Features
Lease-purchase
With deals like this, can you really make it as an owner-operator?
This is the seventh in a series of exclusive articles describing how owner-operators can spot illegal motor carrier leasing practices.

By Paul D. Cullen Sr.
The Cullen Law Firm, PLLC

Many truckers try to join the ranks of owner-operators by entering into leaseback agreements with a motor carrier. Under these agreements, the trucker leases a truck from the motor carrier and then re-leases the truck back to the carrier under a lease covered by the truth-in-leasing regulations in Title 49, CFR, Part 376. These agreements are sometimes called “lease-purchase” agreements.

Questions about your lease or your carrier’s practices?

Editor’s Note: If you have any questions about these regulations, about the legality of your lease, or the legality of your motor carrier’s practices, send your questions, a copy of your lease and a copy of any other pertinent documents to: Donna Ryun, OOIDA, PO Box 1000, Grain Valley, MO 64029. E-mail: dryun@ooida.com. All communications will be held in the strictest confidence. The most frequently asked questions will be published (no names mentioned) in future issues of Land Line, along with answers.

Carriers cannot violate the truth-in-leasing regulations with impunity. The leasing regulations specifically forbid a carrier from providing regulated transportation services in equipment it does not own unless that equipment is covered by a lease that complies with these regulations. Federal courts have the authority to enjoin carrier operations (i.e. stop them cold) until valid leases are executed. OOIDA has obtained one such injunction and is eager to seek injunctions against additional carriers in order to put an end to bad leases.

Recruiters for motor carriers present a powerful sales pitch. Why be a company driver when you can be an “owner-operator”? Actually, in most of these agreements, the trucker is not buying any ownership interest in the truck. The trucker is simply leasing the truck — that is, making rental payments on and maintaining the truck while driving it. While the trucker may have the option of purchasing the truck at some established value at the end of the lease, in most cases, the lease drivers own nothing during the term of the lease.

Carriers advertise these agreements as a way to get into trucking with no down payment for the truck and no credit references. Something that sounds too good to be true usually isn’t true. A few individuals survive such lease-purchase arrangements to the end of the lease. But this is rare and usually involves a trucker blessed with many good loads over the life of the lease and no major upsets in the business climate like significant hikes in fuel prices. Drivers who enter into such agreements almost always walk away from them with no ownership of a truck and poorer than when they began. When motor carriers have an owner-operator turnover rate in excess of 100 percent per year, anyone contemplating a lease-purchase arrangement ought to think long and hard before choosing this option.

Under most of these agreements, the trucker is required to pay all costs of operating the vehicle. Motor carriers find these arrangements very advantageous — most of the risk and cost of running its business are shifted to the driver. In addition to the lease payments, these costs include maintenance, insurance, fuel costs, state and federal taxes and numerous other expenses. Some of these costs can be estimated based on the experience of other truckers in years past. OOIDA has a lot of experience in this area and regularly surveys its members to obtain a realistic cost of operating a tractor. Some of these projections are shown on Table 1 (Page 50).

Other items require the owner-operator to project future costs. The cost of fuel per gallon is anyone’s guess. With oil industry workers in Venezuela on strike and our country poised for a war with Iraq, the current price of $1.48 per gallon is not unrealistic. Based upon an average of 6 miles per gallon, if the price of fuel goes up 10 cents per gallon, the driver’s bottom line for the year will go down by $17.70 for every thousand miles he drives.

Many carriers do not base mileage pay on actual miles. Often a mileage guide like the Household Goods Carriers Mileage Guide is used. Such carrier-selected mileage guides almost always show fewer miles than what it really takes to complete a trip. Your cost of operating the truck, however, is directly related to the actual miles you drive. That cost is not reduced when the carrier cuts your compensated miles. There are other reasons why a driver’s actual miles over a year will be more than compensated miles, such as uncompensated deadhead miles between loads, etc. OOIDA surveys show a driver’s uncompensated miles will often equal 20 percent of his compensated miles.

Many lease-purchase agreements impose an excess-miles penalty on drivers who exceed a certain number of miles per month. Such drivers are thought to be wearing out the truck too fast while making money for the carrier. We have seen excess-miles penalties as high as 5 cents per mile. For purposes of analysis, OOIDA assumes a 3.5 cents per mile penalty for anything over 10,000 miles per month. Although most leases say the driver will get this money back if he purchases the truck at the end of his lease, few owner-operators ever complete the lease and benefit from this provision.

