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• FORMULA FOR SUMMER SELLING • LEASE HERE-PAY HERE VS. BUY HERE-PAY HERE • COMPLIANCE OVERDRIVE

DALLAS, TEXAS Permit No. 2079

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I N D U S T R Y U P D AT E

NIADA’s Petersen Joins NMVTIS Advisory Board

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MAGAZINE CONTENTS 04 Formula for Summer Selling 06 Curbstoning: What’s Being Done 18 Compliance Overdrive

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satellite radio company. Independent dealerships can now offer a free SiriusXM three-month trial on all pre-owned vehicles with factory-equipped satellite radio. In addition to selling your customers a quality vehicle, you’ll be giving them the opportunity to enjoy satellite radio. And there’s no cost to your customer. Visit www.siriusxm.com/niadaprogram to enroll your dealership today!

NIADA Member Health Plans, administered

Independent dealers were given a voice in the National Motor Vehicle Title Information System (NMVTIS) when NIADA legislative /regulatory/compliance counsel Shaun Petersen was named to the NMVTIS Advisory Board. Petersen becomes the second auto industry representative on the 27-member board, joining James Moors of the National Auto Dealers Association. Moors, who represents new car dealers, suggested adding Petersen to the board to represent the used car business, Petersen said. “My appointment to the board will bring the voice of the used car dealer to the table,” Petersen said. “NIADA is seen as an independent and different voice from the new car dealer. I think it is significant they sought us out.” The board – which also includes members representing the insurance industry, the salvage industry, law enforcement, consumer advocates, state departments of motor vehicles, organizations focused on preventing vehicle-related crime and the system’s technology partners – was established to advise the Department of Justice’s Bureau of Justice Assistance on ways to promote the effective and efficient administration of the NMVTIS program and database. NMVTIS was created to prevent the introduction of stolen vehicles into commerce, to protect states and consumers from fraud, to reduce the use of stolen vehicles for illicit purposes and to provide consumer protection from unsafe vehicles. NMVTIS reports provide title and branding data, odometer readings, total loss history and salvage history. Insurance carriers, auto recyclers and junk and salvage yards are required to report data to the system, and states must perform an NMVTIS check before issuing a title.

by JLBG Health, bring you choice and flexibility when designing your personal health plan while providing potential savings of thousands of dollars annually. To review the plan details and receive an instant online rate, visit www. NIADAHealthPlans.com or call 1-888-308-9340.

ADVERTISERS INDEX

ADESA........................................ Inside Back Cover Ally.....................................................................13 AutoTrader.com......................................Back Cover Kelley Blue Book................................................... 5 Lobel Financial...................................................... 7 Manheim.com ............................ Inside Front Cover NIADA Certified...................................................16 Nowcom.............................................................11 Protective ............................................................ 9 United Acceptance.............................................. 17 Voisys.................................................................18 Westlake Financial..............................................15

OFFICE FOR INFORMATION ON HOW TO BECOME A MEMBER PLEASE CONTACT CINDY SIRKEL. CINDY@NIADA.COM • 800-756-4232 NATIONAL INDEPENDENT AUTOMOBILE DEALERS ASSOCIATION WWW.NIADA.COM • WWW.NIADA.TV NIADA HEADQUARTERS: 2521 BROWN BLVD. • ARLINGTON, TX 76006-5203 PHONE (817) 640-3838 FOR ADVERTISING INFORMATION CONTACT: TROY GRAFF (800) 682-3837 OR TROY@NIADA.COM.

The Nevada Dealer News is published bi-monthly by the National Independent Automobile Dealers Association Services Corporation, 2521 Brown Blvd., Arlington, TX 76006-5203; phone 817-640-3838. Periodicals postage paid at Dallas, TX and at additional offices. POSTMASTER: Send address changes to NIADA State Publications, 2521 Brown Blvd., Arlington, TX 760065203. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Nevada Dealer News or the National Independent Automobile Dealers Association. Likewise, the appearance of advertisers, or their identification as members of NIADA, does not constitute an endorsement of the products or services featured. Copyright © 2012 by NIADA Services, Inc. All rights reserved. STATE MAGAZINE MGR./SALES Troy Graff • troy@niada.com EDITOR Andy Friedlander • andy@niada.com ART/PRODUCTION MGR. Christy Haynes • christy@niada.com PRINTING Nieman Printing

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B E I N G A B L E T O S E L L I N T H E D O G D AY S I S R E A L LY N O D I F F E R E N T T H A N S E L L I N G I N T H E H E Y D AY S .

