access to equipment leasing programs that are structured with the idea of providing fully tax-sheltered distributions of 8% to 10%, which are roughly equivalent to before-tax portfolio earnings of 16%. The percentage distribution is calculated on 100% of one's originally invested capital.

The goal is to triple the equipment portfolio's size by using 50% leverage and the reinvestment of undistributed cash from operations (i.e., self-financing) so as to liquidate the portfolio in ten years and have residual value equal to 100% of one's originally invested capital.

Example: 35% residual value of the equipment; 35% of 300% (leverage) =105% residual value. For each $10,000 invested, a return of $20,934 (an after-tax IRR=7.24%; 10.5% before tax).

Equipment leasing programs may provide tax deferral opportunities in the early years. Passive income generators (PIGs), such as cash flow generated from rental income, can be sheltered, or offset by passive activity losses (PALs) like allowable depreciation amounts. In essence, very little, if any, of the cash flow is taxable. In later years, the percentage of sheltered income would be reduced. However, unsheltered distributions can often be further sheltered using passive losses from other activities.

Upon sale of the equipment, the rules of depreciation recapture state that all gain on the disposition of the equipment, if any, will be taxed, unless that gain is sheltered with passive deductions or credits from elsewhere.

The only item of AMT adjustment is the excess of accelerated depreciation claimed on MACRS property over the straight-line depreciation of the 150% declining balance method until switching to straight-line when it would produce a larger deduction.

An investor's liability is limited to their original contribution. There are no capital calls.



Due to the hard asset nature of equipment leasing programs [and the fact that they are not actively traded on a secondary market] they are not subject to the volatility of financial instruments such as stocks and bonds.

Leasing is a way to invest in the growth of the global economy for a contract-driven yield, much different from a market-driven yield. When inflation and/or rising interest rates are prevalent, the value of stocks and bonds is diminished. Conversely, hard assets, such as equipment, may actually increase in value. In times of recession, when stocks and bonds may suffer, equipment leasing may pick up as companies defer the purchase of new or replacement equipment, and turn to leasing as a viable alternative. Equipment leasing offers the potential for returns in either inflationary or recessionary times.



Risks include the potential for the lessee to default on lease payments. In order to mitigate this possibility, it's beneficial for investors to have a diversified portfolio of equipment.

Prevailing market conditions may affect the residual value of the equipment when it is ready to be sold.

You are reliant on the fund manager to properly identify, price, negotiate terms, manage, and ultimately dispose of the capital equipment. Also, many program managers conduct other operations, which could present potential conflicts of interest.

Equipment leasing programs are available to accredited investors only and may not be suitable for everyone. All investment strategies have risks. Each opportunity should be analyzed carefully to weigh the balance of risk and reward. Investors must read the sponsor's Private Placement Memorandum prior to investing to obtain and comprehend in-depth information about the offering. Private issue and non-traded interests are generally considered illiquid, as no public market exists for their resale. A change in tax legislation could negatively affect this type of investment program.



Triple-Net Lease means the lessee pays the taxes, insurance, and maintenance costs.

Hell-and-High-Water Lease means the lessee must pay the lease rate in any event—whether they use the equipment or not.

No equipment is acquired without a signed Triple-Net and Hell-and-High-Water lease in place beforehand.

A hybrid combination of the following Triple-Net Leases are available in the equipment leasing programs we represent:

• Operating Lease: Short term—typically 3-4 year lease requiring active management in which the lessee can acquire use of the equipment for a fraction of the equipment's useful life. The aggregate rental payments are less than the purchase price of the equipment. Monthly rental rates, however, are high providing greater income potential than what you would find in a full pay-out lease. This is because the risks associated with the holding period are minimized for the lessee. The need to re-lease the equipment at the end of the lease period, however, increases risk. An easy way to think of this is a short-term car lease vs. a long-term lease.
• Full Pay-Out Lease: A long-term lease of 10+ years requiring rental payments greater than the cost of the equipment, but less than what you would find in the monthly payment in an operating lease. Full pay-out leases do not require active management or re-leasing of equipment. Under a full pay-out lease, the lessor recovers the original cost of the equipment during the lease term. We recommend full pay-out leases be included in your equipment leasing program.
• High Pay-Out Lease: An operating-type lease that recovers at least 90% of the equipment's cost during the lease term.

Lease Terms: In the equipment leasing programs we represent, the lessee pays for comprehensive insurance including fire, liability, acts of God, and extended warranty coverage. In addition, the lessee assumes the risk of loss of the equipment, whether or not insured.

Lessees will indemnify and hold the Partnership harmless from and against any and all claims, costs, expenses, damages, losses and liability.

Here are some of the things we look for in equipment leasing programs:

	Recommended	Not Recommended
Assets	Multiple Assets Long-lived Equipment	Single Asset
Diversity	Multiple Industry Lessees Multiple Locations Multiple Types of Equipment	Single Industry Lessees
Credit Support	Creditworthy Lessees (75% Rated Investment Grade Lessees by Moody)	Questionable Credit Lessees
Lease Type	Combination of: Operating, Full-payout Leases (100% cost recovery), and High-payout Leases (90% cost recovery)	Operating Leases (Do not fully pay cost)
Leverage	Moderate (i.e., 50%) (Designed to be an income generator, not a tax shelter).	High (i.e., 80% +) (Designed to be a tax shelter)

We agree with the basic financial planning philosophy that clients should diversify in order to mitigate risk. Having a well-balanced portfolio often means holding a variety of investments that will perform differently under changing market conditions.

Though individual risk tolerance, time horizon and other suitability considerations vary, the April 1994 issue of Financial Planning Magazine states "Leasing programs should be 15% of all optimized portfolios to counteract market-driven financial assets."

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