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VOLUME 29 • NUMBER 2 • SPRING 2011 Articles in the Journal of

Equipment Lease Financing Understanding the UNIDROIT Model Law on Leasing are intended to offer By Rafael Castillo-Triana Developed by UNIDROIT in 2008, the Model Law on Leasing attempts to aid the responsible, timely, in-depth international expansion of leasing. This article explains that although many issues remain on the table, the advantages are coming into focus. analysis of market segments, finance sourcing, marketing The Use of Escrows in Lease Transactions and sales opportunities, By Bill Brooks liability management, tax Escrow accounts have been used in municipal and tax-exempt lease transactions for years but are rarely used in commercial equipment finance. When faced with laws regulatory issues, and a challenging transaction, lessors should consider whether an escrow structure might help in completing it. This article covers the benefits and types of transaction current research in the field. structures. Controversy is not shunned.

If you have something The Place of the Independent Equipment Finance Company important to say and would By Michael J. Fleming and David S. Wiener like to be published in the Based on a study commissioned by the Foundation, this article demonstrates that the market needs independent lessors. Moreover, independents can be successful with the industry’s most valuable right executive leadership and the right value proposition. educational journal, call

202.238.3400. ARTICLE OF THE YEAR FOR 2010 WINNER ANNOUNCED

The Equipment Leasing & Finance Foundation 1825 K Street NW Suite 900 Washington, DC 20006 202.238.3400 www.leasefoundation.org Copyright © 2011 by the Equipment Leasing & Finance Foundation • ISSN 0740-008X The Use of Escrows in Lease Transactions By Bill Brooks

scrow accounts have been used in municipal The escrow agreement should also specify any asso- and tax-exempt1 lease transactions for years ciated fees, including investment management fees, de- but are rarely used in commercial equipment pository fees, and the escrow agent’s fee, to name a few. finance. This comprehensive article of record For commercial lessees, it is also in the best of all Ewill explain how both familiar and in- the parties to select an investment type novative escrows are used in municipal Escrow accounts have that ensures preservation of the princi- and commercial transactions. pal. Otherwise, there may be a shortfall In addition to the traditional been used in municipal of funds when it comes time to pay for equipment acquisition fund, which is the equipment. most often used in municipal transac- and tax-exempt lease Documentation tions, escrows can also be used for both transactions for years municipal and commercial customers In order to disburse funds, the lessee is to protect the lessor’s security inter- but are rarely used in required to provide documentation to est; to facilitate equipment installation, the lessor including invoices, an accep- testing, and acquisitions over time; and commercial equipment tance certificate, title documentation to secure a stream of payments or to (if applicable), and a document called hold funds to pay for items such as finance. When faced with a disbursement authorization form. security deposits, repair and mainte- The disbursement authorization form nance, , and other prepaid a challenging transaction, should specify who is to be paid, the expenses. lessors should consider method of payment, what equipment is involved with this disbursement, BACKGROUND whether an escrow and the amount to be paid. An escrow agreement is the legally The lessor reviews and approves enforceable contract between three structure might help in the documentation and signs the dis- parties: the lessor, the lessee, and the bursement authorization form as well. escrow agent.2 The escrow agreement completing it. This article The lessor then forwards the form, governs both the escrow process and which has been duly signed by both the rights and responsibilities of each covers the benefits and the lessor and lessee, to the escrow party. The escrow agreement first states types of transaction agent, who will disburse the funds how much money has been deposited as directed. Most escrow agreements and where and how the funds will be structures. specify that only the disbursement invested. Many municipalities have form is to be sent to the escrow agent, strict investment guidelines, so it is important to verify as the escrow agent is not responsible for evaluating the that the investment vehicle is considered a qualified in- collateral or documentation supporting the disburse- vestment under the lessee’s bylaws.3 ment request or acquisition of the collateral. The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2

