| |
| |
|
Leases & Leasing Information |
|
|
|
Interim Rent: Equipment Leasing's Trap Door
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 the trap door that allows lessors to receive increases in lease pricing. It is unpredictable and the amount can be arbitrary. By understanding how interim can impact your lease, you can close this trap door and enjoy the lease pricing you thought you negotiated. What is Interim Rent? Interim rent, also known as stub rent, is the rent that a lessor charges a lessee from the time the lessee accepts the leased equipment until the official lease start date. Most leases start on the first day of the month following equipment acceptance. In a lease with monthly payments, interim rent is calculated as follows: multiply the number of days in the interim period by the monthly payment amount and divide the product by 30. In the extreme case, interim rent can add almost a full periodic payment to the lease. In these cases it lifts the effective lease rate dramatically. The impact of interim rent in the extreme case can be seen in the following example: assume you accept a 36-month lease for equipment that cost $100,000. Also assume that the monthly payment is $3,113 per month, paid on the first of each month. Assume that the lease allows you to acquire ownership of the equipment for $1 at lease end. Therefore, your effective lease rate is 8%. Now assume that the interim lease period is 29 days. For simplicity sake, we will round the period to a full month and add it to the lease. The new effective rate for 37 payments of $3,113 is 9.7%. The new rate is more than 20% higher than the rate originally quoted by the lessor. This higher rate represents a trap door in your lease that produces more cost for you and a higher return for the 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 the equipment during the interim period. Problems with Interim Rent There are two flaws in the reasoning offered by these lessors. First, interim rent is exorbitant since it is based upon the periodic lease payment instead of the lessee's borrowing rate. Since each lease payment has a return-of-capital component, the periodic payment is not an appropriate standard to use for interim rent calculations. A calculation based on the lessee's borrowing rate is probably a fairer measure. The second flaw in this reasoning is that lessors often have not paid for the equipment during the interim period. They may not have incurred any additional cost during this period. The net result is that lessees incur significant increases in their effective lease rates while lessors are able to sneak extra yield through a trap door in the lease. Interim rent can turn a competitive lease into a relatively high rate transaction. Solutions Savvy lessees look for ways to limit or eliminate interim rent. They try to ensure that they receive the lease deal for which they bargained. Here are five strategies to blunt the impact of interim rent: 1. Eliminate interim rent. Try to negotiate a lease that excludes interim rent. One way to eliminate interim rent is to have the interim period count as a partial payment period. Another partial payment period can be added at the end of the lease, such that the two periods constitute one full payment period. 2. Pay interest instead of interim rent. Instead of paying interim rent based upon the periodic payment, base the interim payment upon the implicit transaction rate or your borrowing rate. This method will eliminate the return-of-capital component that plagues most interim rent calculations. 3. Limit or fix the amount of interim rent. If you cannot eliminate interim rent, you can try to negotiate a limit on it. You can offer the lessor a fixed interim period, regardless of the equipment acceptance date. 4. Manage equipment deliveries. Another strategy is to coordinate with the equipment vendor to schedule equipment delivery and acceptance towards the end of the month. End-of-the-month acceptances would ensure a reduction in interim rent since the interim periods would be short. 5. Sale-leaseback at month end. As a last strategy, if allowed by the lessor, you could schedule a sale-leaseback of newly acquired equipment at month end. This strategy would also guarantee a short interim period. It is important to understand the impact of interim rent on your lease. Rather than assume that you will receive the lease rate quoted, review the lease carefully. If your lease includes interim rent, plan to negotiate this feature. Use one of the strategies above to reduce this potentially costly aspect of your lease. Even if you cannot eliminate the interim-rent trap door, you may be able to seal it. George Parker is a co-founder, Director and Executive Vice President of Leasing Technologies International, Inc. ("LTI"). Mr. Parker has been active in secured lending and equipment financing for over twenty years. An industry leader, he is a frequent panelist and author of several e-books and articles pertaining to equipment financing. Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: http://www.ltileasing.com
MORE RESOURCES:
Leases-Leasing - Google News |
|
|
|
RELATED ARTICLES
