One of the fun parts of negotiating leases is collecting the war stories. The negotiations often produce revealing and humorous moments.
Lessors and lessees view lease transactions very differently. Lessees see leasing as finance transactions. Lessors – at the very core – generally see leasing as an asset rental and/or service business. We know we are getting somewhere in a negotiation when this difference in understanding surfaces. One key indication that we are getting somewhere is when the leasing sales rep says “You are looking at it wrong! You can’t look at it like a finance transaction. That’s not LEEEASING!!”
We measure the all in cost of leasing for clients and evaluate the performance of a lease portfolio so that it can be compared to any other source of financing. In effect we do a post mortem lease versus buy analysis on the portfolio to determine how much the program actually cost. This analysis usually reveals that clients pay a significant premium to lease equipment relative to other finance sources. In a lease negotiation – whether the negotiation occurs at beginning or end of any given lease or anywhere in between – we use this analysis as a tool to help clients explain their point of view on the total cost of leasing to lessors. Leasing companies don’t like this approach at all because they don’t – in their heart of hearts – view leasing the same way the lessee does. For example when we walk through the various accumulated costs over the life of a lease –a full lease portfolio – the lessor will typically respond by saying – in effect – the only costs that count – the only charges which should be evaluated are the committed rents for the duration of the original term of a lease. If the lessee wants to consider any other costs the lessor will respond … that’s not Leeeeasing ….
“That’s not Leeeeasing.” We hear this statement a lot and there is some substance to it since leasing does in fact provide the flexibility for clients to extend their leases and keep paying theoretically forever. That’s a rather costly feature which other finance options do not offer. Lessors always claim the difference between leasing and other finance sources in flexibility for lessees. The question is – at what cost? To determine that cost of the flexibility which the lessor has provided it is important to examine all of the costs associated with leasing.
Conclusion: The cost of the “flexibility” of leasing needs to be examined. The best way to do this is to do an historical analysis of the all-in cost of leasing. Based on this analysis Leasing should also be compared to other alternatives in order to see if an offer by a lessor is attractive. When the leasing representative starts saying “That’s not Leeeeasing” we have gotten to the heart of the matter and are about to make real progress.