Formula for Selling in the Dog Days of Summer The dog days of summer are here. The time to make hay while the sun was shining has come and gone. The typical Buy Here-Pay Here dealer will sell 40-45 percent of his annual units in the first three months of the year. He will also realize about the same percentage of his annual profit in those three months. So if you got off to a slow start in 2012, the dog days of summer could be the only way to salvage your year. Because we all know the last three months are not time to try to make your year. Being able to sell in the dog days is really no different than selling in the heydays. The same four key ingredients to selling are the same. The only difference is the focus has to be there. In the heydays, selling is pretty easy. Customers have money. You have inventory. All is right with the world. But come the dog days, customers have less money. And they seem to be harder to find. The first, and most important, of the key ingredients to selling in the dog days is training. Well-trained salespeople can sell any time of year. You should always be training your staff, always honing their skills. Both phone training and basic sales skills training should be done weekly, at a minimum. Work with staff on overcoming objections – role-playing is a good way to accomplish that. When it comes to phone training, work on how to set effective appointments. Lot traffic is at a premium during the dog days, so your people had better know how to effectively handle it. The second ingredient is appearance. Now, I’m not necessarily talking about your employees’ appearance, which should always be neat and professional, but your overall lot appearance. The No. 1 reason customers list as the reason they come in is “drive by.” So if that is the case, why wouldn’t you want

your lot to look the best in town? The lot should always be neat and orderly, not with vehicles facing all four directions of the compass and then some. Vehicles should be spaced evenly, with a good mix of colors and styles. A lot party or lot rodeo should be done at least once a week, if not more. It will really go a long way to making your lot look fresh. You should consider the vehicles on your lot your mannequins and treat them the way fine department stores treat theirs. Keep them fresh, neat, clean and always ready to sell. That goes for overall lot appearance as well. A fresh coat of paint and some weed killer can do wonders. Marketing is the next key ingredient. Again, with traffic being at a premium, this is the time when repeat and referral programs really pay dividends. It’s a good time of year to focus on referrals, not just with your customer base but with outside companies and people as well. If you are not already paying referrals to non-customers, it’s something you should seriously consider. I can assure you some, if not all, of your competitors are. Marketing also extends to your web presence. Make sure your website is up to date, especially if you are displaying inventory. I was on a dealer client’s website the other day and he had pictures of some of his inventory with snow on it. In addition to the inventory, make sure all other aspects of your site are up to date. That includes any advertised specials, about us sections and employee introduction sections. You wouldn’t want someone calling or coming in asking for someone or something that is no longer there. The last key ingredient in the dog days selling formula is advertising. In this very competitive industry, advertising in some form or fashion is

almost a must. The thing that makes advertising effective is reaching the right folks with the right message. The two most popular media are, of course, television and radio. There is a thought people watch less television and listen to more radio in the summer, but that is just not the case. Studies have shown television viewing doesn’t drop off at all during the summer, and the same goes for radio listening. The important thing to remember about advertising on both those media is to remember you are not your customer, so don’t advertise to yourself. Chances are your customers watch different television stations and listen to different radio stations than you do, so make sure the stations you are on are the ones your customers are watching and listening to. Customer surveys from new and existing customers are the best way to gauge their entertainment preferences. Simply put, just ask. As with marketing, your web presence is also a way to advertise. The use of your website, as well as Facebook and even Twitter can be ways to get your message out. I wouldn’t necessarily count on those selling more cars, but they are perfect ways to advertise new inventory or special sales promotions. The formula for selling in the dog days is the same as selling in the heydays. It just takes a little more attention to detail. There are usually fewer opportunities in the dog days, so capitalizing on them is much more important. Remember, the two most important ingredients in the formula are the two most inexpensive. Hopefully, you have the right mix of all the ingredients to keep the dogs at bay.

BY BRENT CARMICHAEL

EXECUTIVE CONFERENCE MODERATOR NCM ASSOCIATES INC. BCARMICHAEL@NCM20.COM

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U N L I C E N S E D O R U N F O R T H C O M I N G D E A L E R S H AV E A G E N T S P O S I N G A S P R I VAT E S E L L E R S I N C L A S S I F I E D A D S .

CARFAX Helps TV Station Take Aim at Curbstoner Editor’s note: Curbstoning – sales of vehicles by unlicensed dealers – is a national problem that takes advantage of consumers and takes money away from state and local governments as well as legitimate dealers. This report from Memphis television station WMCTV exposing a local curbstoner and explaining the issue to the public is a direct result of the commitment of vehicle history report provider CARFAX to fighting curbstoning. “We brought the issue to the station’s attention,” CARFAX public relations manager Chris Basso said. “Tennessee is one of the biggest hotbeds for curbstoning, but it’s a nationwide problem. Whenever we hear about curbstoners in a particular area, we work to get the word out about the potential problems with the cars these people are selling and how to avoid them. “Most curbstoners are selling cars reputable dealers won’t touch – cars with hidden damage or rolled-back odometers or such – because they’re trying to make a quick sale. Anyone buying a used car needs to be wary of not only the car but of who they’re buying it from.” Basso said CARFAX has contacted other media outlets, including stations in Nashville and Phoenix, with similar tips, as part of the company’s ongoing efforts to help educate and warn consumers and dealers about emerging issues involving used cars in their area. By Andy Wise Action News 5/WMC-TV A police report revealed a car buyer intends to press theft charges against the son of a woman who is fronting used car sales from her home for a dealership, a practice called “curbstoning.” Bill Sullivan filed a complaint with the Germantown (Tenn.) Police Department on May 23. The complaint alleged he gave $4,500 to Thomas Coleman, son of Deborah Coleman, to purchase three vehicles. When their delivery was delayed,

