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A flexible lease arrangement anticipates upgrades. Usually, at time of equipment upgrade, present value of rents associated with upgrade can be combined with present value of remaining equipment rents to create a revised schedule. Other methods might be required in event that lessor will incur penalties or additional charges resulting from way lessor has funded lease.

Will you be able to terminate lease early without an onerous charge? An amount consisting of present value of remaining rents plus a termination charge no greater than 3% to 5% should compensate lessor for early termination in most leasing arrangements. Where equipment has high residual value, request that a portion of anticipated residual value be applied to reduce early termination charges.

Does lease have flexible end-of-lease options? Clearly, if lease contains a nominal purchase option, there is little need for additional end-of-lease flexibility. Otherwise, a good array of end-of-lease options is desirable. Request right to return equipment to lessor without undue penalty or expense, right to purchase equipment at a fair or reduced price, and right to continue leasing equipment at a fair or reduced rent. Use of ‘caps’ in fair market value purchase or rental options can greatly reduce potential costs at lease end. Beware, however. Lessors may insist on fair market value ‘floors’ (lower limit) when they agree to ‘caps’.

It may become necessary to relocate equipment to another site. Make sure lease provides that equipment can be relocated without unreasonable penalties or charges, subject to notifying lessor. Keep in mind that equipment relocation may create extra expense for lessor, particularly if it is to be moved to another state or to multiple locations. Most lessors perceive multiple locations as adding additional risk to transaction in event they must repossess equipment. As long as these considerations are taken into account, lessor should permit relocation of equipment with reasonable notice and reimbursement of lessor’s direct costs and administrative expenses.

Is there a sufficient notice period at end-of-lease for you to indicate your desire to renew lease, purchase equipment or return equipment? The notice period generally ranges from one to six months, with three months being typical. If you violate notice period, lease kicks into an automatic renewal period, usually one to six months. You should seek notice and automatic renewal periods that are short, to avoid unintended additional lease charges. If lessor is unwilling to negotiate this provision, you can manage situation by making sure notice requirement is fulfilled within allowed time.

Look For Competitive Lease Pricing

Lease pricing is a function of many factors, including: market rates, perceived lessee credit risk, lessor competition, equipment collateral quality and equipment re-marketing prospects. Get at least three lease bids, if possible. At end of day, lease pricing is market driven. A properly completed present value analysis will bring into focus comparison of diverse proposals otherwise difficult to make. Make assumptions about equipment residuals and incorporate all anticipated costs and fees. Take into account amount and timing of periodic rental payments, any advance rental payments, security deposits, cash collateral, interim rents and commitment fees. To achieve an accurate analysis of cash flows, you should incorporate any tax charges/benefits as they are to be realized.

If you are concerned about impact of lease transaction on your firm’s financial statements, compare impact of each proposed lease on balance sheet and income statement (if lease accounting is not your forte, get a qualified accountant involved). For example, if your company is sensitive to adding additional debt to its balance sheet, a capital lease should probably be avoided. As you can see, there are several ways to evaluate lease proposals and to compare lease pricing. The important thing is to use an analysis method with consistency and to choose method that best fits your company’s priorities.

Understand All Fees and Penalties

Leasing proposals vary in types and amounts of fees and penalty charges. Some common lease charges include: commitment fees; documentation charges; charges for attorney fees; and charges for UCC financing statements. Additionally, some leases might contain penalty charges for late rental payments or early lease termination. These are only a few of possible fees and charges. It is important that you go through lease proposal and lease agreement to identify likely charges. If fees or charges are significant and likely, you should incorporate them into your pricing analysis.

Understand Lessee’s Major Responsibilities and Obligations

Most lease proposals cover basic terms of lease, but are silent regarding many of obligations and conditions normally included in lease agreement. Lessors usually will not negotiate lease agreement before receiving a signed proposal letter. While negotiating lease terms might not be customary or practical at proposal stage, requesting a copy of lessor’s standard lease along with proposal letter is a good idea. In their standard agreement, look for any onerous or non-standard terms that would otherwise eliminate proposal from consideration.

There are lease provisions that are common to almost all ‘net’ lease agreements, including: 1) prompt payment of rent, taxes and other required payments; 2) equipment & liability insurance; 3) equipment maintenance and upkeep; 4) tracking and reporting relocation of equipment; 5) freedom from any liens or other encumbrances against equipment; and 6) return of equipment. Less common lease provisions, such as financial covenants or requiring personal guarantees might not be competitive or might result in you rejecting a proposal that is otherwise attractive. Review proposal letter and lessor’s standard lease agreement to insure that they are free of provisions that are problematic.

In all cases, it is important that you have right to terminate proposed transaction if you and lessor can not come to terms on lease agreement, especially if onerous terms appear in lease that are not covered in lease proposal.

Conclusion

Snaring best lease deal and relationship need not be like getting a root canal. With a dash of advance planning and a few well defined objectives, you can find a good match. Remember to establish your priorities in making a decision on lease proposals and allow enough time to go through proposal, lease approval and documentation phases. Also, while lease pricing is usually of utmost concern, make sure you consider other factors that can increase costs or create problems.