The escrow agreement should also permit the es- six months, at least a $450,000 fire truck within the first crow agent to terminate the escrow agreement under the year, and then use the remaining $400,000 before the direction of the lessor, provided an event of default has end of the first 18 months for which the escrow account occurred (such as nonpayment of the lease payments) opened. or the escrow agreement has reached the agreed-upon termination date. Once the escrow agreement has been BENEFITS OF USING AN ESCROW ACCOUNT terminated, the escrow agent will follow the “transfers The most obvious benefit to a tax-exempt or municipal upon completion” section. This section explains what customer is that an escrow transaction allows it to set to do with any remaining funds in the escrow account, aside monies appropriated for in one year to be spent whether there are any prepayment fees associated with in a subsequent year or years. Many municipalities have the leftover funds, and, sometimes, requirements that funds (or ) that even how to handle the arbitrage calcu- Arbitrage is a situation have been approved need to be used lation. Some escrow agents can provide by the end of a fiscal year, or else they arbitrage calculation services, but this that both lessors and cannot be used at all. If the municipal- is more typically done by an account- ity cannot spend the money, then the ing firm. lessees should carefully funds or debt would need to be reap- proved the following fiscal year. avoid when the related Arbitrage For example, if a municipal- Arbitrage is a situation that both les- financing is done on a ity appropriates funds in year one to sors and lessees should carefully avoid purchase a fire truck, but the truck is when the related financing is done on tax-exempt basis. not ready for delivery by the end of a tax-exempt basis. Arbitrage can occur the municipality’s fiscal year, the mu- when the interest earned on the escrow account exceeds nicipality would have to go through the process to reap- the yield in the lease; however, there are time-frame re- propriate the purchase amount the following fiscal year. quirements for spending the escrow proceeds which, if Essentially, the municipality would lose out on the op- met, can provide an exception. If the interest earned on portunity to use those funds in the first fiscal year, and the escrow account from a tax-exempt financing exceeds then must reapprove the amount again the next year. By the yield in the lease, then the lease can lose its tax-ex- committing to a financing agreement for the fire truck, empt status and the lessee will owe a rebate to the In- the municipality is agreeing to a budgeted amount of ternal Revenue Service (IRS), unless the funds are spent debt in that fiscal year. according to the exceptional spend-down requirements. By using an escrow account when funding the trans- The best way to ensure that the lease will comply action, the municipality can close on the lease transac- with IRS laws is to have the lessee agree to the terms of tion in the current fiscal year, having in essence used the a tax and arbitrage certificate, which outlines the spend- approved funds for the purpose of the lease agreement. down requirements.4 The first spend-down requirement The lessor will then deposit the funds into an escrow is that 15% of the funds in escrow must be used within account and the funds can be used to purchase the fire the first six months, then, 60% of the funds must be truck in any subsequent fiscal year when the fire truck is used within the first 12 months, and finally, 100% of the ready to be delivered and accepted by the municipality. funds must be used within 18 months. For this reason, many escrow agreements have an expiration date of 18 Starting the Income Earnings Stream months. Lessors, however, should monitor the spend- The most obvious benefit to lessors is that, generally, es- ing and ensure that tax-exempt lessees are meeting the crows allow the lessor to commence the lease and start spend-down requirements to avoid the IRS rebate. the income earnings stream immediately. Similar to the As an example, with a $1 million lease for various way in which a lessee appropriates for the funds by en- city vehicles, the city manager would have to accept de- tering into the financing agreement, the lessor puts the livery of $150,000 worth of police cars within the first transaction on its books the day that the funds are sent to

