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
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 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 34
Click to edit Master title style
Presentation Goal
❑ Lease Differences
❑Lease Return Costs – Damage, Cleaning, Corrosion, Mechanical
❑Terminology Differences, AAR, Car Owner, Lessee, Legal
❑Definitions
❑Control Costs
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 35
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
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 36
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 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 37
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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.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 38
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.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 39
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Largest CostsMaster
at Endtitle
of Lease
style
❑Cleaning
❑Damage and Corrosion
❑Coatings
❑Valves, Gates and Hatch Covers
❑Truck Repairs
❑Mechanicals
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 40
Click to edit Master title style 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? 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 41
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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.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 42Click to edit Master title style
Plastic Pellet -
$1200-$1800
per car
“Residue Free”
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 43Click to edit Master title style
Grain Car
$400 - $1200 Per
Car
Sweep to Wash
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 44Click to edit Master title style
Grain Car
$400 - $1200 Per
Car
Sweep to Wash
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 45Click to edit Master title style
Coal Cars
$200
Average CPC
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 46Click to edit Master title style
Product Spillage – Dirty Car Conceal Defects
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 47Click to edit Master title style
Crude Oil
$3K - $6K
per car
“Residue
Free”
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 48Click to edit Master
Residue Free on
title style
Tank Cars means
Valves need to be
Clean inside and
out
Consider
*O-Rings
*Gaskets
*Testing
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 49Click to edit Master title style Ports and Cavities 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 50
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DERAILMENT and UNLOAD DAMAGE
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 51Click to edit Master title style
UNLOADING
DAMAGE
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 52Click to edit Master title style
Aluminum Corrosion is Damage
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 53Click to edit Master title style
Damage from loading or unloading or Product Damage – Lessee Responsible.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 54Click to edit Master title style
CORROSION
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 55Click to edit Master title style
CORROSION is DAMAGE!
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 56Click toin edit
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.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 57Click to edit Master title style Coatings 58 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
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Coatings and Corrosion
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 59Click to edit Master title style
Coatings and Corrosion
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 60Click to edit Master title style Mechanical Defects 61 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
Click to edit Master title style Mechanical Defects 62 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
Click to edit Master title style Mechanical Defects 63 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
Click to edit Master title style Mechanical Defects and Owners Responsibility 64 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
Click to edit Master title style Mechanical Defects and Owners Responsibility 65 2018 COPYRIGHT ALLTRANSTEK, L.L.C.
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
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 66Click to edit Master title style 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. 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 67
Click to edit Master title style Appendix A Office Manual 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 68
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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. 69Corrosive Service: Defined by D.O.T. Regulations for Class 8.
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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 carsClick 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.” 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 71
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Normal Wear & Tear and Ordinary Wear & Tear
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 72Click to edit Master title style
Lease Terms vs Railroad Terms – Rule 12 Fig A
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 73Click to edit
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.
2018 COPYRIGHT ALLTRANSTEK, L.L.C. 74Click 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 75Click to edit Master title style
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. 76ClickTips 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. 78You can also read
