Lease Strategies Pitfalls of Rail Car Leasing

 
Lease Strategies Pitfalls of Rail Car Leasing
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       Lease Strategies
       Pitfalls of Rail Car Leasing
                  J E R RY C H A R A S K A
                  S WA R S FA L L M E E T I N G , D A L L AS, T X
                  SEPTEMBER 2018

        1101 W. 31st St. Suite 200 Downers Grove IL 60515 | 630.325.9977   AllTranstek.com
Lease Strategies Pitfalls of Rail Car Leasing
Click to edit Master title styleMy Background

❑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

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Lease Strategies Pitfalls of Rail Car Leasing
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                             Presentation Goal

❑ Lease Differences
❑Lease Return Costs – Damage, Cleaning, Corrosion, Mechanical
❑Terminology Differences, AAR, Car Owner, Lessee, Legal
❑Definitions
❑Control Costs

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Lease Strategies Pitfalls of Rail Car Leasing
ClickService
Full  to edit Lease
              Master title style

❑ 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

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Lease Strategies Pitfalls of Rail Car Leasing
ClickLease
NET   to edit Master title style

❑ 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

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Lease Strategies Pitfalls of Rail Car Leasing
Click to Lease
Typical  edit Master
               Language
                     title style
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 manner consistent with maintenance
     practices used by SUBLESSEE in respect of other equipment owned or leased by SUBLESSEE similarly in type
     to such Railcars, (iii) in compliance, in all material respects, with all applicable laws, regulations and
     requirements (as such are in effect both as of the date hereof and throughout the Term of this Sublease) of
     any governmental authority relating to the use, operation or maintenance of the Equipment including
     without limitation, applicable FRA regulations, DOT regulations, STB regulations and AAR Interchange Rules as
     applicable to continued use by SUBLESSEE and in a condition suitable for free interchange under the AAR
     Interchange Rules, and (iv) in compliance with any maintenance requirements, if any, contained in policies of
     insurance maintained by SUBLESSEE pursuant to Section 23 hereof. SUBLESSEE shall maintain or cause to be
     maintained all records, logs and other documents required by applicable law to be maintained with respect
     to each Railcar, and will maintain such records and logs on a nondiscriminatory basis and in accordance with
     SUBLESSEE’s normal record-keeping procedures. SUBLESSEE agrees that it will not discriminate against any
     Railcar (as compared to other similar equipment owned or operated by SUBLESSEE) in respect of the use or
     maintenance of the Equipment.

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Lease Strategies Pitfalls of Rail Car Leasing
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  Typical  edit Master
                 Language
                       title style
❑ 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 manner
    consistent with maintenance practices used by SUBLESSEE in respect of other equipment
    owned or leased by SUBLESSEE similarly in type to such Railcars, (iii) in compliance, in all
    material respects, with all applicable laws, regulations and requirements (as such are in effect
    both as of the date hereof and throughout the Term of this Sublease) of any governmental
    authority relating to the use, operation or maintenance of the Equipment including without
    limitation, applicable FRA regulations, DOT regulations, STB regulations and AAR Interchange
    Rules as applicable to continued use by SUBLESSEE and in a condition suitable for free
    interchange under the AAR Interchange Rules, and (iv) in compliance with any maintenance
    requirements, if any, contained in policies of insurance maintained by SUBLESSEE pursuant to
    Section 23 hereof. SUBLESSEE shall maintain or cause to be maintained all records, logs and
    other documents required by applicable law to be maintained with respect to each Railcar, and
    will maintain such records and logs on a nondiscriminatory basis and in accordance with
    SUBLESSEE’s normal record-keeping procedures. SUBLESSEE agrees that it will not discriminate
    against any Railcar (as compared to other similar equipment owned or operated by SUBLESSEE)
    in respect of the use or maintenance of the Equipment.

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Lease Strategies Pitfalls of Rail Car Leasing
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Largest  CostsMaster
               at Endtitle
                      of Lease
                           style

❑Cleaning
❑Damage and Corrosion
❑Coatings
❑Valves, Gates and Hatch Covers
❑Truck Repairs
❑Mechanicals

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Lease Strategies Pitfalls of Rail Car Leasing
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CLEANING

❑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?

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Lease Strategies Pitfalls of Rail Car Leasing
Click to Language
Typical  edit Masterfortitle
                         Cleaning
                             style

❑(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.

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

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                                      Grain Car
                                   $400 - $1200 Per
                                          Car
                                    Sweep to Wash

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                                      Grain Car
                                   $400 - $1200 Per
                                          Car
                                    Sweep to Wash

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                                                      Coal Cars
                                                        $200
                                                     Average CPC

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           Product Spillage – Dirty Car Conceal Defects
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                                                                        Crude Oil
                                                                        $3K - $6K
                                                                         per car
                                                                        “Residue
                                                                          Free”

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Residue Free on
                     title style
Tank Cars means
Valves need to be
Clean inside and
out

             Consider
           *O-Rings
           *Gaskets
             *Testing

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Ports and
Cavities

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 DERAILMENT and UNLOAD DAMAGE
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                                        UNLOADING
                                        DAMAGE

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                   Aluminum Corrosion is Damage
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Damage from loading or unloading or Product Damage – Lessee Responsible.

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             CORROSION

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                        CORROSION is DAMAGE!
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Devil      the Details
                Master –title
                           Coatings
                              style

❑(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.

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Coatings

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                      Coatings and Corrosion

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                      Coatings and Corrosion

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Mechanical
Defects

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Mechanical
Defects

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Mechanical
Defects

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Mechanical
Defects and
Owners
Responsibility

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Mechanical
Defects and
Owners
Responsibility

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Click toTerms
Lease    edit Master
              vs Railroad
                     title style
                           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

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Definitions

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.