2 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2 the escrow agent. With progress payment arrangements, lessor can deposit the purchase price of the equipment the lease does not typically commence until after the fi- into an escrow account. Then, after the equipment deliv- nal progress payment is made and the equipment is de- ery, installation, and/or testing has been completed and livered and accepted. This is usually also the point when the lessee is ready to accept the equipment, the escrow the lease term begins, finance charges or interest begins agent can release these funds to the equipment manufac- to accrue, and the lessee begins making payments. turer or vendor. Using an escrow account is beneficial to the les- Another benefit of using an escrow account for sor because the lessor books the entire transaction at commercial entities is that it allows the lessee to fix the the time of funding and the lessee and before acceptance of the equipment supplier have more time to Typically, escrows are used equipment. In a volatile market, inter- work out the details of the equipment est rates can change significantly in a well into the lease term. Whereas prog- in commercial settings short time. A prospective equipment ress payment arrangements are usu- purchaser can monitor interest rates when delivery, installation, ally short term, escrow accounts can and secure a favorable rate by funding remain open for years while the lessee and/or testing are required into an escrow account. Once the les- acquires the equipment. sor funds the proceeds of the lease into Even in transactions where only before acceptance. an escrow account, the lessee can then a portion of the funds are deposited begin the equipment purchasing pro- into an escrow account, the client is also still required to cess, knowing that the funds are available. make full rental payments and the lessor retains a secu- rity interest in the escrow account. The security interest Additional Opportunities in the escrow account provides the lessor with collat- Escrow transactions can provide additional opportuni- eral that will not depreciate in value the way equipment ties for fees and interest income to the lessor. While the does. In the case of an event of default or if some other escrow agent is going to charge the leasing company an problem with the transaction occurs while these monies escrow management fee5 to hold the escrow account, are still held in escrow, the lessor has a right to the funds these fees can be passed on to the lessee and can even held in escrow. be marked up, because the lessor invests considerable time managing the escrow account and approving the Commercial Transactions disbursements. Typically, escrows are used in commercial settings when Municipal lessees rarely question fees associated delivery, installation, and/or testing are required before with escrows, but commercial customers may try to ne- acceptance. This allows the funding to be in place and gotiate around escrow fees. When the lessee’s fees are provides the benefit that the transaction can be fully waived, lessors will still be responsible for paying the booked by both the lessee and lessor, while the equip- escrow agent. A bank-owned leasing company should be ment vendor and the lessee can take their time to install able to split the escrow agent fees with the bank’s trust and fully test the equipment. Once the lessee is satisfied group, which will act as escrow agent. A separate escrow with the vendor’s work and has had an opportunity to documentation fee can be charged to lessees, which can test and validate the performance of the equipment, the range from $100 to $2,500, depending on the complex- lessee agrees to a final acceptance and the funds are dis- ity of the transaction, the amount of the deposit, and bursed to the vendor. other factors as agreed upon by the parties. For example, expensive and technically sophisti- In municipal escrow transactions, it is common for cated medical imaging equipment like X-ray machines, lessors to charge a fee for the unused portion of funds re- magnetic resonance imaging (MRI), computerized to- maining in the escrow account (referred to as the excess mography scans (CT or CAT scans), and the cyberknife funds) when the escrow account is closed. This is usually all require testing, which can be very time-consuming, calculated as a percentage of the excess funds (anywhere before they are ready to be accepted by the lessee. The from 2% to the yield in the lease). In the event that the

3 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2 total funds are not used for acquisition of the equipment, by paying out to the leasing company a portion of the the escrow agreement should stipulate the process for investment income that the bank receives. the disposition of the excess funds. It is common to have these monies applied to pay TYPES OF TRANSACTION STRUCTURES down the principal balance remaining under the lease. In the municipal sector, most equipment can be acquired However, this will reduce the lessor’s yield, so a small through an escrow vehicle. It is common with many mu- surcharge on the excess funds should protect the yield nicipalities to get a blanket lease that is good for various in the transaction in the event that all of the funds in the types of equipment. For example, a municipality could escrow account are not used to purchase the designated obtain a $500,000 lease for various vehicles and equip- equipment. ment with a term of three years. The municipality could In the event that the lessee does not use funds de- then use these funds to purchase 16 outfitted police cars posited in the escrow account within for $25,000 each, a computer system the agreed-upon time period, exten- A bank-owned leasing for $50,000, and handheld radios for sions may be necessary. It is typical $50,000. The police cars could be de- for lessors to charge an extension fee company can use escrow livered in two batches, eight the first in such circumstances. The extension year and eight the second year; and the fee covers the lessor’s time and expense accounts to increase computers and radios could all be de- to create and document an extension livered in the second year. The impor- amendment to the escrow agreement, deposits with its parent tant thing is that all of the equipment which will give the lessee the addition- should be evaluated by the lessor’s bank. The bank, acting as al time needed to purchase equipment. equipment manager to have a useful Lessors with escrow accounts the escrow agent, can set life of three years. spend time, money, and personnel ex- In another example, the same pense managing and monitoring active up a depository program municipality could obtain a lease escrow accounts. When a lessee fails to for $1 million for the same equip- use the funds within the agreed-upon that can add to its leasing ment listed above, plus two ambu- time, lessors look to be compensated lances for $100,000 each and a fire for the additional time they will spend company’s revenue. truck for $300,000. The ambulances monitoring the account because the and fire truck have been evaluated to lessee has failed to acquire all of the equipment within have a useful life of 10 years. Since the ambulances and the time frame outlined in the escrow agreement. fire truck have a longer useful life, two separate lease schedules should be set up, along with two separate cor- Investment Income responding escrow accounts, one lease schedule and es- Investment income is another source of revenue that crow account for the equipment with the useful life of needs to be addressed in the escrow agreement. Different three years, and one lease schedule and escrow account types of escrow accounts can allow the lessor or the les- for the equipment with a useful life of 10 years. see to realize the investment income paid on the depos- ited proceeds. In municipal , it is most common Less Common Equipment for the municipality to receive the interest proceeds of While the above-listed equipment is more common, the escrow account. However, escrow agreements can be using an escrow transaction structure also creates op- negotiated to have lessors receive a portion of the invest- portunities to lease equipment that is not as common. ment income. For example, equipment that typically requires a long A bank-owned leasing company can use escrow ac- build-out period, such as energy-saving equipment or counts to increase deposits with its parent bank. The municipal facilities finance (real estate combined with bank, acting as the escrow agent, can set up a depository construction financing) usually requires progress pay- program that can add to its leasing company’s revenue ments and the buildout period can take several years to

