Case 2:12-md-02311-SFC-RSW ECF No. 2205-3, PageID.39911 Filed 04/25/22 Page 1 of 5
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`EXHIBIT B
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`Case 2:12-md-02311-SFC-RSW ECF No. 2205-3, PageID.39912 Filed 04/25/22 Page 2 of 5
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`Open-End vs. Closed-End Leasing
`January 2016
`by Paul Clinton
`
`The fleet leasing industry is taking a cautiously
`optimistic approach to coming changes in accounting
`standards that have reignited discussions about the
`leasing instruments that have become essential tools
`for procurement of fleet vehicles.
`
`The Financial Accounting Standards Board’s (FASB)
`new lease accounting may not have a seismic impact
`on fleet management when they arrive in early 2016,
`but fleet managers will need to assess the impact
`of including lease obligations on corporate balance
`sheets and should initiate thoughtful, preemptive
`conversations with their finance departments.
`
`In the commercial fleet industry, leasing has become
`the dominant way companies acquire their vehicles,
`a trend that stands in stark relief to the public fleet
`realm, where fleet managers often deploy replacement
`reserve funds to fund fleet purchases.
`
`Companies choose to lease their vehicles as a way
`to reduce the amount of capital tied up in non-core
`assets, as well as to reduce sales tax by paying tax on
`a leased vehicle similar to rental instead of paying tax
`on the vehicle purchase amount.
`
`AS FEATURED ON
`www.fleetfinancials.com
`
`Fleets that opt for leasing over financing or outright
`cash purchases still mostly prefer an open-ended
`TRAC lease, which can also be known as an operating
`lease. TRAC, which stands for Terminal Rental
`Adjustment Clause, is a certification that tells the
`Internal Revenue Service that the lease conforms
`to its tax codes and isn’t considered a daily rental
`agreement. Open-ended leases typically offer a fleet
`manager more flexibility in dealing with variable
`mileage and greater input into remarketing decisions.
`
`“We have found that the TRAC lease meets the
`objectives of the widest audience,” said Bruce Wright,
`strategic consulting manager with Element Fleet
`Management. “The TRAC lease traditionally offers the
`lowest total cost of ownership over the long run of the
`portfolio due to the customer experiencing the actual
`depreciation based on their asset utilization patterns.”
`
`Other fleets prefer closed-end operating leases that
`provide greater cost certainty for tighter monthly
`budgets, smaller fleets, or executive fleets that tie
`vehicles to compensation.
`
`“Companies turn to closed-end leases when they’re
`looking to get a fixed-cost solution for the provision
`of vehicles rather than taking the risk themselves
`and waiting until the vehicle is disposed to know
`what their ultimate cost was,” said Joe Pelehach, vice
`president of Motorlease Corp.
`
`A third lease type, known as an open calculation lease,
`has arrived from Europe. The lease isn’t widely offered
`by U.S. fleet management companies, and it offers a
`middle ground on costs and remarketing decisions.
`It functions like a closed-end lease with greater
`transparency.
`
`Commercial leasing has evolved from the early days of
`closed-end offerings, where fleet managers now face
`two main choices, including open-ended and closed-
`ended leases that offer basic benefits. An open-ended
`lease is set up as a “cost plus” arrangement, while the
`closed-end lease offers a fixed price.
`
`
`Choosing a lease should always be undertaken with a
`clear idea of how the vehicle will be used in the field.
`Other factors that must be considered include the
`company’s financial needs, operational requirements,
`asset type and utilization. Executives with fleet
`management companies suggested that fleet
`managers should calculate the total cost of ownership
`of a vehicle before choosing a leasing instrument.
`
`

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`Case 2:12-md-02311-SFC-RSW ECF No. 2205-3, PageID.39913 Filed 04/25/22 Page 3 of 5
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`Let’s take a closer look at leasing options available to
`commercial fleets. Read our sidebar about the benefits
`of using capital to purchase fleet vehicles outright.
`Financing fleet vehicles is yet another option that may
`lose steam as interest rates rise higher.
`
`In the present leasing environment, a capital lease
`would be added to a company’s balance sheet while
`an operating lease could be kept off the balance
`sheet, a situation that will likely change under the new
`accounting standards.
`
`Open-Ended Leasing: Flexibility and Control
`Open-end leases have become pervasive in fleet leasing
`because they offer fleet managers greater control of
`asset utilization and disposal. In an open-end lease,
`the lessee agrees to a minimum term that’s usually at
`least 12 months and can terminate the agreement at
`any point after the end of the term. The lessor then
`sells the vehicle. If the proceeds of the sale are greater
`than what was calculated in the agreement, the lessee
`receives a reimbursement. If the vehicle is sold for less,
`the lessee must reimburse the lessor for the difference.