Some costs are in the control of the driver, but the driver does have to eat and maybe he would like to sleep in a real bed once in a while when he is on the road. Also, he may be lucky and avoid the cost of fines and tickets. OOIDA’s projections are average costs, and an individual driver’s luck may not be as good as the OOIDA projection, e.g. his fine and ticket costs may be higher, liability claims for cargo damage may be higher, etc.

New trucks are covered by a manufacturer’s warranty. All too often we find carriers charging drivers for repairs paid for by the manufacturer under the warranty. Guess who keeps the manufacturer’s warranty payment? Older trucks cost more to maintain than newer trucks. If you lease an older truck, your lease payment should be less than that of a new vehicle. The difference in lease payments should make up for the difference in the cost of maintaining it. Some leases we have seen fail to adjust for the age of the truck.

Another favorite scam is the carrier’s refusal to pay for anything except ambiguously defined “major repairs.” Repairs under $500 often come out of weekly settlement sheets, leaving maintenance escrow accounts to grow fat, only to be confiscated by the carrier at lease termination. Confiscating maintenance funds at lease termination was condemned by the court in OOIDA’s truth-in-leasing litigation against Arctic Express and is being attacked by OOIDA in other cases.

The trucker’s ability to make the payments on the truck is almost solely dependent on the quality and number of loads the carrier gives the trucker. OOIDA has received many complaints from truckers that some carriers appear to give the owner-operators good loads early in the lease. Then the number and quality of those loads goes down. The carrier has the ability to put the owner-operator out of business by controlling his dispatches. According to those complaints, some carriers use that ability to force the owner-operator to break the lease so the carrier can confiscate the escrows set up to pay for maintenance and tire replacement. The next driver to lease the truck starts the whole process over again, but never benefits from maintenance escrow funds set aside for the truck by previous drivers.

This practice is most often illegal. Under the leasing regulations, maintenance and tire reserves are treated as escrows and are subject to the truth-in-leasing rules covering interest, accounting and return following lease termination. Under the leasing regulations, the court in OOIDA’s case against Arctic held that maintenance escrows can’t be put into a general slush fund to be used to offset other items the owner-operator may owe the carrier.

If the trucker turns the truck back to the motor carrier before the end of the lease, most leases require lease payments for the balance of the lease term. The law does require that the carrier attempt to “mitigate” its damages by re-leasing the truck to another owner-operator or using it as a company-driven truck. Most carriers do not attempt to collect lease payments after termination, but if the carrier makes the effort to re-lease the truck and can’t, it may well go after the trucker for the balance of the lease.

In short, most lease-purchase or leaseback agreements are not good deals for anyone but the carrier. Lease-purchase arrangements have proven to be a fertile area for violations of the truth-in-leasing regulations established to protect owner-operators. If the driver fails, he will be lucky if he leaves the carrier with just a bad credit rating.

OOIDA’s projection for operating a truck for the year 2003 is shown in Table 1. The cost of the lease is an important factor. Leases range from the high $300s to more than $600 per week. The number chosen to represent the cost of the lease, $425 per week, is in the low end of that range. In evaluating the potential costs you may have in entering into such a leasing arrangement, your assumption as to weekly lease payments and fuel costs will be critical.

Table 1 shows that under OOIDA’s cost assumptions, a driver being paid 82 cents a mile and driving 100,000 compensated miles per year would go in the hole $13,960 dollars per year. One can argue with OOIDA’s cost assumptions, but the reality is you must reduce these cost assumptions by $13,960 before the driver breaks even!

Table 2 shows a driver facing these costs would have to drive 133,000 miles per year just to break even. Alternatively, a driver could hope his cost of fuel per gallon would go down to $0.78 so he could break even. This drop in fuel prices is most unlikely. The only realistic way for a driver to make even a modest income is for compensation to go up. Table 2 shows that at $1.30 per compensated mile, a driver could take home $34,040 after expenses. Such compensation rates are not available under typical lease-purchase arrangements.

Not everyone has what it takes to be an owner-operator. If you have no down payment for a truck and are not eligible for bank credit, you should seriously consider whether being an owner-operator is for you. Sure there are motor carriers that will offer you a deal that will put you behind the wheel of a truck. Too often, however, such deals give drivers no real opportunity to become independent and often leave them worse off after lease termination than they were before.

