lease strategies - swars · 2018. 10. 4. · click to edit master title style lease strategies...

Click to edit Master title style

Lease StrategiesPitfalls of Rail Car Leasing

JERRY CHARASKA

SWARS FALL MEETING, DALLAS, TX

SEPTEMBER 2018

1101 W. 31st St. Suite 200 Downers Grove IL 60515 | 630.325.9977 AllTranstek.com

Click to edit Master title styleMy Background

2018 COPYRIGHT ALLTRANSTEK, L.L.C. 34

❑41 Years in the Freight-Car Repair and Consulting Business

❑Started from bottom

❑Managed Repair Facilities for 22 years

❑19 years consulting including hundreds of pre and post lease inspections

❑Represent Car Owners, Lessee, sub-lessor, sub lessee

Click to edit Master title stylePresentation Goal


❑ Lease Differences

❑Lease Return Costs – Damage, Cleaning, Corrosion, Mechanical

❑Terminology Differences, AAR, Car Owner, Lessee, Legal

❑Definitions

❑Control Costs

Click to edit Master title styleFull Service Lease


❑ Lessor provides railcars to lessee to be used subject to certain terms and conditions.

❑ General Overview:

▪ Lessor pays for AAR Interchange Repairs. Maintenance of cars, Railroad Damage (Rule 95)

▪ Lessor usually will reimburse for time cars are “out of service” unless lessee responsibility

▪ Lessor covers property taxes and insurance

▪ Lessor covers manufacturer warranty items

▪ Lessor takes cars of AAR and FRA Mandatory Repairs and Upgrades

▪ Lessee covers all parts of car that product touches, hatches, interiors outlets and valves.

▪ Lessee covers damage to cars while handling, loading and unloading

▪ Disadvantage - Higher monthly cost to lessee

Click to edit Master title styleNET Lease


❑ Lessor provides railcars to lessee to be used subject to certain terms and conditions.

❑ General terms and conditions:

▪ Lessee pays for maintenance and repair expenses

▪ Lessee pays for special interior coatings

▪ Lessee pays property taxes and insurance

▪ Lessee pays railroad interchange repairs as well as Railroad Damage (Rule 95)

▪ Basically lessee takes care of the car from one end to the other.

▪ Lessee covers manufacturer warranty items

▪ Lessee takes cars of AAR and FRA Mandatory Repairs

▪ Monthly lease cost is less per car

Click to edit Master title styleTypical Lease Language


Maintenance; Inspection.

▪ SUBLESSEE shall throughout the Term of this Sublease maintain the Railcars, at its expense (i) in good repairand operating condition, ordinary wear and tear excepted, (ii) in a manner consistent with maintenancepractices used by SUBLESSEE in respect of other equipment owned or leased by SUBLESSEE similarly in typeto such Railcars, (iii) in compliance, in all material respects, with all applicable laws, regulations andrequirements (as such are in effect both as of the date hereof and throughout the Term of this Sublease) ofany governmental authority relating to the use, operation or maintenance of the Equipment includingwithout limitation, applicable FRA regulations, DOT regulations, STB regulations and AAR Interchange Rules asapplicable to continued use by SUBLESSEE and in a condition suitable for free interchange under the AARInterchange Rules, and (iv) in compliance with any maintenance requirements, if any, contained in policies ofinsurance maintained by SUBLESSEE pursuant to Section 23 hereof. SUBLESSEE shall maintain or cause to bemaintained all records, logs and other documents required by applicable law to be maintained with respectto each Railcar, and will maintain such records and logs on a nondiscriminatory basis and in accordance withSUBLESSEE’s normal record-keeping procedures. SUBLESSEE agrees that it will not discriminate against anyRailcar (as compared to other similar equipment owned or operated by SUBLESSEE) in respect of the use ormaintenance of the Equipment.

Click to edit Master title styleTypical Lease Language


❑ Maintenance; Inspection.▪ SUBLESSEE shall throughout the Term of this Sublease maintain the Railcars, at its expense (i) in