Sullivan pressured Coleman to produce the cars’ sales documents. Once Coleman finally presented the sales documents, Sullivan said they revealed something else. “The cars were never purchased by them on my behalf,” Sullivan said. “They were purchased by somebody else.” According to the sales documents, that “somebody else” was The Auto Connection, an auto dealership at 1419 E. Broadway St. in West Memphis, Ark. Sullivan’s police report alleged Coleman pocketed his $4,500 and never purchased any cars with his money. The cars the Colemans claimed to have purchased with his money, Sullivan said, were actually cars they sold on behalf of The Auto Connection. “Correct,” Sullivan acknowledged. “They split the profits.” The Action News 5 Investigators pinpointed Deborah Coleman as a curbstoner when the vehicle history tracker CARFAX warned that unlicensed or unforthcoming auto dealers have agents posing as private sellers on CraigsList and in classified ads. “Somewhere between 80 and 90 percent of [auto sales] classified ads are believed to be curbstoners,” CARFAX’s Chris Basso said. “These are dealers posing as private sellers who are selling cars that have a lot of hidden problems.” Coleman has posted numerous listings for used car sales on CraigsList, all found while running searches based on her cellphone number. Kayce Wyatt of Arlington, Tenn., answered one of Coleman’s ads for a 2001 Nissan Maxima, thinking Coleman was the vehicle’s private owner putting it up for sale. She met Coleman at Coleman’s home. That’s where the car was stored, Wyatt said. After taking a test drive and negotiating the deal – but failing to run a vehicle history report or to have the car inspected – Wyatt paid $3,500 for the car, according to the paperwork.

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It’s when Coleman handed Wyatt the title that Wyatt realized something was up. “I got the title, and it said, ‘The Auto Connection,’ ” Wyatt said. The dealership, owned by Jimmy Smith, is licensed with the Arkansas State Police to sell used cars in Arkansas. But according to the records of the Tennessee Motor Vehicle Commission, The Auto Connection is not licensed to sell cars, new or used, in Tennessee. It wasn’t long until Wyatt started having trouble with the Maxima. The “Service Engine Soon” light stayed on. The radio’s power switch malfunctioned. The brakes, pads, rotors, spark plug and oxygen sensor had to be replaced. She nearly paid as much to repair the car as she did to buy the car. If she had run a vehicle history report, she would have discovered The Auto Connection had Deborah Coleman curbstone Wyatt a car that had been in an accident in Michigan. Neither Coleman nor The Auto Connection disclosed the accident to Wyatt. “So it’s been wrecked,” Wyatt said. “I cried and cried and cried about it, but I had to do what I had to do. I didn’t have a way out of it.” An undercover producer of The Action News 5 Investigators answered one of Coleman’s ads for a Volkswagen Jetta. The test drive revealed the “Service Engine Soon” light was on. “That’s because it’s due for an oil change,” Coleman said to our producer. A CARFAX report revealed nothing of concern with the vehicle’s history. Both the Jetta and a Cadillac Coleman was selling outside her home had Arkansas dealer temporary tags. When our producer asked about the out-of-state tags, Coleman admitted she was selling the vehicles for The Auto Connection. “[The] business is over in Arkansas, and it just saves all the [document] fees, and it saves me about $1,500-$1,600 dollars per car,” said Coleman, who is also not licensed to sell automobiles in Tennessee,

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CARFAX Helps TV Station Take Aim at Curbstoner according to state records. According to the Tennessee Code Annotated, 55-17-109, “it is unlawful for any person to engage in business … as a motor vehicle dealer [or] motor vehicle salesperson ... without first obtaining a license as required in this part.” “Tennessee law says that if you sell more than five vehicles in a year, you have to have a dealer’s license,” Basso said. “These are people who are skirting that law, selling hundreds of cars without getting a dealer’s license, costing the state and local dealers hundreds of thousands of dollars” in tax revenue. Coleman refused to answer questions when confronted. Smith agreed to an oncamera interview, then abruptly canceled the interview the next day. On the phone, he said Coleman “is my agent. She sells cars for me. Sometimes it’s from her own driveway. Sometimes it’s from a [drug store] parking lot. She’s just trying to feed her kids.” Germantown police department records revealed another car buyer reported Coleman in December 2010. According to the complaint, the buyer blew the whistle on Coleman after he said he witnessed her and her son altering a temporary drive-out tag on a vehicle. Coleman told the police officer who wrote the report that she sold the car on behalf of Star Auto Mart, in Collierville, Tenn. “No, sir,” Star Auto Mart owner David Fleming said. “She’s never sold for me. Never had a salesman’s license here. Never anything.” Germantown police determined there wasn’t enough evidence to charge Coleman with a crime and decided it was a civil issue. “It’s a lose-lose situation with curbstoning,” Basso said. “The state loses money. The [licensed] dealers lose money and the consumer gets ripped off. “If you’re looking online, especially through sites like CraigsList, you really need to be careful about what you’re buying.” Coleman’s curbstoning operation may be in violation of a Germantown city ordinance that prohibits “receiving persons at a residential property for the purpose of buying, selling, ordering or picking up products in connection with a business.” “Code compliance has had contact with [Coleman] in the past,” said Stacey Ewell, spokesperson for the city of Germantown. “We did provide notice for unlicensed vehicles in the street in November of 2010 but have not had anything vehicle-related since. In addition, there is no business license for” Coleman’s address.

