Five Lease Gotchas that Will Cost You

Mary Redmond

EIGHTY PERCENT of all companies lease equipment—everything from phones, computers and servers, to presses, copiers and mailing equipment.

Leasing can bring many benefits, including:

• Conserving cash flow. Instead of paying large up-front deposits, lessors usually require only one or two months' rent in advance.
• An additional source of capital. Wise companies develop multiple sources of financing.
• Avoiding obsolescence concerns.
• Spreading expenses over the same period of time as the depreciable asset life.

Keep in mind that all leases are negotiable—but only if you ask. The problem is that most companies do not choose to negotiate their leases. They assume that all leases are the same, boilerplate language. So what possible benefit could be achieved by negotiating the terms? The company with the lowest payment is the best choice, isn't it?

Simply stated: NO! Savvy lease negotiators know that lessors will negotiate financial terms and conditions, end-of-lease terms, late charges, prepayment definitions and more. Leasing has a language all of its own. We call it "Lease Speak." It is possible to decode the language, negotiate your way through the murky water and save money for your company.

There is no one-size-fits-all lease. It must be tailored (negotiated) to fit your operation. If your organization does not frequently review and negotiate significant portions of every equipment lease, consider consulting a lease review specialist to keep current on the most common lease "Gotchas."

Five Areas to Negotiate in Every Lease

1. End-of-lease Options: At the end of the lease, the lessee should have three options: purchase, renew or return. Surprises occur when the definitions and conditions pertaining to the end options are uncovered.

TIP: Understand end-of-lease options and definitions of any terms used throughout the lease.

REAL LIFE: These terms and dates were found in a recent lease: Acceptance Date, Installation Date, Commencement Date, First Day of Initial Term, Last Day of Initial Term, Scheduled Termination Date, and Daily Rental. All of these terms were critical to a full understanding of the lease and none of them meant the same date during the life of the lease.

Define each date and how much additional rent is added when the Installation Date is the day the equipment arrives in your building and not the day the equipment is finally installed and producing an acceptable product. The time between these dates can add months and thousands of dollars to your total lease costs.

2. Renewal Option: The renewal option may be automatic without notice from the lessee and can frequently add 12 extra payments. Some lessees slip into an automatic renewal and discover it only after months of extra payments.

TIP: Leases usually require the customer to provide a written end-of-lease notice 90 days before the last day of the lease. Tricky lease language may require that the notice be no more than 120 days and no less than 90 days before the final day of the lease. Yikes! It's easy to miss that narrow 30-day period. Negotiate the notification timing to allow your company more time to give the notice. Put a reminder on a number of employees' calendars so your department does not miss giving a timely end-of-lease notice.

REAL LIFE: A company missed the required notification date by seven days. This added $85,000 in surprise extra lease payments for the 12-month automatic extension. Worse yet, replacement equipment was already on order.

3. Fair Market Value: At lease end there is an option usually referred to as the "In-Use, In-Place Fair Market Value" purchase option.

TIP: Never assume that the "In-Use, In-Place Fair Market Value" is the same as the Used Equipment Value. It is not. "In-Use" values can include electrical costs, user training, consulting and system wiring. These added surprise costs increase the purchase prices by 10-15 percent. We recommend a more detailed end-of-lease purchase option process. If the lease total amount is a significant investment for your department, delete the "In-Use, In-Place" phrase. Add language that provides your company with the option to involve two or three appraisers to determine the Fair Market Value. In addition, share the appraisal expense with the lessor.

4. Return Charges: If the company decides to return the equipment at the end of the lease, packing and shipping charges, as well as insuring the equipment, are the lessee's responsibility. If returns are not well coordinated, the leasing company can also add rental and storage fees.

TIP: Prior to lease commencement, obtain a copy of the lessor's standard repair charges necessary to return equipment to acceptable condition. With this document in hand, the decision to return, renew or purchase the equipment is easier. Receive a clear understanding of the definition of the "Lessor acceptable condition" before signing the lease

Another option that some lessors allow, is to replace damaged equipment with "like kind" equipment. Lessors require that the institution own this equipment free and clear and that it not financed on another lease.

REAL LIFE: A company had to pay a 60-day storage charge during the time the lessor inspected the returned equipment. In addition, the customer owed unexpected damaged equipment charges. The lessee's IT department had inspected all equipment prior to shipping and found it to be in good working condition. Was the equipment damaged in shipping? Perhaps. No proof existed to validate the customer's assertion that the equipment was in working condition when it was shipped to the leasing company.

A lessee told me that the damage charges became a big enough financial problem that they hired the equipment vendor to inspect, photograph and certify each piece of equipment prior to shipping to the leasing company. Damaged equipment charges dropped dramatically. That was an expensive lesson for the customer.

5. Missing Equipment: When returning equipment, the lessee owes the lessor for missing, damaged or destroyed equipment.

TIP: With every lease contract, require a copy of a document titled the "Stipulated Loss Value Table." Aggressively negotiate the values in the table. It determines the amount to be paid to the lessor when equipment is lost, damaged or destroyed during the lease life cycle.

If at any time equipment is damaged beyond repair, the lessee may allow the lease payments to continue as if the equipment were still in good working condition or choose to pay the Stipulated Loss Value of the equipment at that point. The lessee's insurance company may also pay the Stipulated Loss Value amount. Most companies choose to cover the cost themselves and not turn in an insurance claim.

If a company continues to make all the lease payments, when the lease ends the lessee owes either the Stipulated Loss Value amount or the Fair Market Value. Most Stipulated Loss Value Tables have higher values than the Fair Market Value.

REAL LIFE: A Stipulated Loss Value Table we negotiated recently for technology equipment showed a three-year end-of-lease value of 35 percent of the original purchase price. Are you prepared to shell out $700 for a three-year-old missing laptop that originally sold for $2,000?

Use the new definitions and information contained in this article to reduce your company's total lease spending. This piece contains only five of the lease surprises you may experience. We search through 26 areas in every lease for "Gotchas." Our system helps you find all the costly surprises. If you want to learn more about lease "Gotchas," request our free reports, "Top 10 Lease Gotchas" and "10 Tips for a Better Lease," at www.LeaseSpeak.com/workshop-keynotes-lease-negotiating.