Lease Strategies. Pitfalls of Rail Car Leasing. Click to edit Master title style JERRY CHARASKA SWARS FALL MEETING, DALLAS, TX SEPTEMBER 2018

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1 Lease Strategies Pitfalls of Rail Car Leasing JERRY CHARASKA SWARS FALL MEETING, DALLAS, TX SEPTEMBER W. 31st St. Suite 200 Downers Grove IL AllTranstek.com

2 My 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

3 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

4 Click Full Service 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

5 Click NET Lease 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

6 Click Typical to Lease 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 COPYRIGHT ALLTRANSTEK, L.L.C. 38

7 Click Typical to Lease 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 COPYRIGHT ALLTRANSTEK, L.L.C. 39

8 Click Largest to edit Costs Master at End title of Lease style Cleaning Damage and Corrosion Coatings Valves, Gates and Hatch Covers Truck Repairs Mechanicals 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 40

9 Click CLEANING to edit Master title style 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

10 Click Typical to Language edit Master for title 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 COPYRIGHT ALLTRANSTEK, L.L.C. 42

11 Plastic Pellet - $1200-$1800 per car Residue Free 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 43

12 Grain Car $400 - $1200 Per Car Sweep to Wash 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 44

13 Grain Car $400 - $1200 Per Car Sweep to Wash 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 45

14 Coal Cars $200 Average CPC 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 46

15 Product Spillage Dirty Car Conceal Defects 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 47

16 Crude Oil $3K - $6K per car Residue Free 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 48

17 Residue Free on Tank Cars means Valves need to be Clean inside and out Consider *O-Rings *Gaskets *Testing 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 49

18 Ports and Cavities 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 50

19 DERAILMENT and UNLOAD DAMAGE 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 51

20 UNLOADING DAMAGE 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 52

21 Aluminum Corrosion is Damage 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 53

22 Damage from loading or unloading or Product Damage Lessee Responsible COPYRIGHT ALLTRANSTEK, L.L.C. 54

23 CORROSION 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 55

24 CORROSION is DAMAGE! 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 56

25 Click Devil to in edit 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 COPYRIGHT ALLTRANSTEK, L.L.C. 57

26 Coatings COPYRIGHT ALLTRANSTEK, L.L.C.

27 Coatings and Corrosion 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 59

28 Coatings and Corrosion 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 60

29 Mechanical Defects COPYRIGHT ALLTRANSTEK, L.L.C.

30 Mechanical Defects COPYRIGHT ALLTRANSTEK, L.L.C.

31 Mechanical Defects COPYRIGHT ALLTRANSTEK, L.L.C.

32 Mechanical Defects and Owners Responsibility COPYRIGHT ALLTRANSTEK, L.L.C.

33 Mechanical Defects and Owners Responsibility COPYRIGHT ALLTRANSTEK, L.L.C.

34 Click Lease to Terms 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. 66

35 Click Definitions to edit Master title style 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 COPYRIGHT ALLTRANSTEK, L.L.C. 67

36 Appendix A Office Manual 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 68

37 Appendix A Interchange Rules 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. 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 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. 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

38 Appendix A Interchange Rules 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. 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 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. DDCT: The rail industry s system for managing damaged and defective cars 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 70

39 Wear & 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 COPYRIGHT ALLTRANSTEK, L.L.C. 71

40 Normal Wear & Tear and Ordinary Wear & Tear 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 72

41 Lease Terms vs Railroad Terms Rule 12 Fig A 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 73

42 Click Railroad to edit 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 COPYRIGHT ALLTRANSTEK, L.L.C. 74

43 RULE 95 B. DELIVERING LINE IN INTERCHANGE Rule 95 A and B 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) (b) (c) 2 or more adjacent posts or braces cut through thickness of metal. Metal end bent inwardly 6 inches or more from a vertical plane, in an area at least 2 feet above end sill. 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) (b) (c) Hole cut through side, slope or end sheet in lading area (including empty car) regardless of extent. Sheet bent inwardly 2 inches or more. 2 or more adjacent metal posts cut through thickness of metal more than one half the width in any direction. 3. Open Top Car 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 75

44 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. Depreciated value vs Stipulated Value 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 76

45 Click My Tips 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 COPYRIGHT ALLTRANSTEK, L.L.C. 77

46 Questions? q Dick Kloster q q kloster@alltranstek.com q Jerry Charaska q q jcharaska@alltranstek.com 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 78