What are Commonwealth Income & Growth Fund Iv's Business Segments?
The Partnership generally purchases only equipment that is subject to a lease
or for which a lease or similar agreement will be entered into contemporaneously
with the consummation of the Partnership’s acquisition of the equipment.
The General Partner leases most of the equipment purchased by the Partnership
to third parties pursuant to operating or finance leases. Types of leases which
the General Partner may enter into are operating leases, finance leases and
conditional sales contracts.
Operating leases are relatively short-term (12 to 48 month) leases under which
the aggregate non-cancellable rental payments during the original term of the
lease are not sufficient to permit the lessor to recover the purchase price
of the subject equipment.
In a finance lease, the lessor generally recovers at least 90% of the original
equipment cost during the lease term.
A conditional sales contract generally provides that the non-cancellable payments
to the seller over the term of the contract are sufficient to recover the investment
in such equipment and to provide a return on such investment. Under a conditional
sales contract, the seller reserves title to and retains a security interest
in, the equipment until the purchase price of the equipment is paid.
In general, the terms of the Partnership’s leases, whether the equipment
is leased pursuant to an operating lease or a finance lease, depend upon a variety
of factors, including: the desirability of each type of lease from both an investment
and a tax point of view; the relative demand among lessees for operating or
full payout net leases; the type and use of equipment and its anticipated residual
value; the business of the lessee and its credit rating; the availability and
cost of financing; regulatory considerations; the accounting treatment of the
lease sought by the lessee or the Partnership; and competitive factors.
An operating lease generally represents a greater risk to the Partnership than
a finance lease, because in order to recover the purchase price of the subject
equipment and earn a return on such investment, it is necessary to renew or
extend the operating lease, lease the equipment to a third party at the end
of the original lease term, or sell the equipment. On the other hand, the term
of an operating lease is generally much shorter than the term of a finance lease,
and the lessor is thus afforded an opportunity under an operating lease to re-lease
or sell the subject equipment at an earlier stage of the equipment’s life
cycle than under a finance lease. Also, the annual rental payments received
under an operating lease are ordinarily higher than those received under a finance
lease.
The Partnership’s policy is to generally enter into “triple net
leases” (or the equivalent, in the case of a conditional sales contract)
which typically provide that the lessee or some other party bear the risk of
physical loss of the equipment; pay taxes relating to the lease or use of the
equipment; maintain the equipment; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or omission
of the lessee or its agents; maintain casualty insurance in an amount equal
to the greater of the full value of the equipment and a specified amount set
forth in the lease; and maintain liability insurance naming the Partnership
as an additional insured with a minimum coverage which the General Partner deems
appropriate. In addition, the Partnership may purchase “umbrella”
insurance policies to cover excess liability and casualty losses, to the extent
deemed practicable and advisable by the General Partner.
The terms and conditions of the Partnership’s leases, or conditional sales
contracts, are each determined by negotiation and may impose substantial obligations
upon the Partnership. Where the Partnership assumes maintenance or service obligations,
the General Partner generally causes the Partnership to enter into separate
maintenance or service agreements with manufacturers or certified maintenance
organizations to provide such services. Such agreements generally require annual
or more frequent adjustment of service fees. As of December 31, 2015, the Partnership
has not entered into any such agreements.
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