INDUSTRY CORNER

Pace of Dealers Adding Inventory Slows

Used car dealers have become less aggressive in bidding for inventory at wholesale auctions in recent weeks, Black Book vice president and managing editor Ricky Beggs said. Beggs noted that the retail market has backed off slightly and dealers have gotten less aggressive with bidding activity for the latest model years. Every car segment showed rate of decline and only two truck segments – compact SUVs and full-size crossovers – were up in May. “While there are seasonality trends currently taking place in the retail markets, we’re starting to see hesitance of dealers to refill used car and truck inventory,” Beggs said. “Some of the rental companies are pushing a few more models into the market with a lesser demand for the 2012s and 2011 models, thus getting less aggressive bidding activity for the latest model years.”

Report Shows Auto Credit Loosening

Average credit scores for consumers buying a vehicle have dropped to near prerecession levels in the first quarter of 2012, Experian Automotive reported. According to Experian’s quarterly automotive credit analysis, the average credit score for financing a new vehicle dropped six points to 760 and fell four points to 659 for used vehicles. For comparison, average credit scores for the first quarter of 2008, just before the economy sagged, were 753 for new vehicles and 653 for used. Lenders continued to set favorable terms for consumers during Q1 of 2012. Interest rates were lower and loan terms longer than in the first quarter last year, giving consumers access to potentially lower monthly payments. The average interest rate dropped to 4.56 percent for new vehicle loans and 9.02 percent for used, while the average loan term increased by one month for both new (64 months) and used (59 months) vehicles. “Our report shows automotive lending is as healthy as it’s been since the market bottomed out in 2008,” Experian director of automotive credit Melinda Zabritski said. “With consumers doing a good job of paying back loans on time and the percentage of dollars at risk reaching its lowest point in six years, lenders are able to extend terms and provide lower rates. “This thawing of the credit pipeline has been good for everyone, from consumers to lenders to automotive.” The analysis also showed an increase in the average amount financed, which rose $589 to $25,995 for new vehicles and $411 to $17,050 for used vehicles.

Rising Sales Lift Floorplans

Rising U.S. new and used auto sales have boosted dealership profits in 2012 and are strengthening already solid performance of dealer floorplan assetbacked securities, the financial ratings service Fitch reported. Dealer floorplan asset performance has been solid this year, with most trust performance metrics at some of the strongest levels seen in the sector. Monthly payment rates are elevated above historical levels, dealer inventory agings are very low and dealer defaults are at record lows for most of the trusts. Given the favorable conditions currently supporting U.S. auto dealership networks, Fitch’s outlook for both asset and ratings performance in 2012 is stable. The report also discusses the health of U.S. auto dealerships in 2012, including sales levels, expenses and profitability, along with detailing other financial dealer metrics and overall industry health. The report, “U.S. Dealer Floorplan ABS: Robust Dealers in 2012,” is available at www.fitchratings.com.

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EXTENDED COMMITMENT

Rent-A-Wreck Offers $1,000 Off a Franchise Rent-A-Wreck of America, a franchise company with more than 150 used car rental locations throughout the U.S., is now offering NIADA members a $1,000 discount off the purchase of a franchise. Rent-A-Wreck, an endorsed NIADA National Member Benefit Partner, has extended its commitment to independent dealers by pledging to contribute $1,000 to the dealer’s state association or the national association for every franchise sold to an NIADA member. Since 1973, Rent-A-Wreck of America has offered used car dealers a franchise they can operate at their existing retail sales lot to bring extra revenue and additional foot traffic with little additional overhead. “Our franchise brings used car dealers everything they need to become a player in their local car rental marketplace,” Rent-A-Wreck of America vice president of operations Michael DeLorenzo said. “We have financing, insurance, a global reservation system and a comprehensive and sophisticated training system that makes car rental a near turnkey opportunity for a used car dealer. “Rent-A-Wreck is a great brand with a long and successful history with used car dealers. Our franchisees who are used car dealers see the benefit of additional cash flow and profits from rentals, but also see that the increased foot traffic helps them sell more cars as well.” Rent-A-Wreck franchise owners receive access to a fleet leasing and purchase program that includes access to closed factory sales, a reservation system connected to multiple global booking channels, online travel agencies, rentawreck.com and 1-800 telephone reservations, point of sale integration with the reservation system, a comprehensive training program in pre-open and post-open phases, a dedicated area representative for recurrent and ongoing needs, insurance and more. For more information, visit www.rentawreck.com/NIADA or call (469) 939-6132 to speak to a company representative.

