Rent to Own AutoTurn-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 $4,000Sale price / Cap Cost $8,800RFC Discount 35.00%Down payment/security deposit $1,000Income tax rate 40.00%Sales tax rate 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

RTO Cash

Calculations: Flow SavingsInitial Sales Tax $ 616 $ 616Sale Price to RFC $5,720Profit on RFC Sale $1,720Income Tax on RFC Sale $ 688 $ 688Total After Tax Cash Savings $ 1,304(Only 100 vehicles) x 100

$130,400

200 vehicles - $260,800 Savings300 vehicles - $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 protectionReduced customer disclosuresReduced State and Federal regulatory

requirements compared to Reg. Z and MVRISA on sales

No APR or Reg. Z disclosure No usury limits

RTO Implementation

You Receive: Program Handbook on all policies and requirements

including residual values RTO agreement + all forms/documents Marketing plan 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 Agreement2. Complete, sign & return the Contingent Insurance

Application3. Complete, sign & return the Physical Damage Insurance

Set-Up Form

Arceri & Associates(504) 309-3087www.arceri-insurance.comarceri@live.com