Many lessees enter into lease transactions that they believe are competitive based on faulty rate assumptions. Most lease rate calculations don’t take interim rent into consideration. Interim rent is
trap door that allows lessors to receive increases in lease pricing. It is unpredictable and amount can be arbitrary. By understanding how interim can impact your lease, you can close this trap door and enjoy lease pricing you thought you negotiated.What is Interim Rent?
Interim rent, also known as stub rent, is rent that a lessor charges a lessee from time lessee accepts leased equipment until official lease start date. Most leases start on first day of month following equipment acceptance. In a lease with monthly payments, interim rent is calculated as follows: multiply number of days in interim period by monthly payment amount and divide product by 30. In extreme case, interim rent can add almost a full periodic payment to lease. In these cases it lifts effective lease rate dramatically.
The impact of interim rent in extreme case can be seen in following example: assume you accept a 36-month lease for equipment that cost $100,000. Also assume that monthly payment is $3,113 per month, paid on first of each month. Assume that lease allows you to acquire ownership of equipment for $1 at lease end. Therefore, your effective lease rate is 8%.
Now assume that interim lease period is 29 days. For simplicity sake, we will round period to a full month and add it to lease. The new effective rate for 37 payments of $3,113 is 9.7%. The new rate is more than 20% higher than rate originally quoted by lessor. This higher rate represents a trap door in your lease that produces more cost for you and a higher return for lessor.
The Purpose of Interim Rent
Many lessors justify interim rent as compensation for obligating themselves to pay equipment vendors on behalf of lessees in connection with lease transactions. As further justification, these lessors point out that lessees have use of equipment during interim period.
Problems with Interim Rent
There are two flaws in reasoning offered by these lessors. First, interim rent is exorbitant since it is based upon periodic lease payment instead of lessee’s borrowing rate. Since each lease payment has a return-of-capital component, periodic payment is not an appropriate standard to use for interim rent calculations. A calculation based on lessee’s borrowing rate is probably a fairer measure.
