Railcar Leasing Options: Managed Net Lease vs. Full-Service Lease

Railcar Leasing Options: Managed Net Lease vs. Full-Service Lease

When considering railcar leasing, the choice of lease type can have a significant impact on both operational efficiency and financial outlay. The primary decision revolves around whether to opt for a net lease or a full-service lease, with a third option—managed net lease—warranting further exploration in this month’s blog. Each of these leasing structures carries its own set of advantages and disadvantages, influencing the effectiveness of your operations and overall costs.

For organizations that already own railcars, Tealinc presents a unique solution for you also: the option to sell your railcars to us and subsequently lease them back under a managed net lease arrangement. This hybrid approach merges the benefits of ownership with those of leasing. Below, we break down these leasing types to assist you in determining the most suitable option for your business.

Overview of Lease Types

Net Lease: In a net lease, the lessee (you) assumes nearly all responsibilities, including maintenance, insurance, transportation, taxes, and more. Maintenance and repair bills can fluctuate leaving monthly receivables unpredictable. The lessor primarily collects rent and pays taxes, remaining largely uninvolved. While you manage all aspects of the railcars, ownership resides with the lessor.

Full-Service Lease: In a full-service lease, the lessor assumes responsibility for most repair and maintenance tasks. However, the lessee retains some obligations, such as repairs to gates, hatches, and the car bodies. The lessor controls the repair locations, which may lead to increased transportation costs if these locations are not conveniently situated. Moreover, you will be liable for repairs not covered by the lessor.

Managed Net Lease: Tealinc’s managed net lease synthesizes elements of both net and full-service leases. You maintain accountability for repairs and maintenance, while we manage the logistical aspects including repair and maintenance management and invoice review, audit, and invoice approval. You can even add a payment account to ensure monthly maintenance predictability This arrangement allows you to concentrate on your core business activities while we handle the details.

Pros and Cons of Each Lease Type

To facilitate your understanding of the various leasing structures, we have compiled a list of pros and cons for each lease type below. A comparative chart is also available at the end of this document for those who prefer visual summaries.

Net Lease:

• Pros:
  • Cost Control: With pre-planning, you can manage maintenance and repairs allowing for tailored budgeting.
  • Customization: You can develop a maintenance program that aligns with your operational needs, potentially minimizing freight costs through on-site repairs.
  • Operational Planning: You control the timing and location of repairs, reducing the risk of deferred or delayed maintenance.
• Cons:
  • Potentially Higher Costs: You bear the burden of maintenance and unforeseen expenses, which may elevate costs and fluctuate month to month.
  • Operational Burden: The necessity to manage inspections and repairs can be challenging without a dedicated team.
  • Increased Stress: A knowledgeable staff is essential for effective net lease management.

Full-Service Lease:

• Pros:
  • Minimal Maintenance Oversight: The lessor manages repairs and maintenance as required, allowing you to focus on core business functions when something goes wrong.
  • Predictable Monthly Costs: The lessor manages monthly maintenance expenses thus allowing you monthly predictability.
  • Access to Expertise: Lessor companies provide valuable insights and experience, alleviating some operational burdens.
• Cons:
  • Limited Customization: You are required to utilize the lessor’s designated repair facilities, which may not always be convenient or cost-effective. Additionally, preventative maintenance items may be overlooked by the lessor since they only get paid when the car is out of the shop causing them to turn cars quickly.
  • Higher Monthly Costs & End of Lease Turnback Costs: While monthly expenses can be predictable, you pay a higher monthly rate versus a net lease to pre-pay the lessor for maintenance and repair costs and the lessor keeps any unused funds. Additionally, total costs can escalate over time especially at lease turnback when preventative maintenance issues that were never addressed during the lease have to be addressed.
  • Dependence on Lessor: Delays in repairs managed by the lessor could disrupt your operations at critical times.

Managed Net Lease:

• Pros:
  • Cost Control & Lower Initial Costs: We assist in establishing a preventative maintenance program and provide options for on-site repairs, minimizing freight costs and downtime. Like full-service leases, you avoid unpredictable upfront expenditures. Unlike a full-service lease, because repairs and maintenance have been addressed holistically during the term of the lease, lease turnback is typically less expensive.
  • Customization and Safety: You retain decision-making authority over repairs, while we manage logistics and documentation. A pre-paid maintenance account facilitates the management of predictable expenses and return of unused funds to you.
  • Reduced Operational Stress & Expert Support: Tealinc oversees maintenance logistics, allowing you to focus on your business without unexpected delays or repair costs. Our experienced team partners with you to ensure your railcars remain compliant and efficiently managed. Since the introduction of this program in 2011, over 50% of our railcar lessee customers have successfully engaged in it. Our first customer from 2011 continues to thrive under this managed net lease, with 100% of participants providing five-star reviews and zero cancellations. We are happy to furnish customer references and testimonials for further validation.
• Cons:
  • Higher Base Pricing: An additional administrative fee is paid for Tealinc monthly for management services and if you elect to establish a pre-paid maintenance account, you will pay a higher fee each month to ensure maintenance and repair funds are appropriately allocated. To ensure the program is productive for you, any unused funds in the pre-paid maintenance account that aren’t used for railcar maintenance and repairs are returned to you.
  • Insurance & Requirements: Like a net lessee or a railcar owner, the lessee (you) are responsible to pay for insurance and taxes during the term of the lease. We will support the administration of both insurance and taxes to simplify this process over a standard net lease.
  • Partnership: You will be asked to provide final approval of any larger project work and be engaged with us while your railcars are in our program. While we’ll give you options and direction, you provide the final decision.

Ready to Get Started?

At Tealinc, we strive to simplify the railcar leasing process. Whether you're considering a net lease, full-service lease, or our managed net lease option, we’re here to help you find the solution that best fits your needs. Feel free to reach out to discuss your railcar leasing requirements—we're here to assist!

Contact Tealinc to learn more at RailPartner@tealinc.com or by phone at (708) 854-6307.