CONTINUING A TREND OF SOFTENING PRICES

Black Book: More Used Cars Will Cause Price Drop Black Book is predicting an additional 900,000 used vehicles will hit the market in 2012 – the effect of a hot new-car market – calling the massive influx a “glaring reason” for the drop in used prices that has already begun. What’s more, if the new car market gets even hotter in 2013, used prices will fall further, the company said. Black Book cited an outside prediction putting total new vehicle sales for 2012 (retail and non-retail) at 14.2 million units, which would be an increase of 1.5 million units over last year. Black Book’s Ricky Beggs said 60 percent of those additional new vehicle sales are likely to have a trade-in attached, putting 900,000 additional used cars into the market. “Almost a million more used vehicles will be added to the industry this year as a result of more trade-ins on new car sales,” Beggs said. “This is a significant driver of lower prices, combined with additional rental cars being sold at auction and dealers preparing for the coming 2013 models.” So how big an impact does 900,000 additional used units make? Consider: Three years ago, 750,000 units were taken out of the used vehicle market thanks to the so-called “Cash for Clunkers” program, and Black Book noted, “At the time, the auto community thought that would have a profound impact on the industry. By comparison, this year the industry will be adding 900,000 vehicles into the system, which is a glaring reason why prices are falling.” Continuing a trend of softening prices, Beggs said in his June 18 report “Beggs on the Used Car Market” that the week ending June 15 showed car segment prices dipping $31 on average, with only one segment showing an increase. The downturn in truck prices was even steeper ($60). Black Book said used car prices will continue to decline “well into next year assuming 2013 SAAR increases further.” Sales Projections There are likely to be 4.43 million used sales in June, according to data from CNW Marketing Research. That would be down from 4.49 million used sales in June 2011 and up from 4.31 million in May, the firm said. CNW said the “true delivery rate” for used sales – similar to the seasonally adjusted annualized rate often used by analysts in discussing new vehicle sales – was 40.19 million in June, down from 43.58 million in May. CNW said the true delivery rate has stayed above 40 million for every month of 2012 except March, when it dropped to 38.54 million. The latest forecast from J.D. Power and Associates’ Power Information Network and LMC Automotive projected 994,800 new car retail sales in June, a 15 percent rise from June 2011 after adjusting for one more selling day in June 2012. The resulting SAAR would be 11.9 million. Analysts are expecting 1.27 million total new vehicle sales in June (retail and non-retail), which would be up 16 percent over June last year. That would translate to a total SAAR of 13.9 million. The firms said the projections for June were based on the first 17 selling days of the month. For the rest of 2012, LMC held its total new sales forecast at 14.5 million and kept its retail projection at 11.6 million. “Despite a rising level of uncertainty with the economic recovery, consumers remain resilient in their willingness to purchase new vehicles,” LMC Automotive senior vice president of forecasting Jeff Schuster said. “Concerns regarding the macro-economic environment and another potential summer slowdown have increased, but we expect the sales pace to remain strong and stable throughout the second half of the year.”

BY JOE OVERBY EDITOR, AUTO REMARKETING

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T H E B E N E F I T S F O R T H E D E A L E R , R F C A N D T H E C U S T O M E R A R E R E A L LY C O M P E L L I N G .

LHPH vs. BHPH: Should My Dealership Switch? In recent years, the Lease Here-Pay Here (LHPH) model has generated some buzz in the world of subprime auto sales – and for good reason. LHPH is an offshoot of the Buy Here-Pay Here (BHPH) concept, but it involves a dealer retaining the title to each vehicle and charging usage fees to customers. While the difference might seem subtle at first, it can radically change how the vehicle transaction is managed, taxed and regulated. Among the advantages of LHPH: •Deferred sales tax. •A federal income tax deduction for depreciation of your assets. •It doesn’t require a related finance company (RFC). •Less burdensome regulations. •Faster repossession times. •Vehicles can’t be claimed in a bankruptcy. Probably the most commonly cited advantage of switching to a lease program is the ability to defer sales tax payment on your vehicles. Instead of paying sales tax up front – long before you’ve received all of the customer’s money – you’re allowed to pay the sales tax in installments, every time your customer pays you. That lessens your risk of losing money when a customer defaults, and it makes cash flow more even and manageable. George Klinke, vice president of business development for the San Diegobased company LHPH, LLC, called that the greatest advantage of the model. “There are 32 states where there’s a real cash flow incentive,” Klinke said. “When you buy a car in California, you pay an 8.75 percent sales tax on that vehicle. On a $20,000 car, you’re paying $1,750. That’s money that comes out of the dealer’s or the consumer’s pocket today.” But in California and 31 other states,

dealerships can pay the sales tax on each vehicle as payments are collected, rather than at the lease’s inception. Additionally, lessors can collect a security deposit, which is not subject to taxation. “This is a pool of money where if there are other expenses that come up in the lease, the security deposit can be applied against those,” Klinke said. Unless state law mandates otherwise, the only up-front tax on a lease is paid on the cap cost reduction. For years, BHPH dealers have avoided income taxes on “phantom income” through the use of a related finance company. An RFC is a legally separate corporation an auto dealership establishes to handle financing, often for customers who have difficulty obtaining credit from traditional lenders. Usually, the dealership sells the note from each vehicle transaction to its RFC at a discount, eliminating most of the dealership’s profit on the sale, which would have been taxable income even though no payments had yet been collected from the consumer. The RFC’s income on the note purchase, however, is taxed as the payments are collected, avoiding a large income tax on profits that haven’t been earned yet and creating a substantial cash flow advantage. If executed correctly, this setup is entirely legal. The IRS has even written a guide for it, available at www.irs.gov/ businesses/article/0,,id=137739,00. html. But the IRS also examines RFCs carefully for evidence that they’re substantive businesses that remain at “arm’s length” from dealerships, rather than thinly disguised shell corporations. One small misstep could place you in line for an audit. For dealers wanting to avoid this compliance headache and the difficulty

