Rent to Own Auto

Turn-Key Program

Presented by Arceri & Associates, Inc

PRINCIPAL RTO ADVANTAGE Increased CASH FLOW!

    No UPFRONT sales tax in most states RTO down payment can be a security deposit eliminating income tax No sale, therefore no “gain on sale” profit recorded, so no income tax  Build profitable business sustainable through weak demand periods. On a typical $4,000 cost vehicle sold for $8,800, AFTER TAX CASH INCREASE > $1,300

BHPH Sale vs. RTO Cash Flow Comparison

Assumptions:

Acquisition Cost Sale price / Cap Cost RFC Discount Income tax rate Sales tax rate $4,000 $8,800 35.00% Down payment/security deposit $1,000 40.00% 7.00% ”Related Finance Company.” To reduce the income tax liability on the “gain on sale”, typically the dealer establishes a wholly owned “Related Finance Company” to which the vehicle can be sold at a loss. However, the discount rate in the sale must reflect the true market value and cannot create a tax loss.

BHPH Sale vs. RTO Cash Flow Comparison – Cont’d

Calculations:

Initial Sales Tax Sale Price to RFC Profit on RFC Sale Income Tax on RFC Sale $ 616 $5,720 $1,720 $ 688

Total After Tax Cash Savings

(Only 100 vehicles)

RTO Cash Flow Savings

$

616

$

688 $ 1,304

x 100

$130,400

200 vehicles 300 vehicles -

$260,800 Savings $391,200 Savings

Security Deposit vs. Capitalized Cost Reduction • Capitalized cost reduction (down payment) is taxable on sales tax, and federal and state income tax • Security deposit is non-taxable on any level and can be used to reduce tax exposure and increase cash flow • Security deposit can be used for default, excess mileage/wear or for repairs/maintenance

State Sales Tax Options

• Monthly on payments collected: 33 states • Upfront on Capitalized Cost (similar to sale): 9 states (CO, IL, MT, NC, SC, TX, VA, AL*, DE*) • Upfront on monthly payments: 6 states (IO, ME, ND, NY, OH, SD) • Upfront on depreciation: 2 states (NJ, VT) * Both on cap cost and monthly payments

Acceleration of Accounting Income

Accounting rules (FASB 13) allow RTO to be treated as a “sale” for accounting purpose even though a RTO is (not a sale) for tax purposes.

 HUGE acceleration of income  Full $4,400 mark-up is immediate income with NO TAX LIABILITY

Acceleration of Accounting Income (cont.)

 BHPH sale: finance books are SAME as tax books  RTO: finance books have ACCELERATED INCOME while tax books have tax deferral from accelerated depreciation  Banks and finance companies have used this tax deferral advantage

Advantages of RTO

 No loss of prepaid sales tax on defaults (in most states)  Eliminates the need for an Related Finance Company  Better control of vehicle (e.g., increased security deposit for excess mileage during the lease)  Greater flexibility in program design (e.g. early termination, collateral substitution, vehicle maintenance and repair)

Advantages of RTO

(cont.)

 Bankruptcy protection  Reduced customer disclosures  Reduced State and Federal regulatory requirements compared to Reg. Z and MVRISA on sales  No APR or Reg. Z disclosure  No usury limits

RTO Implementation

 Program Handbook on all policies and requirements including residual values     RTO agreement + all forms/documents Marketing plan You Receive: Sales system, training and collateral Insurance selection and purchase

RTO Implementation – cont’d

You Receive:     Lessors Contingent Liability Insurance Independent Insurance Tracking Physical Damage Insurance to protect your collateral Payment Assurance / Asset Tracking –Starter Interrupt, & Payment Reminder

Getting Started

1. Complete, sign & return the RTO License Agreement 2. Complete, sign & return the Contingent Insurance Application 3. Complete, sign & return the Physical Damage Insurance Set-Up Form Arceri & Associates (504) 309-3087 www.arceri-insurance.com

[email protected]