During my tenure as a dealer principle, I had a conversation with an office equipment leasing company executive. We were discussing the return of a large population of multi-function copy equipment from a mutual customer. For this customer, my dealership had stayed on top of all the lease requirements for notification of intent to return equipment at lease expiration. On my customer's behalf, I was making the arrangements for the return of the equipment. The leasing company executive was reluctant to provide return authorization information for the equipment.
Commercial leases can be described in four categories: gross, modified gross, triple net, and absolute net. A gross lease does not require the tenant to reimburse the landlord for any of the expenses that the landlord might incur in operation of the premises. Under a gross lease, the tenant pays base rent and the landlord absorbs all costs for common area maintenance ("CAM"), real property taxes, landlord's insurance, and other charges associated with the operation and maintenance of the property. A modified gross lease typically requires the tenant to reimburse landlord for "pass through" costs over a stated expense stop or base year. For example, the tenant may be required to reimburse landlord for all CAM over $4.00 per square foot, or alternatively, the tenant may be required to reimburse landlord for all CAM in excess of base year 2005. In most situations, the commercial tenant will be asked to sign a "triple net" lease, which requires the tenant to reimburse landlord for CAM, real estate taxes, and landlord's insurance. The "pass through" costs included in a "triple net" lease can vary, and can include additional items other than just CAM, taxes, and insurance. Thus, a prospective tenant will be well served to review a proposed lease with counsel to ensure that tenant understands the nature and type of pass through costs it will be expected to absorb under the lease. Also, in certain circumstances, a landlord may utilize a "net" or "absolute net" lease, which requires the tenant to absorb ALL costs of maintenance and operation of the property, including capital expenditures and major repairs. Typically, an absolute net lease is utilized where the tenant is the sole and 100% occupant of the building - for example, a restaurant or an office building occupied by one tenant.
Generally, a major round of equity capital raised from credible investors or venture capitalists makes venture leasing viable for the early stage company. Lessors structure most transactions as master lease lines, permitting the lessee to draw down on the lines as needed throughout the year. Lease lines usually range in size from as little as $ 200,000 to well over $ 5,000,000, depending on the lessee's need and credit strength. Terms are typically between twenty four to forty eight months, payable monthly in advance. The lessee's credit strength, the quality and useful life of the underlying equipment, and the lessor's anticipated ability to re-market the equipment during the lease often dictate the initial lease term. Although no lessor enters a leasing arrangement expecting to re-market the equipment prior to lease expiry, should the lessee's business fail, the lessor must pursue this avenue of recovery to salvage the transaction. Most venture leases give lessees flexible end-of-lease options. These options generally include the ability to buy the equipment, to renew the lease at fair market value or to return the equipment to the lessor. Many lessors limit the fair market value, which also benefits the lessee. Most leases require the lessee to shoulder the important equipment obligations such as maintenance, insurance and paying required equipment taxes.
Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation. Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
Commercial leases can be described in four categories: gross, modified gross, triple net, and absolute net. A gross lease does not require the tenant to reimburse the landlord for any of the expenses that the landlord might incur in operation of the premises. Under a gross lease, the tenant pays base rent and the landlord absorbs all costs for common area maintenance ("CAM"), real property taxes, landlord's insurance, and other charges associated with the operation and maintenance of the property. A modified gross lease typically requires the tenant to reimburse landlord for "pass through" costs over a stated expense stop or base year. For example, the tenant may be required to reimburse landlord for all CAM over $4.00 per square foot, or alternatively, the tenant may be required to reimburse landlord for all CAM in excess of base year 2005. In most situations, the commercial tenant will be asked to sign a "triple net" lease, which requires the tenant to reimburse landlord for CAM, real estate taxes, and landlord's insurance. The "pass through" costs included in a "triple net" lease can vary, and can include additional items other than just CAM, taxes, and insurance. Thus, a prospective tenant will be well served to review a proposed lease with counsel to ensure that tenant understands the nature and type of pass through costs it will be expected to absorb under the lease. Also, in certain circumstances, a landlord may utilize a "net" or "absolute net" lease, which requires the tenant to absorb ALL costs of maintenance and operation of the property, including capital expenditures and major repairs. Typically, an absolute net lease is utilized where the tenant is the sole and 100% occupant of the building - for example, a restaurant or an office building occupied by one tenant.
Generally, a major round of equity capital raised from credible investors or venture capitalists makes venture leasing viable for the early stage company. Lessors structure most transactions as master lease lines, permitting the lessee to draw down on the lines as needed throughout the year. Lease lines usually range in size from as little as $ 200,000 to well over $ 5,000,000, depending on the lessee's need and credit strength. Terms are typically between twenty four to forty eight months, payable monthly in advance. The lessee's credit strength, the quality and useful life of the underlying equipment, and the lessor's anticipated ability to re-market the equipment during the lease often dictate the initial lease term. Although no lessor enters a leasing arrangement expecting to re-market the equipment prior to lease expiry, should the lessee's business fail, the lessor must pursue this avenue of recovery to salvage the transaction. Most venture leases give lessees flexible end-of-lease options. These options generally include the ability to buy the equipment, to renew the lease at fair market value or to return the equipment to the lessor. Many lessors limit the fair market value, which also benefits the lessee. Most leases require the lessee to shoulder the important equipment obligations such as maintenance, insurance and paying required equipment taxes.
Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation. Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Bobby Jain & How Artists May Utilize Financial Management You have full permission to reprint this article provided this box is kept unchanged.
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