TRAC or Split TRAC Lease
True Leases of qualified motor vehicles and trailers with Terminal Rental Adjustment Clauses are what is known as TRAC Leases.
At the outset of a TRAC Lease, the Lessor and Lessee agree on the terminal value of the equipment, commonly known as the equipment’s “Estimated Residual Value.” The Estimated Residual Value is a prediction of the fair market value of the motor vehicle at the end of the term. The predicted value is then compared to the “Actual Residual Value” received by the Lessor at the end of the lease term through a sale to a third party, a sale to the Lessee, or by appraisal. If the Actual Residual Value is less than the Estimated Residual Value, the Lessee will make up the shortfall. Conversely, if the Actual Residual Value is greater than the Estimated Residual Value, the Lessee will receive the excess.
A Split-TRAC Lease follows the same principle as a TRAC Lease except the Lessee’s potential lease-end exposure is limited to a portion of the Estimated Residual Value.