The Language of Leasing: Your Guide to Saving Money on Leases
Mary A. Redmond, President
Independent Lease Review, Inc.
913/441-4108; [email protected]
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.
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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.
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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
of a four-year lease. End of lease notification language is often obscure and unclear. At
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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.
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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
negotiation and you lose more than you gain in time when you bypass the homework step.
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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.
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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.
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