One of the fun parts of negotiating leases is collecting the war stories. The negotiations often produce revealing and humorous moments.
Lessors and lessees see lease transactions very differently. Lessees see leasing as
finance transactions. Lessors generally see leasing as an asset rental or service business. These differences in point of view are often exposed during end of lease negotiations. For example, during end of lease negotiations, Lessors often cannot understand why ALL payments made to the lessor – such as yet un-credited deposits – belong in an analysis of the total all-in cost of the lease program.
Deposits are a relatively common feature of leasing programs at their inception. At the inception of a lease relationship, leasing companies are frequently processing significant credit risk. As a result security deposits and occasionally letters of credit are sometimes required. Most of the deposits are structured to be returned at the end of the last active lease or credited against the final regular term payment. However the language can be tricky and some security deposits require the lessee meet a very high standard – such as fulfilling “all the obligations” set forth in the document – for deposits to be returned. In addition deposits are usually not tracked by the lessee and can be forgotten as the years go by.
We track deposits – along with every other type of economic transfer between a Lessee and a Lessor — as a part of all-in cost of leasing analysis and use this analysis as a part of an overall lessor negotiation strategy. During a negotiation when the topic of deposits comes up there are usually two reactions on the part of the lessor: 1 – Ignoring the comment (often times repeatedly), or 2 –Claiming whatever deal that may be on the table already includes the lessor retaining deposits. An extreme example of the “ignore” approach recently happened to us during an actual client negotiation. The lessor held $200K in deposits but had never mentioned deposits in any of the negotiations or in any of the written offers. When the subject was brought up on one of the final conference calls the lessors simply refused to acknowledge the word deposit – directly ignored it three times – and ultimately said “I don’t know what you mean by deposits.” Ultimately the deposit amount was acknowledged and credited but it took a major communication effort and innumerable repetitions to get there.
It is important not just to perform a theoretical lease versus buy analysis at the beginning of the lease but to do an analysis of the all-in cost of leasing as leases mature. In effect the best practice is to do a post mortem lease versus buy analysis on the portfolio to determine how much the program actually cost and capture all the elements of the economic transfer between the parties including deposits. This analysis usually reveals that clients pay a significant premium to lease equipment relative to other finance sources.
Conclusion: Deposits are a good tool in negotiations but should be used carefully. If the card is played too early in negotiations it is effectively “given away.” But if used at the right time deposits can be leveraged to generate significant savings on certain lease transactions.