`
`Open-end leases appeal to fleet managers with
`remarketing expertise who monitor the used-vehicle
`market and can sell vehicles during peaks in the value
`cycle.
`
`Michael Bieger, senior director of global procurement
`for payroll servicer ADP, uses open-end leases for
`his fleet of mostly Ford Fusion Hybrid sedans for this
`reason. Bieger usually leases his 1,200 vehicles for
`about 36 months.
`
`Open-end leases carry no mileage restrictions and
`as a result appeal to companies with unpredictable
`mileage. High-mileage vehicles will depreciate faster,
`which will force the lessee to bear the brunt of higher
`use in the used-vehicle market. The lessee also assumes
`responsibility for remarketing decisions, including the
`risk or reward involving resale value.
`
`“In North America, most fleets exist to serve as work
`and business tools and are not provided in lieu of
`compensation,” said Norman Din, vice president of
`strategic sales with Wheels, Inc. “Because they are work
`tools, mileage is typically both high and varied.”
`
`Fleet management companies usually offer different
`kinds of open-end leases depending on the accounting
`guidance from the corporation’s finance department.
`A lease would be considered a capital lease versus an
`operating lease if one of four factors is met, said Bryan
`Wilson, ARI’s controller.
`
`“The difference between a capital and operating lease
`comes down to the accounting guidance that governs
`leases,” Wilson said. “If at least one of the four criteria is
`true then the lease would be classified as a capital lease
`on the lessee’s account books.”
`
`A lease would be considered a capital lease if the
`ownership of the asset is shifted to the lessee, the
`lessee purchases the asset at below market price by
`exercising a “bargain purchase option,” the lease term
`encompasses at least 75% of the useful life of the asset,
`or the present value of the minimum lease payments
`plus any lessee guarantee is at least 90 percent of the
`fair value of the asset at lease inception.
`
`“The reason we don’t have hard and fast end points
`is because we need flexibility to respond to market
`conditions,” Bieger said. “We can cycle the vehicles out
`early should it be a good business decision for ADP.
`If you have a closed-end lease that opportunity is not
`provided to you.”
`
`Fleet management companies specializing in open-end
`leases include ARI, Donlen, Element, EMKAY, LeasePlan,
`and Wheels, Inc.
`
`Closed-Ended Leasing: Predictable Outcomes
`Closed-end leases can resemble retail leases and appeal
`to fleets seeking a fixed monthly payment. With this
`lease, the term is set and monthly payments are based
`on the estimated residual value of the vehicle at the end
`of the term. The leasing company estimates this value,
`and sets restrictions on mileage and wear. The lessee
`can walk away from the deal at the end of the term
`with no additional costs if the vehicle didn’t exceed the
`maximum mileage or wear-and-tear parameters. The
`lessor sells the vehicle and assumes responsibility for
`any profits or losses caused by fluctuations in market
`value.
`
`“Closed-end leases have the benefit of a predictable
`monthly payment with no residual risk to the lessee
`at term end,” said Craig Lehmann, Donlen’s director
`of equipment leasing operations. “With the lessor
`assuming the residual risk, the potential drawback
`is there are usage provisions incorporated into the
`lease, which could lead to end-of-term charges for
`customers that did not accurately project usage at
`lease inception.”
`
`Closed-end leases can carry penalties for mileage
`overages or increased wear and tear, but the fleet
`
`

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`Case 2:12-md-02311-SFC-RSW ECF No. 2205-3, PageID.39914 Filed 04/25/22 Page 4 of 5
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`management companies offering these products say
`they make adjustments to gain customer loyalty.
`
`Closed-end leases can also find favor with multi-
`national fleets that manage vehicles in various countries
`to harmonize their lease accounting across the board.
`
`“The mere prospect of having an excess mileage charge
`or early termination fee causes some fleets to remove
`closed-end leases from consideration,” said Pelehach.
`“The reality is that whether a lessee is in a closed-end
`lease or an open-end lease, they are going to have
`to deal with the economic realities of the use of that
`vehicle, whether it is terminating a lease earlier than
`anticipated or driving higher miles.”
`
`As one way to ease the impact of unpredictable
`mileage, Merchants Fleet Management allows larger
`fleets to pool mileage to help even out driving patterns.
`
`“The economics of a closed-end lease payment usually
`make sense when driver mileage is predictable,” said
`Tom Coffey, vice president of sales and marketing for
`Merchants.
`
`Similarly, Motorlease offers a mile-per-mile credit that
`allows a fleet to apply the unused miles from one
`vehicle to the mileage overage of another vehicle.