The truth-in-leasing regulations can protect drivers from some of the abuses by unscrupulous carriers. These regulations can do nothing, however, to protect a driver from economic ruin if he attempts to earn a living hauling freight for only 82 cents per mile while paying his carrier $400-$600 per week to drive a truck he will never own himself.

These lease-purchase agreements also have negative implications for the industry as a whole. Carriers who get owner-operators to work for nothing under lease-purchase agreements can afford to haul freight for next to nothing, driving freight rates down and hurting the rest of the industry and its drivers in the process. Numbers don’t lie. Even if a driver owned his own truck outright, it would be hard to make a decent living at 82 cents per mile. It is simply not possible to earn a decent living at 82 cents a mile under any of the lease-purchase agreements I have reviewed. LL

Paul D. Cullen Sr. serves as OOIDA’s General Counsel and is managing partner of The Cullen Law Firm, PLLC of Washington, DC. He can be emailed at pdc@cullenlaw.com.

Lease-Purchasing a Truck
The Economics
Compensation
Gross Compensation - Miles
Excess Miles Penalty 
Net Compensation
$ 82,000
– 0 –


$ 82,000
Direct Costs
Fuel
Maintenance Reserve Escrow
(Repairs less than $500)
(Repairs more than $500)
Tractor Tires
Qualcomm
Road, Fuel Property, Highway Taxes
Loading/Unloading
Licenses
Permits
Truck Washing
Fines & Tickets
Subtotal Direct Costs
$ - 29,600

- 6,000
- 6,275
- 2,200
- 1,375
- 1,875
- 1,600
- 1,750
- 575
- 675
- 300












$ - 52,225
Insurance
Physical Damage
Non-trucking Liability 
Cargo
Occupational Accident 
Subtotal Insurance
$ - 2,000
- 525
- 1,250
- 1,775




$ - 5,550
Indirect Costs
Bookkeeping
Meals 
Lodging 
Medical Insurance (Driver Only) 
Miscellaneous Expenses 
Telephone 
Sub-Total Indirect Costs
$ - 600
- 5,500
- 685
- 3,400
- 4,700
- 1,200






$ - 16,085
Annual Lease Payment
$ - 22,100
Net Income
$ - 13,960

 

Table 1

Assumption Table
Compensated Miles
100,000
Uncompensated Miles as % of Total Miles
20%
TOTAL MILES
120,000
 
Compensation Rate Per Mile
0.82
Excess Miles Limit / Year
120,000
Excess Miles Penalty / $ per mile
0.0350
Fuel Price per Gallon
1.48
Average MPG
6.00
Maintenance Reserve / $ per mile
0.05
Weekly Lease Payment
425

 

If you’re going to lease-purchase a truck, you will have to make certain assumptions about your business. How many compensated miles will you drive? How much will you be paid per mile? How much will you be paying for fuel? This assumption table shows the assumptions we made in producing Table 1, “Lease-Purchasing a Truck — The Economics.”

 

Table 2

Impact of Miles, Fuel and Revenue on Income
Compensated
Miles
Price of Fuel
Per Gallon
Weekly Lease
Payment
Compensation
Per Mile
Net
Income
Drive
More Miles
100,000
$ 1.48
$ 425.00
$ 0.82
$ - 13,960
120,000
1.48
425.00
0.82
- 5,520
133,000
1.48
425.00
0.82
- 34
Pay Less
For Fuel
100,000
$ 1.30
$ 425.00
$ 0.82
$ - 10,360
100,000
1.00
425.00
0.82
- 4,360
100,000
0.78
425.00
0.82
40
Don't Haul
Cheap Freight
100,000
$ 1.48
$ 425.00
$ 1.00
$ 4,040
100,000
1.48
425.00
1.15
19,040
100,000
1.48
425.00
1.30
34,040

 

This table show three ways to improve driver compensation. First, you can drive more miles – but you must drive 133,000 compensated miles per year just to break even. Second, you can hope the price of fuel goes down. But the price of fuel is not likely to go down enough to make money. Finally, you can refuse to haul cheap freight.
* Fuel prices averaged $1.48 when this story was written. At presstime, the U.S. average was up to $1.72.

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