4 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2 be completed. The progress payments can be disbursed account. The lessee can then take its time to produce the out of the escrow account as they become due and proper documentation showing that it has purchased the payable. equipment and can then seek to be reimbursed from the Other equipment types that are very well suited to escrow account. According to the tax code, a lessee may the escrow process include equipment that has been or- not seek reimbursement for equipment that has been dered but takes a long time to be fully built and deliv- purchased more than 60 days prior to the date of the ered, such as fire trucks, aircraft, and financing resolution. police cars. Funds used to purchase In a net-funded Another type of reimbursement is this equipment can sit in escrow and for equipment that is purchased after earn interest throughout the duration transaction, interest the funds have been deposited into the of the order and delivery time period. escrow account and the lease term has It is important to note that certain earnings make up the begun. A lessee may simply choose to taxable equipment financing struc- pay the vendor directly for the equip- difference between the tures—such as a true lease, operating ment and then seek to be reimbursed lease, or fair market value lease—are funded amount and the with the funds in the escrow account. not allowed to have escrows, per IRS For any reimbursement, the lessee will laws.6 These rules are primarily due to total equipment cost. need to provide the original vendor in- the strict acceptance and delivery time voices, along with a certified proof of line standards that are associated with the depreciation payment to verify that payment has already been made. of the equipment and the associated tax advantages. In an escrow transaction, the equipment cannot be Net-Funded Escrow Accounts depreciated because it has not been delivered or placed Another type of lease structure using an escrow account into active service. There cannot be a transfer of the own- is a net-funded escrow account. In a net-funded transac- ership of the equipment from the lessee to the lessor be- tion, the amount deposited into the escrow account is cause the equipment is not yet owned by either party. less than the total equipment cost. The equipment deliv- Therefore, since the benefit of these lease structures is ery date is known at the time the funds are deposited in based on gaining a tax advantage from the equipment’s the escrow account, and the interest is calculated so that depreciation, no portion of the equipment cost can be the interest earnings make up the difference between the escrowed. Nontax leases, such as a finance lease, condi- funded amount and the total equipment cost. tional sale, or dollar-out lease, are usually good candi- For example, if a $1 million fire truck is being de- dates for escrows. livered one year after the start of the lease term and the yield on the escrow account is 5%, the lessor will deposit Reimbursements approximately $950,000 into the escrow account. The There are two different ways in which a municipality can interest earnings of approximately $50,000 are used to use reimbursements during the escrow process. First, a make up the difference so that at the end of the one- municipality can seek reimbursements for equipment year period, when the fire truck is ready to be delivered, that has been purchased before the signing of the financ- there will be $1 million in the escrow account, com- ing agreement. However, in order for this to be allowed, posed of the $950,000 that was initially deposited plus the lessee must have a resolution in place that states that the $50,000 in interest earnings. it intends to finance that specific equipment. This type of To use net-funding, a fixed-rate account should reimbursement process is usually used when the lessee be used. This structure benefits the lessor because the has experienced an urgent need to acquire the equip- amount of the lease is the full $1 million even though ment, but has not had the opportunity to seek out the the escrow agent has contributed $50,000 toward the financing for that equipment yet. purchase price of the equipment. When the lessee finds the financing and signs a lease For a net-funded account that requires progress agreement, the lessor deposits the funds into an escrow payments, certificates of deposit (CDs) can be purchased