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of establishing a legitimate RFC, LHPH is an attractive option. Because of the inherent tax advantages of leasing, it is not necessary to have a related finance company to handle LHPH deals – though dealers may still choose to keep their RFCs as a buffer against bad publicity, lawsuits and financial risk. Because the dealer is the lessor and therefore the owner of the asset (vehicle), he can claim depreciation over the term of the lease based on IRS guidelines and use it as an income tax deduction, reducing the overall tax bill. Jason Berger, managing partner of AK Acceptance, an RFC in Pittsburgh, said LHPH deals are not constrained by the tougher regulatory requirements that affect BHPH dealers. At the federal level, LHPH deals fall under the less restrictive Regulation M rules that govern auto leasing, rather than the notoriously tough Regulation Z rules that govern auto sales. Under Reg M, a dealer is not obligated to disclose an annual percentage rate because there is no interest rate in a lease – just a “rent” or “lease” charge. The lack of an interest rate also means you are is not encumbered by state usury limits. You can impose mileage overage charges to protect the value of the vehicle. And if the lessee declares bankruptcy after starting an LHPH deal, he won’t be able to avoid repossession because he never had ownership of the vehicle. For the same reason, if a lessee breaches the contract, there’s no mandatory grace period to comply with for repossessions. “We pull the trigger faster,” Berger said, noting dealerships can technically repossess a vehicle if a payment is even one day late – though that might not be a great way to build goodwill in the

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community. “My target turnaround time is 21 days from the time of default [to when the car is available to lease again]. With a loan, we’d usually let it go a little bit longer.” LHPH has some appeal for consumers, too. Because they aren’t paying for full, lifetime ownership of the vehicle, drivers can normally afford a better quality automobile than if they insisted on purchasing. Like the dealer, customers can usually pay less cash up front. And when the customer is done with the car, he can simply return it and get another car, or become the owner by paying or financing the agreed-on residual value. Klinke said given the choice, customers should prefer to pay the security deposit on their lease rather than a down payment on a loan. “If the lessee does everything correctly,” Klinke said, “he can roll that [sum] over into a new lease or get his money back [at end of term].” Many dealers cite those reasons when attempting to explain the rising national interest in the LHPH model. Berger’s dealership partner had operated on the BHPH model since 1999, but never experienced the growth it has since it switched to LHPH. “Year-over-year, I’ve seen a 73 percent jump in originations,” Berger said. “The primary reason for that is leasing.” But before you take the plunge, you should also consider the challenges of LHPH. •An expensive retraining process. •It requires more advanced dealer management software. •Vicarious liability issues that require contingent liability insurance. •Less liquidity than BHPH. As advantageous as LHPH can be, it is not a simple change for dealerships to make. LHPH deals require more advanced dealership management systems that can perform complex lease calculations like depreciation schedules and payments that include rental charges, depreciation and sales tax. Those programs often cost more than basic deal software. Allen Lentsch, CEO of Northland Dealers and executive director of the Northland Independent Auto Dealers Association, said there is also some liability risk involved.

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| LHPH vs. BHPH: Should My Dealership Switch?

“When you do LHPH, you own the title of the car, so you can be held responsible for things your customers do with it,” Lentsch said. That includes causing an accident. The concept is called vicarious liability. To be protected against vicarious liability and the risk of lawsuits, dealers must purchase contingent liability insurance, which many turnkey LHPH solutions provide for their dealers. The Graves Amendment, passed by Congress in 2005, was written to prevent unlimited vicarious liability lawsuits, but the law has been challenged frequently. And despite the Graves Amendment, there is still potential vicarious liability for the dealer/lessor up to the state minimum financial responsibility limits. Because of that risk, it’s incumbent on dealers to make certain each lessee has proper insurance coverage. “We always make sure a customer has insurance, just as much as we make sure they’re keeping up with payments,” Berger said. “We disable vehicles if [a customer’s] insurance lapses.” If you’re a BHPH dealer who sells loan portfolios to investors, you might have a tougher time drumming up interest in your LHPH leases, partially because the product is less commonly understood. “Some lenders are opening up to this,” Berger said. “From what we see, there are going to be more in the near future.” To dodge potential complications, many LHPH dealers use consulting organizations, such as Northland Dealers, LHPH, LLC and Lease It Own It, to advise them on compliance issues and provide training materials, forms and access to specialized insurance. The services can assume various levels of responsibility for a dealer’s compliance with lease regulations. LHPH, LLC even goes so far as to adopt the responsibilities of the lessor, shielding the dealership from some legal risks. Before switching, it’s a good idea to contact some LHPH services to learn the different approaches and costs associated with outsourcing LHPH implementation. Working with experts of some kind could be the smartest way to go. Implementing a LHPH Program If LHPH sounds like the right way forward for your business, there are a