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Appendix A
Office Manual

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                                                                            APPENDIX A

                                        Correct Repairs: Material and repairs specified in Section B of any AAR Interchange
                                         Rule.
                                        Corrosive Service: Defined by D.O.T. Regulations for Class 8.
                                        Cost Benefit Analysis: The methodology described in the Association of American
                                         Railroads’ cost benefit analysis procedure, used to identify all of the relevant
                                         estimated costs and benefits.

Appendix A                              Cost Factors: Indices used to adjust the original cost of a freight car for annual price
                                         fluctuations.
                                        Counter Billing Authority (CBA): A document that issues authorization to collect an

Interchange                              overcharge (similar to a credit memo) or to deduct (offset) an overcharge from a bill.
                                        Cracked: Unless defined otherwise in a specific Rule, cracked means fractured
                                         without complete separation into parts, except that castings with shrinkage cracks

Rules
                                         or hot tears that do not significantly diminish the strength of the member are not
                                         considered to be cracked.
                                        Data Exchange System: The AAR’s system of collecting, sorting, analyzing and
                                         distributing freight car repair information to participating railroads and car owners.
                                        Data Summary: A Data Summary is a real-time compilation of relevant data for a
                                         specified category (e.g., wheel impact data, acoustic bearing data, overload/
                                         imbalance data, etc.). Information contained in a Data Summary may be used to
                                         facilitate safe and economical operations. Approved Data Summary definitions are
                                         documented 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 an
                                         interchange freight car dated prior to 1/5/11. After 1/5/11, an incident created in the
                                         DDCT system where an active record in the system indicates the handling line
                                         accepting responsibility for damage or loss to an interchange freight car as outlined
                                         in AAR Rule 95.
                                        Delivering Line: Subscriber offering a freight car in interchange.
                                        Depreciated Value: The reproduction value of a freight car adjusted for depreciation
                                         up to the date of the damage, based on annual rate of depreciation shown in AAR
                                         Rule 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 Rule
                                         115 (DDCT) incidents. The designated party must be registered in FindUs.Rail and
                                         must be signatory to the AAR interchange Rules. Upon acceptance of a DDCT
                                         incident from the car mark owner, the designated party must handle all car owner
                                         requirements related to the DDCT incident including, but not limited to, shop
                                         disposition, Actual Depreciated Value, Joint Inspection, and rendering of invoice to
                                         damaging carrier.
                                        Dismantling Allowance: The compensation due when it has been determined that
                                         equipment 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) at
                                         time of settlement. See AAR Rule 107.
                                        Disposition: Destination and routing instructions issued by a car owner to the
   2018 COPYRIGHT ALLTRANSTEK, L.L.C.    handling line per AAR Rules 1, 114, and 115.                                              69
Corrosive Service: Defined by D.O.T. Regulations for Class 8.

Click to edit Master title style
                            Cost Benefit Analysis: The methodology described in the Association of American
                             Railroads’ cost benefit analysis procedure, used to identify all of the relevant
                                           estimated costs and benefits.
Appendix A                                Cost Factors: Indices used to adjust the original cost of a freight car for annual price
                                           fluctuations.
Interchange                               Counter Billing Authority (CBA): A document that issues authorization to collect an
Rules                                      overcharge (similar to a credit memo) or to deduct (offset) an overcharge from a bill.
                                          Cracked: Unless defined otherwise in a specific Rule, cracked means fractured
                                           without complete separation into parts, except that castings with shrinkage cracks
                                           or hot tears that do not significantly diminish the strength of the member are not
                                           considered to be cracked.
                                          Data Exchange System: The AAR’s system of collecting, sorting, analyzing and
                                           distributing freight car repair information to participating railroads and car owners.
                                          Data Summary: A Data Summary is a real-time compilation of relevant data for a
                                           specified category (e.g., wheel impact data, acoustic bearing data, overload/
                                           imbalance data, etc.). Information contained in a Data Summary may be used to
                                           facilitate safe and economical operations. Approved Data Summary definitions are
                                           documented in AAR MSRP Section F.
     2018 COPYRIGHT ALLTRANSTEK, L.L.C.   DDCT: The rail industry’s system for managing damaged and defective
                                                                                                        70    cars
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.”

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   Normal Wear & Tear and Ordinary Wear & Tear
                                   2018 COPYRIGHT ALLTRANSTEK, L.L.C.   72
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   Lease Terms vs Railroad Terms – Rule 12 Fig A
                                   2018 COPYRIGHT ALLTRANSTEK, L.L.C.   73
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Railroad  Terms
              Master
                and Lease
                     title style
                             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.

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Click to edit Master title style                                              RULE 95

                                        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
Rule 95 A and B                              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.
   2018 COPYRIGHT ALLTRANSTEK, L.L.C.
                                              3. Open Top Car                                                          75
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        Depreciated Value – Rule                                          Stipulated Value – Car
         107 – AAR Method to                                                owners method of
        calculate the settlement                                        calculating residual value
        of a freight car damaged                   /                     and can be much higher
              beyond repair                                              than depreciated value.

       Depreciated value vs Stipulated Value
                                   2018 COPYRIGHT ALLTRANSTEK, L.L.C.                                76
ClickTips
My     to edit Master title style

❑ 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.

2018 COPYRIGHT ALLTRANSTEK, L.L.C.                                                              77
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    Questions ?
q Dick Kloster
q 847-544-6760
q kloster@alltranstek.com

q Jerry Charaska
q 970-396-1255
q jcharaska@alltranstek.com

         2018 COPYRIGHT ALLTRANSTEK, L.L.C.   78
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