5 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2 for the varying time periods. For example, if a construc- are being paid directly to the vendor, a vendor payable tion project costs $5 million and the progress payments account can be used. are $1 million paid every six months, five CDs can be purchased with specific maturity dates that will mature Unique Credit Requirements at intervals timed with the disbursement dates. The first Often in equipment finance, there are unique credit CD will mature in six months, the second CD in a year, requirements that can make it difficult to immediately the third in 18 months, the fourth in two years, and fund a transaction. Even when the equipment has been the fifth in 30 months. The interest rates are factored delivered and installed, there are sometimes additional so that each CD costs less than $1 mil- credit requirements that can prevent lion, thereby causing the total amount Often in equipment the funds from being released imme- funded into escrow to be considerably diately. One such requirement that is less than $5 million, with the interest finance, there are unique becoming increasingly more common making up the difference. is a visual inspection by an equipment When considering this type of credit requirements that manager or appraiser, which can of- account, the lessor and lessee should ten delay a funding by several days or can make it difficult work closely with the vendor to en- more. sure that the progress payments dates to immediately fund a However, credit managers are are acceptable to all parties. If a vendor likely to approve the transaction if demands a payment sooner it will be transaction. the funds are being deposited into an difficult to cash the CDs before they escrow account in which the lessor mature. Many energy management service providers are retains a security interest. Then, after the visual inspec- knowledgeable about this type of structure, and these tion or appraisal has been completed, the funds can be types of contracts are well suited to this kind of escrow released from escrow. Again, the benefit is that the lessor structure. can put the transaction on the books immediately, rather than issue a commitment letter and then have to wait for Vendor Payable Accounts these additional requirements to be met before booking. Another type of escrow account is a vendor payable ac- count, so named because the funds are paid directly to Security Deposits and Other Uses the vendor. What makes this type of account unique is While the equipment acquisition fund is the most com- that a vendor payable account is a noninterest-bearing mon type of escrow account used in the equipment escrow account. Since there is no interest, the full de- finance and leasing industry, there are other uses for es- posit amount is paid to the vendor upon the lessee’s ac- crow accounts in which funds designated for other pur- ceptance of the equipment. These types of accounts can poses are escrowed. Security deposits can be placed into be used for short-term escrows, where the equipment escrow accounts at the beginning of a lease term. The is close to being delivered but there are just a few final benefit of putting a security deposit into an escrow ac- items that still require completion. count is that the deposit is under the control of a third If the expected amount of interest that would oth- party rather than under the direct, sole control of the erwise be earned is very small, or if the period that the lessor or lessee. Having sole control of a security deposit monies will be held in escrow is minimal, it is often not can lead to fraud, and financial issues or bankruptcy can worth the extra effort to set up an interest-bearing ac- cause the funds to be unavailable to the other party. Hav- count. Interest needs to be accounted for as income and ing the funds in an escrow account could avoid potential needs to comply with the tax code, and often finance litigation in the event that the sole controller of the funds directors would rather not have this headache over a few used the funds for a purpose other than what they were dollars. Some municipalities have specific requirements designated for. that escrows should not bear interest; however, this is If a lease transaction does go awry, escrow accounts rare. If a municipality has this requirement and the funds are a great way to transfer funds during a litigation or

