Posted by David Butler on June 19, 2007 at 13:14:21:
Hello Gerald,
It is difficult to get too technical in a Forum such as this, particularly when going into areas where the art and science of legal “hair-splitting” begins to enter the discussion by necessity. Invariably something eventually gets miscommunicated somewhere in the mix, or, as is more frequently the case, misunderstood. More problematic - often, the need for extremely long discussions often comes into play, in order to adequately “try” to make the necessary distinctions.
Ultimately, research and legal counsel are where the best answer lies for each individual, and more particularly, their individual situation. But, this can be a starting point - if you make sure to approach it as such (so long as you don’t make the mistake of considering it the end point - no matter who makes what response, or their credentials).
First thing to keep in mind - not all “income streams” nor the legal documents that create them - are alike. Unlike a note, which represents evidence of debt (an I.O.U.), a lease is a contract for use of premises (or equipment as the case may be). Though a lease does represent an income stream, that income stream is not in the form of debt repayment, or forbearance of debt. Rather, it is payment for the right to use another’s property.
While I have not researched the question fully, and am not prepared to cite any legal precedents, I believe the four elements necessary for a determination of usury are along the lines of:
- a loan of money or forbearance of debt
- an agreement between the parties that the principal shall be repayable absolutely
- the exaction of a greater amount of interest or profit than is allowed by law, and
- the presence of an intention to evade the law at the inception of the transaction
The absence of any one of above requirements would generally preclude a finding of usury (i.e., ALL FOUR elements MUST be proven), to establish a violation of usury law. Considering the discussion immediately above regarding the most basic difference between a lease, and a note - it would appear self-evident that Item #1 all by itself would preclude the purchase of a lease contract, all by itself, as having any capacity to be considered a loan or forbearance of debt.
Another thing to keep in mind about usury law. The intent is to prevent debtors from paying inordinately high amounts with regard to debt - not necessary to prevent an investor from earning a high profit. Ignoring the distinctions between notes and leases themselves for the moment… whether certain actions may cause a lease contract to become usurious, would likely rely on a similar fact pattern to the discussion regarding notes. Some sort of seller recourse or guarantee, that shifts the burden “of debt” TO THE SELLER of the cash flow, and exacts FROM THE SELLER, a higher interest or profit than is allowed by law. A Payor being liable for his own debt, in which the terms of the debt itself are not usurious, is another matter entirely. (Again… lease contract is not evidence of debt, or forbearance of debt - it is payment for use of leased asset(s)).
Also forgetting for the moment that most forms of cash flow investments rely on the quality of the cash flow itself in terms of Payor and collateral, is the instance of state laws and/or controlling legal doctrines where jurisdiction lies. Assuming for the moment that for some reason (though oxymoronic) you would demand a seller to “guarantee”, and the seller would be willing to guarantee, an investment you describe as “…so golden I’m able to get 100% financing…”, the scenario you describe (Premium Payor, with the ability to be sued for full performance on the terms of the lease) - is one in which, depending on the terms of the lease agreement itself - very little discount would normally be taken, all things considered.
As would be the case with premium AAA notes in the private cash flow markets, even after the discount, the guarantee of the seller may very well not create a debt liability TO THE SELLER, that would result in a usurious yield being realized by the beneficiary. And if it did, this result may be mitigated by having the seller guarantee ONLY the amount of the purchase price paid by the cash flow buyer, rather than cash flow purchased.
If the investment is risky enough that you feel a seller guarantee is warranted, you may decide that instead of such a guarantee, you will carry the risk yourself, and discount the price offered for the cash flow sufficiently to offset the risk. That is the general operation of the private cash flow marketplace, on the whole, and always has been.
But back to the main point. If you go to the seller, and purchase his lease from him/her - wherein the lease itself is “the property”… with no “bells and whistles” existing between you and the seller other than your agreement to pay a certain price for the lease, and his agreement to sell you the remaining lease payments for that price - where is the fact pattern you see that may in anyway turn this transaction into a potential “loan” that might prove usurious?
The decision here looks to be one of yield vs. security. Do you prefer an unusually high rate of return, or a more secure investment? Therein lies the trade-off. But it doesn’t sound like much of a trade-off in the instant scenario. The leases themselves are so golden [i.e. “secure”], it would seem that you can shoot for the highest yield you can get; by way of paying as low a price for the lease as you can get the seller to accept.
BTW… your request for help in “… structuring a template…” as described in your last sentence, unfortunately puts all but licensed attorneys dangerously close to the unauthorized practice of law - a risky venture in its own right!
Hopefully the meat of the discussion above gives a better perspective to work from in pursuing what looks to be a nice cash flow niche - one I am sure that already has at least some buy/sell transactions occurring.
David P. Butler