The Language of Leasing: Your Guide to Saving Money on Leases Mary A. Redmond, President
Independent Lease Review, Inc. 913/441-4108; mary@reviewyourlease.com
95th ISM Annual International Supply Management Conference, April 2010
Abstract. To keep pace with competitive demands, companies continue to change, upgrade and invest in technologically advanced equipment. Department budgets and cash flow considerations require managers to investigate new ways to get the equipment required to meet company and customer needs.
Leasing is one of many financing tools available to fill increasing capital equipment
requirements. Leasing allows fixed rate financing and usually is accompanied with little or low upfront costs.
A U.S. Department of Commerce study reports that 80% of all companies lease equipment including Fortune 500 multi-national corporations. Many companies decide to lease because of concerns about rapidly changing equipment technology lifecycles.
The Leasing Landscape. Equipment that holds its value for years is usually financed for five to seven years. This equipment provides lenders added comfort if their customers run into financial troubles. These companies intend to use the equipment for many years and want to own it at lease termination even if the end of lease purchase option seems excessive.
However, at lease termination leasing companies do not want the equipment back. Returned equipment creates disposal and resale problems.
Digital technology creates challenges for leasing companies. Equipment lifecycles are shorter and the value of the equipment drops dramatically and rapidly. Like an automobile, once you drive the car off the lot, the resale value automatically drops 20%. Lease terms for digital print equipment and computers may be for two to four years. Sometime between the 12th and 24th month the equipment resale price nears the zero level.
Some companies intend to return equipment to the leasing company at lease end. Because leasing companies do not want to get the equipment back, leases contain language that prohibits easy returns without penalties and traps.
Manufacturers are continually introducing newer, faster equipment with features not available last year or last month. When the leasing company is in partnership with the manufacturer, the equipment sales rep tells the customer that the old lease debt, remaining payments or forced purchase option will vanish and the old debt will be forgiven. In exchange for this financial clemency, a new lease on the latest and greatest technology is waiting. Sign here please and financial worries disappear. The new lease term on the latest and greatest digital wizard might be for seven years. Now where did the old payments go? Gotcha! They are wrapped inside the new lease.
Leases will not indicate the interest rate or total financing cost. End-of-lease options may not be easy to decipher and can be ambiguous. Surprises - or “gotchas” - can increase the total finance cost by 10-20% of the equipment purchase price. Sometimes maintenance
agreements, built into the lease contract, add unexpected cost add-ons too.
Leasing “Gotchas” That Can Get You. Before donning the lease reviewer‟s hat, learn more about the “gotchas” that are looming in every lease. Here are nine of the most common. 1. Negotiate: Begin with the assumption that everything is negotiable.
2. Equipment price: Negotiate the equipment price separately from the lease payments. Focus on lowering the purchase price. If the purchase price is reduced, the lease payment will decrease as well.
3. End of lease options: Be certain you receive at least three flexible end of lease options. A. Return the equipment when it no longer serves the company needs. It is important to
have the opportunity to return equipment without fees, fines or penalties. In order to have the most end of lease return flexibility, timely end of lease notice is required. Timely notice is defined differently in every lease. Read and track end of lease notification closely.
B. Renew the lease for an extended period. When the decision to buy or return the equipment is not finalized before the end of the initial lease term, it may be helpful to have the option to extend the lease for a few additional months. Avoid one-year forced renewals. The best renewal option is month-to-month with reduced lease payments. After all, the equipment is now used and the value in the market place is reduced over time.
C. Purchase options: Define the process for determining the fair market value purchase price before signing the lease. Language added to the lease might
involve employing the use of appraisers. I suggest both the lessor and the lessee retain their own appraiser. Negotiate the selection process and qualification of the appraiser as well.
4. Avoid the Standard Lease: The “Standard Leasing Agreement” is simply the document‟s title. The term “standard” never means one-size fits all. If the “standard lease” is negotiated, it will more fairly represent the needs of both parties. The Standard Lease is written by leasing company attorneys who protect their clients, not the lessee. A wisely negotiated lease can reduce total lease spending for the lessee by five to 15 percent.
5. Reduce upfront costs: Negotiate to reduce documentation fees, security deposits, personal guarantee requirements and multiple advance payments. Here are a few rules to follow.
A. Unless your company is in financial trouble, do not agree to pay more than one monthly payment at lease commencement.
B. Documentation fees for leases less than $100,000 should be no more than $200. The fees should include the Uniform Commercial Code (UCC) filing costs.
C. Documentation fees for multi-million dollar financing transactions should not exceed one-quarter of one percent.
D. Security deposits are usually not requested to shore up the transaction due to leasing company credit concerns. Deposits are more frequently taken to increase the leasing company‟s financial return.
