Beyond the Rate

What you see is not always what you get... a low monthly payment might not be so attractive once all the fine print is taken into account.

LAB can help you identify some of the more concerning terms in your prospective lease that, if left undetected, can make that attractive lease rate, well ... unattractive. And the time to make these discoveries is NOW, at the onset, before you sign and lose your bargaining power. The links below present a few key areas for consideration:

Note: The “Lessee” is you, the customer. The “Lessor” is us, the leasing company.
We use lessee/customer and lessor/leasing company interchangeably throughout our discussion.
At LAB, we believe leasing is an equipment acquisition process that can and should be kept simple. The lease document needs to be concise and easily understood. Our agreement is just two pages long, front and back, written in a legible font and an easy-to-read format. Designed to be as customer friendly as possible, it contains reasonable terms and conditions that clearly explain each party’s responsibilities.

However, many lessors produce long and ponderous documents, often confusing or befuddling the customer. Heavy on legalese, they require intensive scrutiny and probably legal review to clarify just what your responsibilities are. One oversight or missed action can prove very costly down the road!

CONCLUSION: It is unlikely that a lessor will completely overhaul their lease to meet your specifications; however, reasonable modifications should be available. If not, find another lessor.

MISERY INDEX: If potentially costly provisions are not removed at the onset, there could be very unpleasant surprises in the future.
We live in a world of fees. Banks and airlines have perfected the art of hidden fees, but many lease documents have their share. Perhaps not a deal-killer dollar amount in the overall scheme of things, but why should the lessee pay for the leasing company’s incidental costs of doing business?

Fees are a nickel and dime way for lessors to pocket a few extra dollars… application fees, documentation “prep” fees, UCC filing fees, upgrade fees, termination fees, return fees, etc., etc. You get the idea. (A commitment fee at the onset of the transaction that is totally applied towards your monthly payments is reasonable and acceptable).

At LAB, we assess no extraneous, non-applicable fees – NONE.

CONCLUSION: Fees don’t belong in a lease.

MISERY INDEX: $500 of fees on a $100,000 transaction raises your cost of leasing by 21 basis points.
The lessee’s obligation to pay rent for the agreed upon term should normally begin on the date the equipment is installed and goes live. This start date is termed the “commencement” date and also authorizes the lessor to pay the vendor. However, too many lessors distort this process by injecting a second, subsequent date that signifies when the lease payments shall actually begin, such as the first day of the following month, or even the following quarter. So far, so good.

No, not so good. You are charged additional “rent” for that gap in time. Termed “Interim Rent”, it is actually just interest, and usually charged at the same amount as the underlying lease payment, not underlying interest rate.

Sidebar for an example: Let’s say you have a 60 month FMV lease for a $100,000 ultrasound system, with a lease payment of $1,730.00/month equating to an APR of 1.25%. If you sign off on the installation on the 10th of the month, but your lease doesn’t start until the beginning of the next month, then you pay 20 days of interim rent (i.e. interest) calculated as $1,730 divided by 30 days which equals $56.67 per day or $1,153.00 in total. An interest rate of 20.70%!

CONCLUSION: If the interim period is 20 days, you essentially end up with close to a 61 month rental term rather than the 60 you may have quoted. Start your payments when the equipment goes live. AVOID INTERIM RENT!

MISERY INDEX: This extra 20 days on a 60 month term raises your cost of leasing by 75 basis points!
The most troublesome terms in a contract often pertain to the end of the lease, whether you return or retain the equipment…

First, how LAB goes about it:

The lessor does need to be notified of the customer’s intentions, be it return, purchase, renew or even, “I don’t know yet”. The big questions are ... who does the notifying and when? At LAB, we notify you. That’s right, we will send you our Option Notice at least 30 days in advance of expiration. Standard options are:

   ---Renew the lease for 12 or 24 months, at a reduced rental.
   ---Purchase the equipment at an offered price
   ---Return the equipment with no further obligation beyond de-installation and        return

Sidebar for elaboration on return: Should the lessee elect to return the equipment at the end of the lease, or any renewal, the process should be fair and reasonable. LAB requires only that the equipment be returned in good working order, normal wear and tear excepted. Unfortunately, some lessors require that the equipment be returned in like new condition, which can require expensive refurbishing before return. And restocking fees may also be applied, regardless of the condition of the equipment.

   ---Delay your decision by continuing to rent on a month-to-month basis.

How Other Lessors go about it, (and here’s where it gets tricky)…

Most leasing companies require you to initiate the notice process. Yes, you must reach out to them. With continuing personnel changes and reductions, do you have the proper systems in place to initiate contact on an expiring lease?

To make matters worse, most leasing companies require notice long before lease end, as much as 180 days beforehand! Of course, you would need the options at least a month or two prior to that to select the proper option and get the proper approval. So now, in reality, you need to start at least 8 months prior to expiration! Again, do you have systems in place for that?

Finally, if you don’t provide notice in time, (not just ask for options on time, but actually commit to an option) your lease will automatically extend from its expiration date for an additional period of time, typically anywhere from 3 to 6 months… at the same rental amount! Did you really want a 66 month lease*?

*MISERY INDEX: An automatic six month extension of a 60 month lease with no reduction of rent raises your cost of leasing by 347 basis points!

Summary: The lessee shouldn’t be forced into making the important decision of retaining or replacing your equipment until prepared to do so. Should you miss an imposed deadline for notification, you don’t want to be obligated to pay additional, extended rent on equipment for which there is no further need.

   1) Who initiates the lease end process?
   2) When is notification required?
   3) What happens if you miss the deadline?

Even a bad lease can be made acceptable with the proper amount of review and negotiations with the lessor. But why not start with a fair and agreeable lease agreement from LAB in the first place?