6 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2 settlement process. Often there are other items that need tion or energy management project. One common way to be performed before funds can be delivered to a dam- to go about this with municipal lessees is to use a capi- aged party, such as signing a confessed judgment and de- talized interest fund. The capitalized interest is put into livering attachments to equipment or manuals for a piece a separate escrow account (separate from the equipment of equipment. Through the use of an escrow account, the acquisition fund or construction fund) and then used funds can be held by a third party until such items have to make the first several payments to the lessor to pay been completed or delivered to both parties’ satisfaction. accruing interest during the construction period. This Escrow accounts can be an excellent way to hold guarantees that these interest payments will be made. funds during the retitling or lien re- For example, if the equipment lease process for large-ticket items. Escrow accounts can cost for an energy management proj- When equipment is being sold, often ect is $1 million, the interest rate is the retitling or lien release process can be used to hold funds 5%, and the construction period is be delayed and cause problems for the two years, the lessee can capitalize lessor, the lessee, and the third party for prepaid expenses the first two years’ worth of interest- that is purchasing the equipment. Les- only payments into the financing cost, like routine repair and sors are reluctant to release liens on which would be $1.1 million. The les- equipment if they don’t have the pur- maintenance of the leased sor would then deposit $1 million into chase proceeds, and third parties are a construction fund escrow account, often unwilling to pay before a lien has equipment, taxes, and and deposit $100,000 into a separate been released on the equipment. For capitalized interest escrow account. this reason an escrow account can be insurance costs. The capitalized interest account would used to safely hold the funds until the then be used to make interest-only lien release process has been completed. The third- party payments to the lessor in the amount of $50,000 per buyer deposits the funds into an escrow account along year for the first two years. Essentially, the lessor is lend- with instructions to hold the funds until all parties have ing the money to the lessee to make these payments and agreed that the liens have been satisfactorily removed or capitalizing the cost into the total lease amount. transferred. Once everyone is in agreement, the escrow While first payment defaults and nonappropriation agent can release the funds to complete the sale of the are not common, they do occur in the leasing industry. equipment. Escrow accounts can be set up to have the lessee de- Another use for escrow accounts is to hold funds for posit the first year’s worth of monthly payments into an prepaid expenses like routine repair and maintenance of account that is managed by a third-party escrow agent. the leased equipment, taxes, and insurance costs. It is The escrow agent should be given specific instructions acceptable to use an escrow account for these types of to make the lease payments on the payment due dates, expenses no matter what the lease type since the funds which also guarantees to the lessor that it will receive the are not part of the actual equipment cost. For repair and lease payments in a timely way. maintenance expenses, a monthly sum, which is a por- tion of the annual maintenance fees, can be added to the CONCLUSION lease payment. Then, when the equipment is ready to be There are many ways in which escrow accounts can be maintained or repaired, the funds can be released from used in equipment finance and leasing transactions. With escrow and paid to the mechanic or vendor on behalf of a reputable escrow agent, lessees and lessors should be the lessor or lessee. Taxes and insurance can be escrowed confident that fiduciary responsibilities will be upheld in the same manner, which is very similar to the way in and that their funds will be kept safe. In a turbulent and which residential real estate escrows are managed. evolving economy, there will always be new and innova- tive ways for lessees and lessors to use escrow accounts. Guaranteeing Payment Streams The next time you are faced with a challenging transac- Escrow accounts can also be used to guarantee a stream tion, consider whether an escrow structure might help to of payments during the construction phase of a construc- get it completed.

7 The Use of Escrows in Lease Transactions JOURNAL OF EQUIPMENT LEASE FINANCING • SPRING 2011 • VOL. 29/NO. 2

Endnotes Bill Brooks 1. Tax-exempt customers, such as 501(c)3 not-for-profit orga- nizations, are treated slightly different than municipalities, but [email protected] for the purposes of this article they will be discussed together. Bill Brooks is assistant vice president 2. Equipment vendors or suppliers are rarely party to an of management at Sun- escrow agreement. It would be advisable to proceed with Trust Equipment Finance & Leasing caution if an equipment supplier requests to be a party to the escrow contract, as most standard escrow agreements are not Corp. (STEFL). Prior to this role, he served as the escrow designed to accommodate an equipment vendor. portfolio manager at STEFL, where he was responsible for one of the largest municipal escrow portfolios in the 3. State and local statues can restrict how municipalities can invest, and lessors need to be aware of these restrictions when industry. Mr. Brooks holds a BA from American Univer- choosing an escrow vehicle. Usually, high-grade investments sity in Washington D.C., and an MBA from the Univer- which have a low risk tolerance for loss of principal and a sity of Baltimore. He currently is a doctoral candidate at high probability of positive return are acceptable, like a nego- Walden University, Minneapolis, Minnesota, working on tiable order of withdrawal (NOW account), which typically a PhD in management with a specialization in interna- invests in some combination of government bonds and/or investment grade commercial paper. tional business.

4. See U.S. Internal Revenue Code of 1986 Section 148(f) and U.S. Treasury Regulation Sec. 1.148–10. Be sure to consult a tax attorney before entering into any financing agreement.

5. Escrow agent fees vary greatly; however, most funding sources (i.e., banks) have internal trust groups that are famil- iar with equipment finance related escrows and can act as an escrow agent. Bank-owned leasing companies will probably be faced with smaller fees because they are helping the parent bank increase bank deposits through the use of escrows. Bro- kers, captives, and other lessors might be faced with higher fees when having to select an escrow agent.

6. See U.S. Internal Revenue Code of 1986 Section 168(f)8 and Section 168(c)2. Consult a tax attorney before entering into any financing agreement.

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