E. If deposits cannot be negotiated out of the lease agreement, be sure to setup specific return conditions and tracking mechanisms. Some companies forget that they gave the leasing company a security deposit. Few leasing companies rush to remind their customers that they are holding on to the security deposits immediately upon completion of a lease term.
6. Independent lessors: An independent leasing company‟s sole business is leasing. It is not financially tied to one vendor. Most equipment salespeople bring in their company‟s
preferred leasing company or provide lease quotes from their favorite leasing company friend. This may not be the best option for a company‟s needs.
Independent lessors offer more financing options than an equipment company‟s
recommended leasing company. Independents have expertise in more than one type of equipment. For their customers, this means that independent lessors can assist with most equipment financing needs. Their experience can range from technology assets to forklifts and from manufacturing equipment to over-the-road trucks.
What should you look for in a lessor?
A. Rates should be market competitive.
B. Experienced sales professionals with knowledge of the benefits of leasing as well as a variety of lease products and end of lease options to fit their client‟s needs.
C. Recommendations based on how long the client intends to keep the asset, whether vendor provided equipment maintenance will need to be included in the lease, and what type of lease structure will most benefit their client‟s tax situation.
D. Independents should have access to their own bank lines of credit, or they may be owned by a bank.
E. Independent leasing companies usually do not receive commissions from the
equipment salespeople nor do the independents pay commissions to the equipment dealers. On the other hand, vendor recommended leasing company usually involves one of the parties paying the other for sourcing the deal.
7. Guard against hidden penalties: Penalties as high as 60 percent can be buried in the maze of legal language. Extra costs hide under clauses such as return provisions, restocking fees, maintenance requirements, equipment upgrades, advance notifications, acceptance deadlines, cancellation fees and automatic extensions.
REAL LIFE: A large Midwest based law firm continuously missed its technology equipment end-of-lease notices. The leasing company offered to renew the lease for 12-18 additional months. An audit of $2 million of their $10 million in computer leases uncovered that they spent an additional $330,000 in lease extensions. How would you explain that cost overrun to the managing partner?
8. Beware of the perpetual lease: Leasing companies seldom notify customers that the end of the lease is approaching. It‟s a real “gotcha” when managers find they are in the fifth year
lease commencement, verify when you must give the leasing company written notice regarding your end of lease plans.
9. Notifications: Send all notices by certified mail. Never fax or email your end of lease notice. Keep receipts and good records of all correspondence.
All leases contain variables, benefits and potential pitfalls that affect the bottom line. They are structured with complex, confusing documentation, obscure terminology and language that can bewilder the most astute financial managers or procurement professionals.
Negotiation is the Key. Negotiation is the key to a good lease. In choosing the lease that best fits, seek legal counsel and help from a lease review expert. Companies save thousands of dollars by consulting an independent lease review expert to serve as an advocate to eliminate the business and financial “gotchas.” An independent lease expert looks at the language and terms differently than an attorney or accountant. Combining all three disciplines ensures a lease that meets your company‟s financial and utilization plans.
Leases can be negotiated at three times: A. Before you originally sign. B. During the life of the lease. C. At the end of the lease.
The biggest reason leasing companies don‟t change contract terms is that no one asks them to make modifications. If you don‟t ask, you don‟t get.
Before You Sign on the Dotted Line. Three negotiations are necessary for new equipment. Too often companies focus on the monthly lease payment. Unfortunately, surprises begin almost immediately. Added costs for maintenance, insurance, lease fees and penalties pop up. 1. Equipment purchase price:Negotiate the cash purchase price first, before you begin lease
discussions. The lease price is based on the purchase price.
2. Lease: When negotiating the lease, do not focus on the monthly payment. The entire contract needs to be examined and negotiated. Always ask for three lease purchase options: fair market value purchase option, $1.00 purchase option, and a fixed purchase option such as a fixed percentage of the original purchase price.
3. Maintenance agreement:Negotiate the maintenance agreement after discussing your usage plans with your lead equipment operator and plant manager.
During the Life of the Lease. Be cautious of these pitfalls during the life of the lease.
1. Late fees: Don‟t get in the habit of paying late. Most late fee penalties are negotiable. Just ask. However, if you pay late every month, do not expect to get the fees waived forever. 2. Restructure payments: Although leasing companies say they do not like to refinance, it is
possible. You will have to find the right person with authority to manage the process. Be prepared to escalate your request through the leasing company management organization.
3. Payment increases: Monitor lease invoices for payment changes. Make written requests for payment change explanations. Compare the changes with lease contract terms.
4. Property taxes: Know whether you are filing property taxes or the leasing company is doing the filing. If they are filing, verify accuracy of the charges they pass on to your company. 5. Insurance: Sometimes the vendor includes insurance charges when your company‟s
general plan already covers the leased equipment.
REAL LIFE:A company had 400 vehicles in its leased fleet. They paid insurance on the leased vehicles when the company‟s insurance plan already covered the fleet. The monthly charge per vehicle was $50 and this went on for three years. That oversight totaled $720,000. All charges were legal. This is an expensive example of customer poor lease management.