good repair and operating condition, ordinary wear and tear excepted, (ii) in a mannerconsistent with maintenance practices used by SUBLESSEE in respect of other equipmentowned or leased by SUBLESSEE similarly in type to such Railcars, (iii) in compliance, in allmaterial respects, with all applicable laws, regulations and requirements (as such are in effectboth as of the date hereof and throughout the Term of this Sublease) of any governmentalauthority relating to the use, operation or maintenance of the Equipment including withoutlimitation, applicable FRA regulations, DOT regulations, STB regulations and AAR InterchangeRules as applicable to continued use by SUBLESSEE and in a condition suitable for freeinterchange under the AAR Interchange Rules, and (iv) in compliance with any maintenancerequirements, if any, contained in policies of insurance maintained by SUBLESSEE pursuant toSection 23 hereof. SUBLESSEE shall maintain or cause to be maintained all records, logs andother documents required by applicable law to be maintained with respect to each Railcar, andwill maintain such records and logs on a nondiscriminatory basis and in accordance withSUBLESSEE’s normal record-keeping procedures. SUBLESSEE agrees that it will not discriminateagainst any Railcar (as compared to other similar equipment owned or operated by SUBLESSEE)in respect of the use or maintenance of the Equipment.

Click to edit Master title styleLargest Costs at End of Lease


❑Cleaning

❑Damage and Corrosion

❑Coatings

❑Valves, Gates and Hatch Covers

❑Truck Repairs

❑Mechanicals

Click to edit Master title styleCLEANING


❑If you received a clean car you should return a clean car

❑Look at your lease if cleaning is required and what kind of cleaning

❑Residue Free?

❑Change of Service?

❑Clean for same service?

❑Sweep Clean?

Click to edit Master title styleTypical Language for Cleaning


❑(ix) Ready for the subsequent loading of the Commodities but for the possible need for simple sweeping or washing: and

❑(x) In such condition that all Cars shall be acceptable for their intended use by other shippers of the Commodities.


Plastic Pellet -$1200-$1800 per car“Residue Free”



Grain Car $400 - $1200 Per

Car Sweep to Wash



Coal Cars $200

Average CPC



Product Spillage – Dirty Car Conceal Defects



Crude Oil $3K - $6K

per car“Residue

Free”


Click to edit Master title styleResidue Free on Tank Cars means Valves need to be Clean inside and out

Consider

*O-Rings

*Gaskets

*Testing



Ports and Cavities



DERAILMENT and UNLOAD DAMAGE



UNLOADING DAMAGE



Aluminum Corrosion is Damage



Damage from loading or unloading or Product Damage – Lessee Responsible.



CORROSION



CORROSION is DAMAGE!


Click to edit Master title styleDevil in the Details – Coatings


❑(c) All repairs, maintenance and modifications shall be performed by AAR certified railroad equipment repair facilities.

❑(d) All cars shall be painted whenever a Car’s exterior shall exhibit rusting or other surface defects.


Coatings

58 2018 COPYRIGHT ALLTRANSTEK, L.L.C.


Coatings and Corrosion



MechanicalDefects



MechanicalDefects and Owners Responsibility


Click to edit Master title styleLease Terms vs Railroad Terms


The Most Common Terms That Cause Misunderstanding:

❑Lease States: Normal Wear & Tear or Ordinary Wear & Tear

❑Railroad Uses: Cause for Renewal

❑Lease States: Damage

❑Railroad Used: Rule 95

❑Lease States: Corrosion

❑Railroad uses: Failure

Click to edit Master title styleDefinitions


Use AAR Interchange Rules & Office Manual – Appendix A

❑Break (Broken)

❑Car Owner

❑Cracked

❑Loose

❑Running Repair

❑Unfair Usage

❑If not in Appendix A it should be defined in the lease.


Appendix A Office Manual



Appendix A Interchange Rules

APPENDIX A

— 709 —

Correct Repairs: Material and repairs specified in Section B of any AAR InterchangeRule.

Corrosive Service: Defined by D.O.T. Regulations for Class 8.

Cost Benefit Analysis: The methodology described in the Association of AmericanRailroads’ cost benefit analysis procedure, used to identify all of the relevantestimated costs and benefits.

Cost Factors: Indices used to adjust the original cost of a freight car for annual pricefluctuations.

Counter Billing Authority (CBA): A document that issues authorization to collect anovercharge (similar to a credit memo) or to deduct (offset) an overcharge from a bill.

Cracked: Unless defined otherwise in a specific Rule, cracked means fracturedwithout complete separation into parts, except that castings with shrinkage cracksor hot tears that do not significantly diminish the strength of the member are notconsidered to be cracked.

Data Exchange System: The AAR’s system of collecting, sorting, analyzing anddistributing freight car repair information to participating railroads and car owners.

Data Summary: A Data Summary is a real-time compilation of relevant data for aspecified category (e.g., wheel impact data, acoustic bearing data, overload/imbalance data, etc.). Information contained in a Data Summary may be used tofacilitate safe and economical operations. Approved Data Summary definitions aredocumented in AAR MSRP Section F.

