Brain Ladin Discusses Leases as a Form of Private Financing for Vessel Acquisitions
Continuing to acquire vessels is essential if a shipping company wishes to remain competitive and successful in the industry. However, obtaining the necessary financing to purchase new ships is no easy task, especially when the most significant source of funds from the past (bank loans) has all but disappeared as a reliable method. Now more than ever before, the shipping industry has been forced to turn to alternative methods of financing. Specifically, many companies have turned to private financing in the form of leases. Lease structured financing is the process whereby the possession of property, in this case of the vessels, passes to the purchaser, but the ownership remains with the lessor. Lease financing has already seen a high degree of success in the commercial aviation industry, which is why Brian Ladin of Dallas, Texas is a strong proponent of it in the shipping industry.
Types of Leases
Finance Lease
According to Brian Ladin, a finance lease, otherwise known as a capital lease or a sales lease, is a type of lease agreement whereby the finance company involved becomes the owner of vessels throughout the duration of the lease. Thus, all the risks, as well as all the rewards, are transferred to the owner. Finance lease agreements are usually a method used for the long-term financing of ships. In a finance lease situation, the ship or ships are purchased by the lessor (who is providing the capital) and leased under a long-term agreement to the shipping company, the lessee. After the finance lease is up, the shipping company has the option of purchasing the ships at a discounted rate. Further, in such an agreement, the financier or lessor, has very little involvement with the vessels other than simply owning them. In contrast, the lessee is responsible for the operating of the vessels and is required to fully compensate the lessor if they were to terminate the agreement early for any reason.
Operating Lease
An operating lease is like a finance lease in that the risk remains with the lessor. However, it differs in that the lessee can terminate the lease whenever they wish, and at the point of termination, the assets would revert to the lessor. During the lease, the lessee has complete use of an asset — in this case a ship — but they are responsible for maintaining the condition of the asset. Operating leases are typically for the short or medium-term, rather than long-term like finance leases. This type of lease is often riskier for the lessor as when the lease is over, the lessee returns the ships to the lessor, who is then responsible for maintaining the ships, which could include such tasks as hiring employees or making any necessary technological upgrades. In contrast to finance leases, for the duration of the operating lease, the lessee acts as the owner of the vessels and does not have the option to purchase them.
Benefits of Leases
Tax Advantages
Brian Ladin claims that one major advantage to acquiring vessels through a lease are the tax advantages that come with them. Through leasing, shipping companies can defer tax liability on capital allowance. Specifically, finance leases provide a tax benefit through reducing the ship’s value against profits. These types of leases are also able to help companies with good profits, but which lack investment to be eligible for tax relief by purchasing a ship. Beyond the benefits for the lessor, there are also benefits for the lessee. One of the major benefits for the lessee is that a lease usually takes less time to process and it does not require the initial cash value of the good up front.
Capital Diversity
Finally, Brian Ladin of Delos Shopping asserts that capital diversity is key when it comes to the shipping industry, and leasing provides just that. The reduction in bank loans has created a financial hole in the shipping industry that is being filled by leasing companies that have better access to capital funds. The abundance of leasing companies offers the shipping industry more sources of capital than ever before. There is more cash flow and the repayment structures aren’t as restrictive, often being longer than the ones offered by banks. The result is that shipping companies have more financing opportunities, which puts them in a positive financial position where they can move forward with plans for fleet expansion or plans to make their existing vessels more energy efficient and environmentally friendly.
