Leasing IT assets offers many advantages. It transfers the risk of technology obsolescence from you to the lessor, conserves cash and can provide you with lots of flexibility regarding how and when you deploy or retire the assets. A successful leasing program can help you accomplish several good things, but an ill-conceived one can hit you with unnecessary cost, risk and a lack of flexibility. Many lessors will gladly provide flexibility on the front end of the lease by allowing you to add assets over time, but they may require you to pay rent for the balance of the month or quarter in which you receive the asset. This is extra rental income for the lessor and extra cost to you, since it’s accrued prior to commencing the fixed term you negotiated, which the lease says begins the next full month or quarter. This clever “gotcha” is done through some tricky, misleading contract language and is called interim rent. Look for it—and negotiate it out of your deal!
The back end of the lease also requires some focus. Most lessors’ form agreements allow you to continue on only a month-to-month basis after the initial term ends, and at the original lease rate. This option does provide flexibility, but at a high cost. The original lease rate is considerably above market value because the underlying asset has depreciated and the lessor already has gotten most of its money back. In short, you’re getting hosed by your lessor. To end leases on more favorable conditions, consider the following four scenarios:
The first scenario calls for return of the assets. The lease is up, and you no longer need the assets. The equipment is returned without further obligation, except for any lessee-caused damage. Remember to negotiate a maximum return-freight transportation charge (such as for no more than 300 miles), otherwise, you could wind up paying coast-to-coast shipping charges. Also, make sure to get a return grace period of about 20 days after the lease ends. Sometimes, as with laptops spread across a dispersed sales organization, it can take more than a few days to round them all up.
The second scenario involves asset purchase. When purchasing from a lessor after the lease period is up, make sure you secure the right to a fair-market-value purchase. This means that you and the lessor negotiate the price. For help in settling on a price, use an industry guide or a third-party appraisal.
The third scenario involves renegotiating the lease for an additional term, say 12 or 18 months. The renewal lease rate should be substantially lower than the original rate. The asset is worth as much as 80% less at the end of a three-year lease term, so the new lease rate should be based on the value of the equipment at the time the new rate takes effect. Anything above that is pure “lessor gravy.”
The fourth scenario gives you the right to continue the lease on a per diem basis for short-term renewals when you can’t pin down the date by which you would return the equipment but you also know that you won’t need it for the long term. The per diem renewal should contain two important elements. First, the per diem rate should be lower than the rate from the original lease, divided by 30. Second, you should be required to give only 30 days’ notice that you’re returning the equipment.
All in all, the main issue of these suggestions is that flexibility doesn’t need to cost you money in leasing. Indeed, by paying attention to prelease and postlease term options, you can impact two significant factors—your money and your flexibility—in a very favorable way.
JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at email@example.com.
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