Residual value leasing for bloodstock purchases

Press, 26 July 1984, Page 30

Residual value leasing for bloodstock purchases

By

W. R. CARSTON

The recent lifting of restrictions on public and private companies as owners in racing and a major change in the rules regarding partnerships could give impetus to a Palmerston North-based company’s decision to expand its activities into the bloodstock field in the South Island. Until now, with the exception of some West Coast and South Canterbury clients involved in the dairy industry, the bulk of business for CentreLease Rural, Ltd, a company specialising in residual value leasing and financing, has been in the North Island. Residual value leasing, common practice in industry and commerce in many countries for the financing of expensive equipment, is a relatively new method of financing expensive livestock in New Zealand. On a recent visit to Christchurch to outline the company’s expansion plans and introduce the newly appointed South Island representative, Mr Neil Cornelius, CentreLease’s founder and the managing director, Mr Bill Laidlaw, of Palmerston North, said that in its first year of operations CentreLease’s main contribution to the bloodstock industry had been to provide finance for breeding stock. It had been active at the Trentham and Waikato sales this year, but more as a conventional financier in association with Wrightson Bloodstock. Since it was founded in February of last year CentreLease had made phenomenal progress, accord-

ing to Mr Laidlaw. It had experienced the usual teething problem of any new venture — that of providing credibility — but once that was established all had been plain sailing. Mr Laidlaw said that in the first 12 months of operations the company which has the financial backing of one of the world’s leading merchant banks, Barclays (N.Z.), Ltd, had financed deals worth hundreds of thousands of dollars and in the first six months of this year the portfolio had increased by 600 per cent. “All the top owners, trainers and stud proprietors would be aware of us now,” said Mr Laidlaw. “The philosophy of leasing, as opposed to a large capital outlay to buy expensive bloodstock outright, was simple,” said Mr Laidlaw. “Profits are accrued from the use, not the ownership of productive assets.” CentreLease, like most providers of finance, is no benevolent institute but Mr Laidlaw asserts that the many benefits gained from leasing far outweigh the disadvantages. In leasing, the client has no capital outlay and pays no deposit. Rentals are known and geared to suit clients and rental payments and depreciation on the asset are tax deductible. “Leaseback” is another facility offered by the company. Under this arrangement the client sells the stock back to CentreLease, at an agreed value, then refinances the lease and still retains the asset. This frees up capital which can be spent on property improvements or for the pur-

chase of more stock. Basically the procedure for seeking finance through CentreLease is the same as for any other lending institute. A potential client with a proposition will approach the company and Barclays, who then run a normal credit check. Depending on the size of the sum sought approval of the loan could take from seven to 10 working days. Once the application has been approved the client may select the horse or horses he wishes to purchase and CentreLease, after the necessary documents have been signed, arranges payment. Residual value is determined at the start of the lease which, according to the type of stock purchased, may run for a period of up to five years. Throughout the lease period the client builds ownership in the horse through the residual value system and all revenue earned by way of service fees or the sale of progeny belongs to the client. At the end of the lease period the client has three options. He may either release or buy the horse at its residual value or put it on the market. If it fetches more than its residual value the amount above that figure goes to the client. In the event of a shortfall the client is required to make up the difference to the residual value. The method by which the residual value is determined and the leasing rentals arrived at is set out in a table provided by CentreLease. This table sets out the leasing rental fees for periods

of two, three and four years for a broodmare or fillies secured for breeding, based on a purchase price of $lOO,OOO. A client’s leasing rental payments may be paid in advance on either a monthly or annual basis. Naturally the annual payment is slightly less. The $lOO,OOO purchase spread over a repayment period of two years in two annual advance payments will cost the client $76,054, or $83,400 if the repayments are made monthly in advance. During that period the depreciation, based on a rate of 33.33 per cent, on the animal will have amounted to $55,552. The residual value of the animal at that point would be $44,448, calculated by deducting the depreciation figure from the original purchase price. A client’s repayments on a three-year leasing term on the corresponding animal’ would amount to $99,216 if paying annually, or $109,008 (if paying monthly), the amount of depreciation claimed would be $70,367 and the residual value would be $29,634. In the same exercise spread over a four-year term the client’s total repayments would amount to $116,472, paid in four equal amounts of $29,118 annually in advance, or, if calculated on the monthly basis, a total of $128,304. During that period depreciation would have amounted to $80,244 and the residual value would then be down to $19,757. There are additional incentives for those clients who are in the happy position of being able to pay all

their rentals in advance. For instance, a three-year rental on a $lOO,OOO purchase paid in advance would amount to $78,672. This client still receives the tax concessions and depreciation on his asset and is immediately $20,544 better off than a contemporary who makes his payments in three equal annual amounts. He also has $21,328, the difference between the total rental and the purchase price, to play with for three years before having to part with the latter amount, plus another $8306, to meet the residual value and make his asset freehold.