few things you should focus on right out of the gate. “I would recommend to any dealer to try to set the most accurate residual [value] possible,” Berger said. “If you do that, you’ll get that vehicle back and put that vehicle back on the road. [You] can get eight years out of it and lease it three times.” However, dealers should also remember the IRS imposes limits on how low residual values can be set and still remain a true lease. Because dealers should keep leased vehicles in good condition for the next lessee, high-maintenance autos are not recommended for an LHPH program. In addition to requiring lessees to purchase comprehensive coverage for their vehicles, many LHPH dealers package in a warranty or service agreement so they’re able to keep their vehicle in good shape while profiting from the reconditioning. Berger said the biggest challenge for the dealership he works with is persuading customers – and employees – to go along with the LHPH plan. “Your customers need to understand that the vehicle isn’t really an asset, it’s an expense for them,” Berger said. “At the end of [a three-year lease], how much will this vehicle actually be worth?” Berger recalled employees at the dealership he works with took about two months to get fully used to the terminology differences between BHPH and LHPH. “When you have people who have been selling cars for 16 or 17 years and all of a sudden you hand them a new model, of course there’s a transition,” he said. “But when they see how much this helps us sell cars, they really want to learn it.” To many dealers, the challenges involved in switching to the LHPH model are far outweighed by its rewards. “I’ve never seen anybody switch back,” Klinke said. “The benefits for the dealer, RFC and the customer are really compelling, and to switch back would just be a real headache for everybody.”

BY ALEX BRAUN

ALEX BRAUN IS MARKETING MANAGER OF AUTOMANAGER, A PROVIDER OF INTEGRATED DEALER MANAGEMENT SOFTWARE, DEALER WEBSITES AND ONLINE VEHICLE MARKETING FOR MORE THAN 25 YEARS. HE CAN BE REACHED AT ALEX@AUTOMANAGER.COM.

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V I S I T W W W. N I A D A H E A LT H P L A N S . C O M .

What Health Care Ruling Means to You The U.S. Supreme Court found in favor of the 2010 health care law, deeming the individual mandate to purchase health insurance unconstitutional under the commerce clause but upholding the mandate by now calling it a tax. Because of the ruling, some of the key factors that will be taking place in the year and a half include: Individual mandate: Starting in 2014, everyone in the United States must buy health insurance or be subject to a tax.

STARTING IN 2014, ALL HEALTH INSURANCE COMPANIES MUST ACCEPT ALL APPLICANTS REGARDLESS OF PRE-EXISTING CONDITIONS. NIADA MEMBERS HAVE ACCESS TO GUARANTEED-ISSUE, LIMITED MEDICAL RIGHT NOW BY VISITING WWW. NIADAHEALTHPLANS.COM.

Those who cannot afford to buy health insurance – families at poverty level – will be subsidized by the government. Families making more than $80,000 per year will not receive a subsidy. That provision was the heart of the lawsuit challenging the law. The individual mandate goes hand-in-hand with the next provision: guaranteed issue. Making everyone buy insurance stops people from buying it only when they become sick. Guaranteed issue: Also starting in 2014, all health insurance companies must accept all applicants regardless of pre-existing conditions. NIADA members have access to guaranteedissue, limited medical right now by visiting www.niadahealthplans.com. Minimum essential coverage (MEC): The provision states the government will regulate what plans will cover and will not cover as a means to qualifying acceptable coverage. Having acceptable coverage means not facing fines or penalties.

It is expected the highest deductible will be $2,000 for an individual and $4,000 for a family. That, however, could jeopardize Health Saving Accounts (HSAs), which are linked to high-deductible health plans and are a popular option for the self-employed and for small businesses. Health insurance exchanges: Each state will set up a health insurance exchange for consumers to shop for health plans. If they qualify, consumers will be able to receive subsidies through the exchange. NIADA members can Visit the NIADA Health Insurance Exchange right now to shop for rates from multiple carriers through www.niadahealthplans.com. Additional questions on the law and how it will affect you? NIADA members can call the NIADA Member Health Plans hotline at 888-308-9340 or visit www.niadahealthplans.com.

BY TODD PAGE, JLBG HEALTH

TODD PAGE IS VICE PRESIDENT OF JLBG HEALTH, THE ADMINISTRATOR OF NIADA MEMBER HEALTH PLANS.

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G I V I N G B A C K T O T H E C O M M U N I T Y H A S A LWAY S B E E N O N T H E T O P O F H I S L I S T

NIADA Names 2012 Quality Dealer of the Year Former Ohio State football player Michael T. D’Andrea of Columbus, Ohio was named 2012 National Quality Dealer of the Year by the National Independent Automobile Dealers Association during NIADA’s 66th Annual Convention and Expo in Las Vegas. In a ceremony televised live from Caesars Palace to an online audience of 150,000 viewers, D’Andrea was chosen from the 21 State Quality Dealers nominated for highest honor given to one of the NIADA’s 20,000 dealer members. D’Andrea is co-owner of Miracle Motor Mart in Columbus, a dealership he founded in 1989 with 40 cars and $150,000 worth of inventory. Miracle Motor Mart now has two locations and 46 employees, and has a combined inventory of more than 400 vehicles. NIADA National Quality Dealer candidates are judged on a variety of factors, including contributions to the automotive industry and community involvement. A panel of judges from Northwood University selects the

annual winner. NIADA chief executive officer Michael Linn said D’Andrea “has provided a superior level of service for his customers, his community and his industry that is beyond reproach. He says his goal each and every day is, ‘God first, others second and myself last.’ “Giving back to the community has always been on the top of his list – supporting youth summer camps, working for his church, distributing food, clothing, toys, medical supplies and prayer to more than 700 families each year. It is an honor and a privilege to bestow this great award to a well deserving dealer, member and automotive professional.” D’Andrea, who played linebacker for Ohio State from 1979-81, and his partner, Mark Meadows, are heavily involved in charity projects in Columbus, including the Run the Race Club, St. Paul’s Outreach, Catholic Youth Summer Camp and St. Patrick’s Youth Ministry. D’Andrea said his business prides itself on “teamwork, loyalty, ethics and honesty,”

and said as the dealership has grown, “in that growth you’re almost forced to do more. You’re almost required to do more. “I’m proud of NIADA’s commitment to encourage dealers to make a difference in their community. We have all been given a great gift of self-employment and being in a free country. … We have a great responsibility with all these gifts we have been given. Let us share them with our friends, our families and our community.”

