|
Case Study Prof. Ian Giddy, New York University Spacemakers
of Kuwait is the largest independent owner-operator of large-scale
automated self-storage complexes in the greater Kuwait City area. The
company opened its first self-storage complex in Kuwait in
1994 and now has facilities throughout downtown Kuwait City and nearby
residential areas. The business is based on a franchise management
company based in Cincinnati, USA. The
Canadian lessor, Hardware Leasing Co., had offered to structure a
capital lease for Spacemakers, as long as Hardware Leasing could
arrange non-recourse financing for the equipment. Hardware wished to
purchase the forklifts with $200,000 of its own cash and $800,000
borrowed from
ABN AMRO Bank in Dubai at 7.5%. The leasing company's effective tax
rate was 30%, and Canadian tax laws permit use of the double-declining
balance method for leasing companies. The forklifts had a tax life of
seven years. Hardware Leasing estimated that it could sell the equipment for $200,000 (the
residual value after 15 years). Spacemakers, the lessee, had requested an early
buyout option (an "EBO") after ten years. Immediately upon purchase,
the lessor would lease the equipment to the lessee for fifteen years.
Rents would be paid monthly, on the same day the debt services were due, and the rents
always would be sufficient to pay debt service.
When Lahcen received a fax summarizing the terms of the lease, he could hardly believe his eyes. The lessor offered Spacemakers a 15-year lease with 180 equal monthly payments of $8,052. This included an effective interest rate of only 6.5% per annum. Not only was the rate very attractive, but Spacemakers would also receive 100% financing with no downpayment. He decided to push his luck and try for the early buyout option. He scribbled "Accepted, as long as we get the EBO!" on the term sheet, signed it, and faxed it back to Toronto. Questions:
|