End of Lease. The end of the lease presents additional challenges.
1. Notification: Familiarize yourself with end of lease notification requirements. Send all notices via certified mail. Missed notices result in automatic payments renewals or loss of return or purchase options.
REAL LIFE: A Midwestern based law firm assumed a large number of technology leases in a merger. The lease contract manager was sure she understood the notification requirements. She didn‟t. The lease automatically renewed for one year totaling $85,000. Scouring the agreement for loopholes, one loophole saved the firm $27,000.
2. Purchase prices are always negotiable. Do your homework and be prepared with used equipment value research.
3. Negotiate return conditions, shipping costs and destinations.
4. Require that the leasing company break out every end of lease charge. Most leasing companies prefer to lump the end of lease purchase or return charges into one amount. That number could include taxes, late fees, return fees, extra end of lease payments, or a very high fair market value purchase price.
5 Essential Tips for a Successful Negotiation. Successful negotiators are prepared
negotiators. Most of us are not born to be great negotiators. We learn at an early age how to get what we want. By the age of two, a toddler knows how mommy and daddy tick and what it takes to get a cuddle, cookie, car ride or their favorite toy.
When we grow up the stakes get bigger. We need to refine the "I want what I want when I want it" method. The "winner takes all" theory works for babies, not for adults. After all, what we are saying is "I want to be HEARD. Please listen to me. Respect my opinions."
Five tips for a successful negotiation are contained in the acronym H.E.A.R.D.
Step 1 – H – Homework. Before every negotiation, you should know as much as possible about the "other team." Homework comes before entering the negotiation room. Jump to
In our information packed lives, savvy negotiators Google the opponent's website, check out the CEO's bio, the corporate marketing philosophy, latest press releases, stock price, trade magazines, blogs, podcasts, webinars and other bits and bytes of research. Use Twitter,
LinkedIn, MySpace, YouTube and other social networking tools to uncover the information gold you‟ll need later when you start to negotiate.
The major reason for doing homework is to understand your opponent's needs, wants and bottom line. Sometimes you can find out their negotiation style and what is important to them outside of the conference room.
Step 2 – E – Engage. In the initial meeting, engage the opponent and assess what you know and need to know. What works best?
A. Open ended questions are tools to get the other team talking. New information is gathered and other information is confirmed.
B. Establish rapport and trust using what you know about the negotiator from your homework steps.
C. Use active listening skills by showing interest in their position.
D. Take notes. This shows you value what they say. Notes help recall what was said and who said it.
E. Reading body language is a tool of a skilled negotiator. Those who master reading body language gain a look into the other person‟s thoughts and feelings.
F. Do not interrupt them. Allow them to talk freely.
Step 3 – A – Assess. Assess what you know and don't know. Test possible options using phrases like "what would you say if..." or "let's imagine if…" and then let the other person talk. This step allows you to help them visualize your preferred solution. Answering a question with a question is a technique we learned at age two and still use in the world of "grown-ups." Why? How? When? This can drive them crazy too so don‟t overuse this technique. If you are faced with someone who answers your question with a question, consider taking a break if this technique is used too often. The coffee pot or a “breather break” has saved many a negotiator from blowing their stack and the negotiation as well.
Step 4 – R – Recommendation. You are ready to present your solution, proposal or position. The recommendation phase is not called the Godfather Step. If you recall in the classic movie
The Godfather, there is a scene in which one of the lead characters Don Corleone, played by
Marlon Brando, tells his associates that he plans to make their opponents an offer. He‟s going to make „em an offer they can't refuse." There are debates over who should make the first offer. Go with your gut. I've done it both ways and ended with wins.
Step 5 – D – Document. A deal is not finished until it is in writing. Accurate note taking
throughout the process makes this phase easy and painless. Immediately after the discussions are finished and the handshake consummates the agreement, the meeting summaries or contracts need to be drafted. Once drafted, the contracts are distributed to all involved parties. Before anyone leaves the room, assign responsibilities to the participants regarding who is going to perform which steps, when they will be completed, and when the documents will be signed. Time should be allowed for clarification of contract details and misunderstandings.
You just laid the foundation for the next meeting, negotiation or transaction. If all parties were treated fairly and each leaves with some of what they need, you have a win-win relationship. You will live to do another deal.
In Conclusion. Leasing equipment can offer a significant and positive impact on a company‟s
financial condition. However, there are many pitfalls and “gotchas” that can snare even the most experienced procurement professional and blow a company‟s budget. The best way to protect your bottom line and get equipment leases that achieve your financial goals is to learn the meaning of the leasing terminology. Then don‟t be afraid to negotiate the leasing
agreements (remember, if you don‟t ask, you won‟t get). Finally, be astute to managing the lifecycles of your leases.