DDCT: The rail industry’s system for managing damaged and defective cars(Damaged Defective Car Tracking).

Defect Card: A document accepting responsibility for damage or loss to aninterchange freight car dated prior to 1/5/11. After 1/5/11, an incident created in theDDCT system where an active record in the system indicates the handling lineaccepting responsibility for damage or loss to an interchange freight car as outlinedin AAR Rule 95.

Delivering Line: Subscriber offering a freight car in interchange.

Depreciated Value: The reproduction value of a freight car adjusted for depreciationup to the date of the damage, based on annual rate of depreciation shown in AARRule 107.

Derailment: Anytime the wheels of a car or engine come off the head of the rail.

Designated Party: A company or agent that a car mark owner elects to handle Rule115 (DDCT) incidents. The designated party must be registered in FindUs.Rail andmust be signatory to the AAR interchange Rules. Upon acceptance of a DDCTincident from the car mark owner, the designated party must handle all car ownerrequirements related to the DDCT incident including, but not limited to, shopdisposition, Actual Depreciated Value, Joint Inspection, and rendering of invoice todamaging carrier.

Dismantling Allowance: The compensation due when it has been determined thatequipment must be retired and prohibited from re-entering interchange service.Dismantling allowance is calculated by dividing the lightweight of car/rack by 2240(gross ton) times the current value of Job Code 4489 (dismantling allowance) attime of settlement. See AAR Rule 107.

Disposition: Destination and routing instructions issued by a car owner to thehandling line per AAR Rules 1, 114, and 115.2018 COPYRIGHT ALLTRANSTEK, L.L.C. 69


Appendix A Interchange Rules


APPENDIX A

— 709 —

Correct Repairs: Material and repairs specified in Section B of any AAR InterchangeRule.

Corrosive Service: Defined by D.O.T. Regulations for Class 8.

Cost Benefit Analysis: The methodology described in the Association of AmericanRailroads’ cost benefit analysis procedure, used to identify all of the relevantestimated costs and benefits.

Cost Factors: Indices used to adjust the original cost of a freight car for annual pricefluctuations.

Counter Billing Authority (CBA): A document that issues authorization to collect anovercharge (similar to a credit memo) or to deduct (offset) an overcharge from a bill.

Cracked: Unless defined otherwise in a specific Rule, cracked means fracturedwithout complete separation into parts, except that castings with shrinkage cracksor hot tears that do not significantly diminish the strength of the member are notconsidered to be cracked.

Data Exchange System: The AAR’s system of collecting, sorting, analyzing anddistributing freight car repair information to participating railroads and car owners.

Data Summary: A Data Summary is a real-time compilation of relevant data for aspecified category (e.g., wheel impact data, acoustic bearing data, overload/imbalance data, etc.). Information contained in a Data Summary may be used tofacilitate safe and economical operations. Approved Data Summary definitions aredocumented in AAR MSRP Section F.

DDCT: The rail industry’s system for managing damaged and defective cars(Damaged Defective Car Tracking).

Defect Card: A document accepting responsibility for damage or loss to aninterchange freight car dated prior to 1/5/11. After 1/5/11, an incident created in theDDCT system where an active record in the system indicates the handling lineaccepting responsibility for damage or loss to an interchange freight car as outlinedin AAR Rule 95.

Delivering Line: Subscriber offering a freight car in interchange.

Depreciated Value: The reproduction value of a freight car adjusted for depreciationup to the date of the damage, based on annual rate of depreciation shown in AARRule 107.

Derailment: Anytime the wheels of a car or engine come off the head of the rail.

Designated Party: A company or agent that a car mark owner elects to handle Rule115 (DDCT) incidents. The designated party must be registered in FindUs.Rail andmust be signatory to the AAR interchange Rules. Upon acceptance of a DDCTincident from the car mark owner, the designated party must handle all car ownerrequirements related to the DDCT incident including, but not limited to, shopdisposition, Actual Depreciated Value, Joint Inspection, and rendering of invoice todamaging carrier.

Dismantling Allowance: The compensation due when it has been determined thatequipment must be retired and prohibited from re-entering interchange service.Dismantling allowance is calculated by dividing the lightweight of car/rack by 2240(gross ton) times the current value of Job Code 4489 (dismantling allowance) attime of settlement. See AAR Rule 107.

Disposition: Destination and routing instructions issued by a car owner to thehandling line per AAR Rules 1, 114, and 115.

