Uncertainty about Tax Reform Curtails Leasing Business

By Morris, John | American Banker, February 12, 1986 | Go to article overview

Uncertainty about Tax Reform Curtails Leasing Business


Morris, John, American Banker


CHICAGO -- Uncertainty over tax reform -- and particularly the confusion over the continued existence of the 10% investment tax credit -- has slowed business in the leasing industry.

While most think it unlikely that Congress will kill the investment tax credit and back-date its death to Jan. 1, its demise might be postponed until the same time next year. Or maybe it won't be banned at all. Or it might be cut in half.

"How can anyone make a reasoned judgment on a capital investment when they don't know what tax reform is going to be?" asked Hugh Zick, president of HFC Leasing Inc. Added Norman Chapman, chairman and president of Security Pacific Leasing Corp.: "We just wish Washington would solidify something."

A disruption of the leasing industry could have serious implications, as leasing accounts for 28% of all capital investment in America. Abolition of the investment tax credit, described as "the real engine of capital formation" by Peter Nevitt, chairman of BankAmeriLease Companies, would have two major effects: It would greatly reduced the benefits of so-called "tax leasing," in which a customer enjoys lower payments because the leasing company utilizes all the available tax benefits, and it would affect the makers of capital equipment by removing what is in essence a subsidy to the buyers by America's taxpayers.

In normal times, a tax lease represents nothing more than a fixed-rate loan, but with a rate reduced by tax benefits to as much as 600 basis points below the comparable cost of bank loans. The disappearance of the investment tax credit would slash that advantage to as little as 150 basis points, according to Mr. Nevitt.

Because the investment tax credit plays such a major part in the mechanics of pricing a lease, its threatened departure has made it very difficult to draw up new lease contracts. Generally, lessors have found two ways to do this: They add an indemnity clause requiring the customer to pay the difference if the investment tax credit is done away with; or they offer to renegotiate or cancel the lease in the same tax year. Neither is satisfactory, as each leaves the borrower with uncertainty over costs or availability of equipment -- the exact opposite of what a lease is supposed to do.

Mr. Nevitt said BankAmeriLease offers alternative financing in the ordinary course of business with a choice of a tax lease, or a higher-priced nontax lease. A bank or finance company has an advantage over nonbank lessors in this respect, as it can offer a choice of financing, he added. But Mr. Chapman said Security Pacific is relying on the ability to renegotiate leases in the same calendar year. "After all, if they have to buy this equipment instead of leasing it, it'll cost them more anyway" without the investment tax credit, he pointed out. …

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