`Mileage overages that result in penalties can be viewed
`as a way to account for unplanned depreciation,
`Pelehach added.
`
`“Assuming that the leasing company is fair in their
`excess mileage charge, the additional cost that is
`incurred by an excess mileage charge is nothing more
`than capturing the additional depreciation that occurs
`as a result of the higher mileage,” Pelehach added.
`
`Closed-end leases can also make more sense in an
`environment of rising interest rates, because the rate is
`fixed with other costs at the beginning of the term, said
`Pelehach. However, fleet management companies who
`offer open-end leases said rates can be fixed on those
`products as well.
`
`Closed-end leases provide more certainty to fleet
`managers who worry about the future of the used-car
`market, which has been strong in recent years. These
`leases fix the cost of depreciation, which typically
`makes up the highest cost in the TCO equation.
`
`“The used market is beginning to move off of those
`historic all-time highs, and looking at historical data can
`be dangerous if trying to calculate future expectations,”
`Pelehach said. “That’s a huge problem with open-end
`leases and TCO. You don’t know what your TCO is until
`the vehicle is sold.”
`
`“International accounting standards only recognize
`closed end leases as operating,” said Brad Vliek,
`EMKAY’s vice president of client services. “Because
`of this, U.S. syndicates with foreign parent companies
`typically choose closed-end leases for consistency with
`their parent company.”
`
`Lease accounting may drive a fleet’s decision to steer
`away from a closed-end lease because the right to use
`an asset would be required for the entire lease term.
`Open-end leases average about six months of “right to
`use” with a minimum term of 12 months, said Wheels’
`Din.
`
`Fleet management companies specializing in closed-
`end leases include LeasePlan, Merchants Fleet
`Management, and Motorlease.
`
`Open Calculation Leases: A Hybrid Offering
`LeasePlan has begun offering an open calculation
`lease that has been a popular offering in Europe
`because it functions similarly to a closed-end lease
`but with characteristics of an open-end. In Europe,
`fleets who opt for closed-end leases that don’t list the
`components that make up the monthly payment.
`
`The open calculation lease gives fleets the predictability
`of a set payment, but also offer more transparency
`about how the lessor arrived at that number. At the end
`of the term, the lease offers a risk-and-reward sharing
`scenario that usually involves the lessor paying the
`lessee half of the reward if the vehicle sells for more
`than the expected value. The lessor usually also agrees
`to shoulder the costs if the vehicle sells for less.
`
`This type of lease also suits the European leasing
`market because vehicles are often sold in lots at
`auction rather than being sold individually. The lot
`allows a lessor to mix vehicles in various conditions to
`spread out risk and level the average selling price.
`
`Closed-end lease terms tend to be longer and can
`range from 18 months to 36 months.
`
`LeasePlan is the only fleet management company
`offering an open calculation lease in the U.S.
`
`

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`Case 2:12-md-02311-SFC-RSW ECF No. 2205-3, PageID.39915 Filed 04/25/22 Page 5 of 5
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`Purchasing Fleet Vehicles with Capital Outlays
`Fleets often choose leasing over purchasing to avoid
`capital expenditures that may be better suited for other
`corporate goals. Companies willing to move forward
`with this outlay can reduce operating costs associated
`with hiring leasing service providers.
`
`Sue Miller, the former fleet manager for McDonald’s
`Corp., shifted the company from a self-funded leasing
`approach to a capital outlay approach in her 29 years
`with the company.
`
`“When we analyzed the lease-versus-own approach,
`we realized we were adding a layer of expense and
`administration that wasn’t necessary by financing our
`own leasing of the vehicles,” said Miller.
`
`Miller turned to fleet management service providers
`for other services and used what’s known as an
`“unbundled” approach. She purchased the vehicles
`through dealers and hired a remarketing company to
`help with disposal. She also implemented a vehicle
`trade-in program that saved the company up to
`$400,000 a year, depending on the quality of the new
`vehicle.
`
`“The unbundled approach became our mode of
`business,” Miller said. “We just wrote a check for the
`cars, and added them to our ledger. During my tenure,
`we were a cash-oriented company. Paying for the car
`outright was still a benefit. With the weighted cost
`of capital, we were still coming out ahead by owning
`the car with no monthly billing reconciliations or
`adjustments that come with leasing. We set up straight
`depreciation for the car and managed it very cleanly in
`that regard. We had no early termination penalties and
`weren’t constrained about how the vehicle was utilized
`or taking a vehicle in or out of service. We were in full
`control of the asset.”
`
`SOURCE: http://www.fleetfinancials.com/channel/leasing/article/story/2016/01/open-end-versus-closed-end-leasing.aspx
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