Getting the Best Equipment Lease Deal

An Equipment Leasing Guide for Lessees

Richard M. Contino

• Publisher: Business Expert Press
• Year: 2019
• ISBN:
  9781949991970
• Topic: Negocios y empresa
• Subtopic: Finanzas

This book is a guidebook for any business, small to large, considering acquiring equipment through a leasing alternative.

It explains the pros and cons of leasing equipment, as well as how leasing and financing companies operate and the pitfalls to watch out for, provides guidance on how to financially evaluate lease offers and compare them to other financing alternatives. It also discusses the various business, accounting, and tax implications. Included are practical tips, recommendations and strategies for getting the best lease deal, a legal and business explanation of all relevant documents, and strategies to negotiate the relevant documents to get the best terms.

Very simply, this book is a comprehensive guidebook tailored expressly for the business lessee--with up-to-date suggestions, insider tips and observations. So, if you're thinking about leasing equipment and want to know how to negotiate the best possible lease deal, this book is for you.

CHAPTER 1

Equipment Leasing Fundamentals for Business Lessees

Overview

The concept of the lease as a property right, and the rights and duties of lessors and lessees, has been part of our legal tradition for decades, particularly in the case of real estate. Leasing began to emerge in the 1950s as a viable alternative for acquiring equipment. At the time of this writing, the latest available annual (2017) business statistics from the Equipment Leasing and Finance Foundation show that businesses acquired 1.7 trillion U.S. dollar of equipment and software, 60 percent of which, or over one trillion U.S. dollars, was financed with leasing (48 percent of this total), the most common method, followed by lines of credit (9 percent of this total), and secured loans (8 percent of this total). So, there is no doubt that the equipment leasing industry plays a major role in the financial community. An equipment user can lease virtually any type of equipment on a variety of terms.

Notwithstanding the many benefits for an equipment user, there have been some drawbacks to equipment leasing. The legal requirements and financial considerations are, at times, extremely complex and the lease documents are often difficult for business people to understand. Because of intense competition among leasing companies for business, however, some progress has been made favoring equipment lessees—for example, many leasing companies now provide lease documents written in plain English, so they are more readily understandable by the layperson.

The interest in leasing as an alternative means of acquiring equipment, however, continues to prompt a deluge of questions from equipment users. For example:

• What are the tax advantages and disadvantages to the lessee?
• What is the best business structure for a lease?
• How should a lease transaction be analyzed from a financial viewpoint?
• How are leases treated for accounting purposes?
• What are the leasing risks, and what are the benefits?

For these, and many other questions, there are no easy answers, but if your company is considering leasing equipment, the material in this book will give you a solid basis to reach a decision and put you in the best position to negotiate the best possible lease deal.

What Type of Businesses Can Benefit from Leasing Equipment?

In general, any equipment user can benefit from a properly negotiated equipment lease arrangement, whether it is a multinational corporation, a small, privately held or family-owned business, or an individual using equipment for business reasons. Whether or not an equipment user in a particular situation should generally lease equipment they need, however, depends on a variety of factors that vary with each situation, outlined in The Pros and Cons of Leasing for a Business Lessee following.

Who Are the Potential Lessors?

In theory, any company in the financing business can be a potential lessor of equipment. However, because of the competitive nature of equipment leasing and the specialized expertise required, only certain types of organizations are actively in the leasing market.

For discussion purposes, it is useful to separate the potential lessors into five categories: individuals, independent leasing companies, lease brokers, captive leasing companies, and banks. If you are considering leasing equipment, you will find an understanding of the categories helpful in narrowing the field of potential lessors.

Wealthy Individuals

Prior to the 1986 Tax Reform Act (TRA), the role of the wealthy individual as lessor was limited because of the rules restricting an individual from claiming investment tax credits (ITCs) on leased property. Now that the ITC is not currently available to lessors, except in limited equipment categories, wealthy individuals can be more rate competitive. This coupled with the fact that they often will take greater business risks than a traditional leasing company can make them a good choice in difficult financing situations. In this regard, a few innovative equipment leasing companies and investment bankers have developed over the years interesting investment programs for individuals who have made them, at times, a part of the equipment financing business. For example, some railcar brokers set up individual investor programs that provide wealthy individuals with opportunities to invest in short-term railcar leases.