What Happens When the Anchor Tenant Moves and You Are On a Ten-year Lease? Recently there was an article in the Houston Business Journal of the anchor store in many shopping centers through out Houston pulling out. Kmart, took out some stores, so did three other big box stores and a few consumer electronics places and larger furniture stores, now Albertson's has left. Terms to Know Before Leasing A Vehicle - Leasing Jargon Simplified So, you've decided that you want to lease that next vehicle. Can't really blame you. Ten Ways Start-ups Use Venture Leases And Loans To Generate Millions The rise of venture leasing and lending has created an opportunity for sophisticated entrepreneurs to gain a competitive advantage. Savvy entrepreneurs are using venture leases and loans to generate millions of dollars for shareholders by leveraging existing venture capital. So You Want to be a Landlord? The residual income from owning rental properties may bring more money into your life than the fast flip in the long term. If nothing else, the stress is reduced because a well-chosen investment will pay for itself until you the market is ready for you to sell. Smart Car Leasing for Beginners Car leasing is extremely popular because it provides an attractive method of driving an automobile that you might not otherwise afford. It allows you to make lower monthly payments than with traditional car purchase loans. What to Consider Before Leasing a Car Some people choose to lease a car rather than buying one outright. Here are some useful tips on what to consider before leasing a car:The most important thing to remember is that you do not own the vehicle. Basic Things You Should Know About A Lease Purchase Contract What exactly is a contract?By definition, a contract is an agreement between two or more parties to do, or to refrain from doing, a particular thing in exchange for something valuable. The parties can be individuals, businesses, organizations and government agencies. Leases And Tenants - The Spooky Tenant You, Mr. Landlord are pleased to find qualified tenants for your rental house. Venture Leasing: Startup Financing On the Rise According to Pricewaterhouse Coopers, investment by institutional venture capitalists in startups grew from less than $3.0 billion at the beginning of the 1990's to over $106 billion in 2000. With a Lease, The Devil Is In The Details In the last article we looked at a few of the things you should consider before leasing that first office or storefront for your business. To recap, you should not only consider the old standard "location, location, location," but also consider things like sufficient parking, the number of employees who will be working onsite, and future growth projections. The Lease And Purchase Option If you have an investment property, should you rent it or sell it? The answer to that question is that you should do both. If you have lots of time on your hands and are handy with tools, you can choose to rent out your property. Explore An Effective Revolutionary Approach To Traditional Business Financing For business owners who need working capital now there is a revolutionary, tax-deductible cash flow solution that frees up capital and gives them the money they need to grow. This diversified cash flow solutions is known as "asset leasing. Pricing Your Apartments How do you fix a price point for an apartment? Take a guess? Figure it based on your carrying costs? Check comps and do a market analysis? Charge whatever the market will bear? If you're looking to place quality tenants, less is sometimes more.We all want to make money with income property; the more the better! When you're looking for a new tenant, however, don't assume that you're going to make more money by charging more. Getting Your Venture Lease Approved Each year venture capitalists fund more than 2,500 start-up companies in the U.S. Ten Ways to Save a Bundle on Your Next Lease According to the Equipment Leasing Association ("ELA"), U.S. Lease or Buy? That is Always the Question with Car Financing Leasing is a perfectly viable and legitimate way to finance a new car. Although leasing offers attractive benefits, it is somewhat more complex than buying with a loan. Equipment Leasing Blunders That Can Cost Your Firm a Mint Rod McHenry, the financial vice president of a document imaging company, thought he had great cause for celebrating. He had signed an unbelievable $370,000 lease proposal covering computer servers, workstations, software and other networking equipment. How Venture Leasing Added Millions To A Startups Equity Value Craig Berman beamed noticeably after completing his board presentation. Berman, CEO of a startup that develops nanotechnology applications for the defense industry, had just closed a $ 20 million equity round. Increase Your Business Growth and Cash Flow Through Equipment Leasing "If it can be manufactured, it can be leased." For the past decade or so, this statement has become more and more true to fact. Ten Equipment Leasing Tips - Save a Bundle on Your Next Lease According to the Equipment Leasing Association ("ELA"), U.S.
|
| Good Credit Loans | home | site map | School Bus Clothing | Florida Pool Heating |
| © 2006 |