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COMPLIANCE OVERDRIVE

Look Before You Lease When I attend industry events, I enjoy meeting dealers and hearing their takes on current challenges and trends facing the industry. One topic that has come up recently is leasing. I have heard a number of dealers comment on how they would like to expand their dealership and start leasing vehicles. While that might sound like a natural step in growing a business, dealers must consider the differences between selling and leasing. To be clear, by “lease,” I mean a contract allowing a customer to use your vehicle for a period of time (minimum: four months). At the end of the lease, the customer returns the vehicle and doesn’t owe you any more money as long as the vehicle has only reasonable wear and tear and was driven no more than the agreed mileage. If there is an option to purchase, the option price bears some relation to the vehicle’s expected market value at the time the option is exercised. In other words, the lessee doesn’t have the option to purchase for $1 because that would really be a sale, disguised as a lease.

Adding leasing to an independent dealership might sound simple. You’re already arranging loans and payments for the vehicles you sell, so why not expand your in-house financing to offer customers another option? But it’s not as easy as it looks. Here are key areas to consider when making your decision. Licensing: Make sure your license for selling vehicles also allows you to lease vehicles. Your current license might not be broad enough to authorize leasing. Insurance: When you sell a car, the title is transferred to the buyer. You focus on receiving timely payments and confirming the buyer has sufficient insurance to protect your security interest in the vehicle. You probably have property and liability insurance to protect your inventory and sales. However, when a dealer leases a car, he still owns it. If the vehicle is involved in an accident, you might be subject to liability as the owner. As part of researching a leasing operation, meet with your legal counsel and insurance carrier to make sure you protect against liability exposure with appropriate insurance coverage. Pricing: Determining the sales price of a vehicle is pretty straightforward. You know your costs to purchase and prepare the vehicle for sale, sales costs and profit margins, and sell the vehicle for more than your costs. You know at the time of sale whether you are making money on the deal. With a lease, the calculations are more complicated. It might be easy to determine what the vehicle is worth today, but how do you know what it will be worth when the lease is up, say, two or three years from now? That depends on factors such as how many miles it will be driven and how well it is maintained. There are also unknown variables. What if gas prices rise drastically and the vehicle is a gas-guzzler? That could impact the market value at the end of the lease (residual value). In most consumer leases, the dealer is on the hook if the residual value is less than predicted. You won’t really know if you’re making money on a lease until you find out how well you predicted the residual value. You might be two or three years into the lease program before you realize you’ve set your residual values too high – and by then it’s too late. Documentation and disclosures: You can’t just modify a retail sales contract to make it a lease. If you are planning to include leasing, you must make sure

your documents meet state and federal consumer lease requirements. The federal Consumer Leasing Act and its implementing Regulation M are the lease disclosure equivalents of the Truth in Lending Act and Regulation Z for consumer lending. Reg M requires dealers to provide a great deal of specific pricing information in lease contracts. Many states require additional disclosures and consumer protections. As part of your leasing startup, you will need to create a unique document set of disclosures and contracts. Taxes: In a lease you retain ownership, so you might roll your sales taxes to purchase the vehicle into your costs and lease calculations, but you might also need to collect use or other taxes on the payments throughout the lease term. Contact your accountant and/or the state to understand your tax obligations and how they differ for leases. Collections: If a buyer doesn’t make timely retail contract payments, you can repossess the car. Fear of losing the car can help motivate a buyer into making past due payments. In a lease, the lessee doesn’t own the car and may expect to return it and walk away at the end. That might make it a little easier for the lessee to emotionally handle repossession, but it might mean the lessee isn’t afraid of having the car repossessed and isn’t as motivated to make past due payments. As with a financed sale, once you repossess a vehicle, the lessee has even less motivation to pay any balance still due. If a car is returned with wear or damage beyond what’s agreed on in the lease, it can be difficult to collect money to cover those costs. You can use the lessee’s damage deposit, so make sure you set it at a practical amount – it might be the only money you end up recovering for excess wear and tear. These are only some issues to consider when starting a lease program. You can identify more by simply reading a motor vehicle lease contract. The differences between selling and leasing are dramatic and can’t be overlooked. Your operations and compliance can be affected by the type of transaction, the vehicle and the state in which you are doing business.

BY CHIP ZYVOLOSKI

CHIP ZYVOLOSKI IS A SENIOR ATTORNEY FOR INDIRECT LENDING AT WOLTERS KLUWER FINANCIAL SERVICES. FOR MORE INFORMATION, VISIT WWW.WOLTERSKLUWERFS. COM/INDIRECT.

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Nevada Dealer News