Recommendation: If you are a prospective lessee considering leasing from an individual, you must look at more than any rent advantage. For example, because individuals often take aggressive tax positions, they may run afoul of the income tax laws. The Internal Revenue Service may then put a lien on all the individual’s property, including the leased equipment. Also, individuals can be somewhat more arbitrary to deal with when variances from the lease terms are required.

Independent Leasing Companies

Independent leasing companies, often referred to as third-party leasing companies, provide a major source of equipment lease financing. Because leasing is their principal source of revenue, in today’s competitive market, independent leasing companies are extremely aggressive and, in some cases, are willing to risk bending the tax rules for the lessee’s benefit to win a transaction. For example, some will give a lessee the right to buy the equipment at a low predetermined fixed price when the lease ends—a practice that can have adverse tax consequences (see Chapter 5).

There are two basic types of independent leasing companies: those that merely buy and lease equipment to the equipment user (finance leasing companies), the vast majority of the independent leasing companies, and those that also offer other services, such as the maintenance and repair of the equipment leased (service leasing companies).

Finance Leasing Companies

Finance leasing companies, lessors of multimillions of dollars of equipment each year, operate in much the same manner as banks or other financing companies. They do not maintain an equipment inventory, but rather, after agreeing to a lease with a prospective lessee, buy the specific equipment needed for the lease. In this case, the prospective lessee orders the needed equipment from the equipment vendor and assigns the right, but not the obligation, to buy the equipment to the leasing company. When the equipment arrives, if it is in acceptable condition and is accepted by the equipment user under the lease contract, the leasing company pays for it and takes title to the equipment.

Finance leasing companies typically write financial-type leases, referred to as finance leases, that run, generally, from 70 to 80 percent of the equipment’s useful life. The total amount received under these leases, from the rents payable and the equipment end-of-lease (residual) value proceeds (taking into account, possibly, any available equipment ownership tax benefits), is sufficient to provide the lessor with a full return of their equipment investment and a profit. If the equipment purchase is leveraged with third-party debt (a leverage lease arrangement), the rents will also cover the full repayment of the debt. This type of long-term lease is net to the lessee. That is, the lessee must assume substantially all the equipment ownership responsibilities, such as maintenance, taxes, and insurance.

Service Leasing Companies

Service leasing companies provide nonfinancial services to lessees in addition to the equipment financing. Services may include equipment maintenance and repair or advice on the equipment’s operation and design. Service leases have become increasingly popular for prospective lessees.

Service lessors typically limit their activity to a single type of equipment, such as computers, or to a single type of industry, such as the mining industry. The intense experience gained through equipment or industry specialization enables them to reduce many leasing risks. For example, because of a specialized equipment focus, they often are able to deal effectively with equipment when it comes off lease, which, in turn, reduces their end-of-lease equipment re-leasing or sale risk. And, because of that reduced risk, they will often offer attractive lease termination or equipment exchange privileges.

Observation: Many industry participants believe that product specialization is less risky for a lessor than industry specialization because there is a greater likelihood that an industry specialized lessor would suffer more if their industry hits hard times than an equipment specialized lessor would if one of the industries in which their equipment was used hit hard times.

Service lessors often write leases with much shorter lease terms than finance leases, referred to as non-payout leases. Because of the non-payout nature, the lease rents will typically not recoup for the lessor its entire equipment investment during the first lease term. And, to recover its investment and make a profit, the service lessor must continue to re-lease the equipment. If the equipment becomes obsolete sooner than expected, the lessor may incur a loss. So, to be compensated for taking this risk, and for providing other services, service lessors will generally charge higher rents than finance lessors, the amount of which is often buried in package payments that include the rental charge for the equipment and the payment of services provided.

When should a prosp...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Dedication
• Abstract
• Contents
• Introduction
• 01_Chapter 1
• 02_Chapter 2
• 03_Chapter 3
• 04_Chapter 4
• 05_Chapter 5
• 06_Chapter 6
• 07_Chapter 7
• 08_Chapter 8
• 09_Chapter 9
• 10_Chapter 10
• 11_Appendix
• 12_ATA
• 13_Index
• 14_Adpage