Click to edit Master title styleWear & Tear


The Most Common Terms:

❑Lease States: Normal Wear & Tear or Ordinary Wear & Tear

❑Railroad Uses: Cause for Renewal

❑Normal wear and tear is easy to define: “It is the point from a new part to a AAR “cause for renewal” – Everything in between is normal wear and tear.”


Normal Wear & Tear and Ordinary Wear & Tear



Lease Terms vs Railroad Terms – Rule 12 Fig A


Click to edit Master title styleRailroad Terms and Lease Terms


❑ Corrosion

❑ Damage – “Rule 95 Allows Railroad to Damage your cars to the extent detailed in the rules.”

❑ Office Manual and AAR Interchange Rules – Appendix A

❑ Paint and Coatings is not mentioned in AAR Interchange Rules

❑ Depreciated Value – Rule 107 – AAR Method to calculate the settlement of a freight car damaged beyond repair

❑ Stipulated Value – Car owners method of calculating residual value and can be much higher than depreciated value.


Rule 95 A and B

RULE 95

— 670 —

B. DELIVERING LINE – IN INTERCHANGE

This section applies to cars moving without defect card protection in existence on

car and damaged to the extent of or in a condition as shown below. Car must

have defect card attached when offered to receiving party except when

documented evidence is sufficient to identify responsible party and/or party

having prior knowledge of cardable defects. Receiving party referred to includes

delivery home to private industry tracks.

1. Boxcar

(a) 2 or more adjacent posts or braces cut through thickness of metal.

(b) Metal end bent inwardly 6 inches or more from a vertical plane, in an

area at least 2 feet above end sill.

(c) Side door missing from any type car. Door placed inside car is not

considered missing; however, door must be the door with which the

car was equipped at time of failure.

2. Covered Hopper Car

(a) Hole cut through side, slope or end sheet in lading area (including

empty car) regardless of extent.

(b) Sheet bent inwardly 2 inches or more.

(c) 2 or more adjacent metal posts cut through thickness of metal more

than one half the width in any direction.

3. Open Top Car

(a) Top chord angle or 2 or more adjacent metal posts, stakes, or braces

cut through thickness of metal in the web.

4. Tank Car

(a) Sheet, head or dome of tank car tank, insulated or non-insulated,

abruptly bent, cut or gouged similar to Illustration A and Illustration B.

(b) Metal jacket of insulated pressure tank car (DOT 112J, 114J, 105A,

105J classes) abruptly bent, cut or gouged similar to Illustration C.

(c) Metal jacket of jacketed pressure tank car (DOT 105S, 109A, 120A,

and 120J Classes) abruptly bent, cut or gouged similar to Illustration

C.

(d) Metal jacket of jacketed non-pressure tank car (DOT 111A and AAR

211A) abruptly bent, cut or gouged similar to Illustration C.

(e) Tank car of stub sill construction, having stub sill reinforcing plate or

bottom tank indented or buckled 1⁄2 inch in depth or more (this area is

between the body bolsters), or abrupt bending of stub sill in excess of

21⁄2 inches per 30 inches of sill length (the stub sill extends outward

toward the end of the car from the body bolster) in the following

categories except when concealed by design:

(1) Non-pressure tank cars (DOT 111A Class) built prior to July 1,

1974, having AAR certified status (SS “00”) and so stenciled on

car per Rule 88.B.

(2) Non-pressure tank cars having exterior coils welded to tank.

(3) All pressure tank cars (DOT 112, 114, 105 Classes).

(4) All tank cars built after July 1, 1974.



/

Depreciated value vs Stipulated Value


Depreciated Value – Rule 107 – AAR Method to

calculate the settlement of a freight car damaged

beyond repair

Stipulated Value – Car owners method of

calculating residual value and can be much higher than depreciated value.

Click to edit Master title styleMy Tips


❑ Escrow Funds for Lease Return Costs

❑ Inspect all or at least a portion of the cars you will be leasing or buying

❑ Archive photos and reports for lease return reference

❑ Pre trip before the first load. Once loaded you have limited options in most leases.

❑ Clean your car prior to return if lease requires it

❑ Understand the “Clean” Terms – Clean, Residue Free, Sweep Clean and Change of Service Clean all have different meanings.

❑ Look for DV vs Stipulated Value

❑ Use Railroad Definitions or reference them in the lease.


Questions ?

q Dick Kloster

q 847-544-6760

q [email protected]

q Jerry Charaska

q 970-396-1255

q [email protected]

mailto:[email protected]:[email protected]

lease strategies - swars · 2018. 10. 4. · click to edit master title style lease strategies...

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