Although time-consuming, determining what type of lease you should sign can save a lot of headaches and money in the long run. If you have already decided to lease instead of own, here are some tips to guide you through the lease negotiation process.
Types of Leases
Typically there are 3 main types of leases:
1. Capital, or finance, lease, which is like a loan. It usually spans the entire expected life of the equipment, which is beneficial if you plan to keep the equipment at the end of the lease. You can also treat the equipment as a depreciable asset.
2. An Operating lease is more like a rental contract. It's shorter than the life of the equipment and generally will tie up less of your cash. Payments are often tax deductible.
3. A skip lease allows you to skip payments during slow months, which is ideal for seasonal businesses such as landscaping.
Assignment of Proceeds - under an Assignment of Proceeds agreement, the vendor agrees to allow the Lessor to fund the manufacturer's cost of the equipment directly to the manufacturer at the time of funding.
Commitment Deposit - a deposit required by the Lessor at time of signing which ranges from 1-2% of the total equipment cost, or the equivalent of the first rental payment. It is generally applied to rental on a pro rata basis if the commitment is taken down, or returned if the lease is declined.
Commitment Letter - the letter prepared by the Lessor to spell out terms and conditions between Lessee and Lessor for a master lease line of credit.
Dealer Lease Referral Application and Agreement - this one page agreement provides the Lessor with valuable information about the equipment vendor. By means of this agreement, the vendor agrees to pass clear title to the equipment to the Lessor upon delivery, acceptance by the Lessee and funding by the Lessor.
Fair Market Value (FMV) - the open-market value of the asset at the termination of the lease. A Purchase Option under a True Lease is generally the Fair Market Value at the end of the lease.
Fair Market Renewal Value - the rental payment paid monthly for a period of up to one year if the Lessee elects to renew the lease once it has initially terminated. The value is determined by negotiation between Lessee and Lessor and represents the Fair Market Rental/Renewal Value.
Finance Lease - a financing arrangement whereby a Lessee can acquire title to the asset for a nominal amount or a guaranteed purchase amount. For tax purposes this form of lease is usually considered a conditional sales contract. Generally, a Finance Lease is non-cancellable during the term of the lease; and the end-user is responsible for maintenance, taxes, insurance and other costs of ownership.
Lessee - party who makes use of property owned by another party (the Lessor) and pays the Lessor, usually in the form of rentals, for that use.
Lessor - company or leasing entity that is the legal owner of the leased equipment.
Level Payments - equal payments over the term of the Lease.
True Lease - a True Lease is a transaction that qualifies as a lease under the Internal Revenue Code. This lease functions so that the Lessee can claim rental payments as tax deductions and the Lessor can claim tax benefits of ownership such as depreciation.
Useful Life - the period of time during which an asset will be usable and have some economic value. To qualify as an operating lease, the property must have a remaining useful life of 25 percent of the original estimated useful life of the leased property at the end of the lease term, and life of at least one year.
• Visit the manufacturer’s website to determine what approved dealers for their equipment are in your area. If there are several, contact at least 3 to get comparative quotes. Sometimes there is a sizable differences in price; and service response is also an important factor to consider.
• Ask if there are any charges at the end of the lease to return the equipment. Often with copiers and large office equipment, the lessee is responsible for shipping the equipment back to the leasing company.
• Find out if you have a purchase option at the end of the lease for Fair Market Value.
• Make sure you have enough insurance to cover the replacement costs of the equipment. Often, the leasing company includes this insurance in the lease payment. You can have that amount deducted as long as you provide a certificate of liability insurance with the leasing company’s name as Additional Insured. They will need new certificates each year or if you change your insurance company.
• Inquire if your vendor holds the lease or if they use a third-party lessor, such as CIT, Wells Fargo, or GE Capital. There usually isn’t a problem with this as long as you understand that you won’t be dealing with the salesperson you negotiated with if there is a problem.
• Ask if there is any recourse on your part if the equipment is out of service for extended periods of time. Usually the lessor won’t help, but the vendor or manufacturer may be able to provide you with a comparable replacement until your equipment can be repaired. GET THIS IN WRITING; include it as an addendum to the lease that if your equipment is down for "X" number of days, you require a temporary replacement until your equipment is fixed.
• Ask how many years they have been representing the manufacturer. If they change reps often, there may be a problem with the equipment, the vendor, or both.
• Discuss the tax implications of the various lease types with your accountant.
• Ask your lease company for four to five references, preferably companies similar to yours in size and sector who are in your general area--and take the time to check with them.
• Check any prospective vendors out with the Better Business Bureau to see if there have been any complaints.
Leasing equipment can be very stressful, but as long as you understand what to expect, you will be well suited to negotiate better lease terms for you or your company.