A terminal rental adjustment clause lease (TRAC Lease) combines all the advantages of leasing while retaining the option to purchase the equipment at the end of the lease term at a pre-determined residual agreed to when the lease starts. Your monthly payments on a TRAC Lease are determined by the residual price you establish at the start of the lease. Depending on your cash flow needs, you can select a higher end-of-term residual amount for a lower monthly payment, or keep the end-of-term residual lower to pay more through the stream of payments. This flexibility of payment options makes the TRAC Lease attractive to any business trying to improve and better manage their cash flow.
At the end of the lease term, the customer has the following options:
If this option is exercised, the bank will sell the equipment in a commercially reasonable manner. If the bank earns more than the pre-determined residual amount when selling the equipment, the lessee or customer receives the difference. If the bank does not get the full pre-determined residual when selling the equipment, the lessee or customer is responsible to make up the difference to the bank. For example, let’s say the pre-determined residual on a lease is $20,000. If the bank sells the equipment for $28,000, the customer will receive the overage of $8,000. If the bank sells the equipment for $13,000, the customer has to pay the remaining $7,000 to the bank.
A TRAC Lease is generally used for “over-the-road” vehicles like trucks, tractors and trailers. The IRS code allows the lessee to maintain the “full deductibility” of a true/operating lease even though there is a pre-determined residual value. The lessor would retain the rights to any depreciation.
Some of the benefits to a TRAC lease include: