Securities Lawyers Blog
Our firm has written numerous times about investor losses in programs such as various equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. These direct participation programs, like their non-traded REIT and oil and gas cousins, all suffer from the same crippling flaw that dooms these investments to a high likelihood of failure from the get go. The costs and fees associated with all of these investments cause the security to be so costly that only unprecedented market boom conditions can lead to profitability. Market stagnation or decline makes any significant return a virtual impossibility.
Yet, investors are in no way compensated for these additional risks. These investments tout high yield like returns for risks far in excess of traditional high yield investments. In fact, the only reason brokers sell these products is because of the high sales commissions coupled with the lack of price transparency that allows these products to be displayed at inflated values for years on investor account statements.
In an equipment leasing program a sponsor sells limited partnership units then takes out substantial offering costs and fees and invests the remainder in a pool of equipment leases that are leveraged up with additional borrowing. Brokers market these products as a predictable income stream but in fact, and what nearly all brokers fail to mention, is that a substantial portion of investor distributions are actually a return of their original investment and not actually income generated from operations.
Beyond the costs, the investments themselves are a poor choice as the purchased leases are either operating leases or full-payout leases. In operating leases, the company owns the equipment and hopes that the residual value of the equipment will be great enough when combined with lease income received over the term of the lease to pay both the cost of the equipment and return a profit to investors. In a full payout lease the trust has no ownership in the equipment but is instead just financing the operator’s purchase and use of the equipment. Thus, investors are investing to borrow money to make other loans backed by equipment to poor credit-quality borrowers.
But what destroys these products in the cradle is the costs and fees investors pony up to be involved in these funds in the first place. In a typical equipment leasing program upfront fees are around 20-25% of investor’s capital. In one example the sponsor took $25,527,491 in fees from the $120,000,000 raised, set aside $1,200,000 in reserves and then invested only $93,272,509 in actual leases. After that, funds such as LEAF III, financed 80% of its lease portfolio with debt adding more fees including a 2% acquisition fee, 4% of gross rental revenue on operating leases, and 2% of gross revenue on full payout leases each year causing conflicts of interest and virtually ensuring that investors would lose money.
In sum, equipment leasing programs are in many instances poorly understood by the brokers and brokerage firms that sold them to clients as income substitutes for traditional bond investments. The high costs and fees associated with these speculative private placements virtually guaranteed investor losses. Investors should think twice before investing in any fund that asks for 20-25% of their money in fees and costs first.
Investors who have suffered losses in investments such as equipment leasing programs may be able recover their losses through arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors and determining when brokerage firms fail to supervise their representatives sale of unsuitable investments or their failure to perform proper due diligence. Our consultations are free of charge and the firm is only compensated if you recover.