The End Game
Capturing the Value of the Residual in Deal Pricing and
Lifecycle Management
Mike Stewart
Executive Vice President
CCA Financial, LLC
The Basics of a FMV/LWOO Lease
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Customer leases (rents) the equipment from the lessor
Lessor holds title to the equipment at all times
Lessor makes an investment in the equipment, known as equity, based
on expected residual value of the equipment at the end of the term
Customer receives a rental amount lower than a finance lease of the
same term
At the end of the original lease term, customer can extend the lease,
purchase the equipment for its Fair Market Value, or return the
equipment with no further expense
A very good option if customer values use over ownership and has
plans to continually upgrade the equipment
Equipment Residual History
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Historically there has been a strong market for end of lease IT assets
Over time, shorter lifecycles and obsolescence have changed the market
Lessors have had to adapt to the new reality by shortening term or
reducing equity and staying ahead of the curve relative to the changing
market and new technology
Opportunity still exists but lessors and lessees need to work together to
find the right products and the proper term
Equipment residual is still significant for many products and can be
used to lower costs and encourage a periodic technology refresh
Where is the market now?
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Equipment residuals are stable, but some equipment is stronger than
others
There is an active secondary market for most technology, especially
tier 1 manufacturers
Low interest rates put considerable pressure on FMV/LWOO leases and
make equipment type and term especially important
“Disruptive technology” (iPad) has become a bigger risk to residuals
than the traditional upgrades and improvements of most
manufacturers
Where is the market going?
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Technology continues to evolve rapidly
Handheld devices are becoming more capable
More manufacturers are entering the market but the brand names still
dominate the residuals
The Cloud is an evolving idea that is changing the way companies use
and access technology
Recent accounting changes are expected to have an impact on FMV
leases but to what degree is not yet known
What types of assets still hold value?
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Almost all assets have value at some point in time making the term of
the lease very important
Manufacturer matters
PC’s and laptops have stabilized and have solid values
Networking, especially Cisco, is valuable
Apple equipment is very strong
Copiers, storage, and rack-mounted servers are all very challenging
Much of the equipment’s value is determined by its age relative to the
pace of technological development. The faster it changes, the more
rapidly it depreciates. This can be both a positive and a negative for a
FMV/LWOO structure.
How does the residual effect the pricing of
an operating lease?
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The stronger the anticipated value, the more equity (investment) can
be taken by the lessor
The greater the equity, the lower the payments
For example, $100,000 of equipment may only require $88,000 to be
paid during the term of the lease. The lessor “owns” the residual for the
remaining $12,000.
Expected residual value of the equipment combined with lease term
create the amount of investment the lessor can make. Typically, the
shorter the term, the greater the residual, which equates to a lower
payment.
The Positive Effects of Residual Values on THE END GAME
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When pricing a transaction, remember that the residual value can be used to
lower the customer’s cost
FMV/LWOO structures are best when the customer places greater value on
using the equipment than on owning the equipment
FMV/LWOO structures help with lifecycle management. There is a firm date in
the future at which time the customer must make a decision. That gives
everyone the opportunity to assist with an equipment refresh.
FMV/LWOO leases allow the customer to budget a repeatable periodic
payment. By using the operating budget as opposed to the capital budget, your
customers can stay current on their technology and avoid the unknown of a
capital request.
The equipment’s residual value can be harnessed to lower costs, keep
technology current, reduce maintenance costs, and put your customer on a
predictable refresh cycle.
Questions