Transcript Document
The Ins & Outs of Leasing Technology LawNet 2004 Annual Conference
Phoenix, Arizona August 26, 2004
Thursday, 3:15 p.m.
Grand Sonoran C, D
Presented by:
Jennifer Volz-Arave U.S. Bancorp Oliver-Allen Technology Leasing
Presentation Overview
Background of U.S. Bancorp Oliver-Allen Technology Leasing The advantages & disadvantages of paying cash, using bank & leasing What can be leased The typical lease terms End-of-term options: purchase or return?
Preparing for the lease process Putting together an effective RFP The “fine print” to be aware of in some lease documentation A recap
U.S. Bancorp Oliver-Allen Technology Leasing
Longest company name in the history of technology leasing Oliver-Allen was established in 1973 and acquired by U.S. Bancorp in March of 2000 Subsidiary of 6th largest U.S. financial services holding company $192 billion in assets Specializes in leasing technology to law firms Over 230 law firm clients nationwide including 28 firms in the AM LAW 100 and 73 firms in the NLJ 250 Strong supporter of legal educational associations
Paying Cash for Technology
Advantages
The firm owns the equipment at the time of the purchase No financing fees or interest Price is easily understood
Disadvantages
May require five year depreciation even though the useful life may be shorter May be difficult to gain internal approval for entire cost of replacing technology The firm’s cash may be better put to use by investing or growing the firm
Bank Financing
Advantages
Excellent for equipment with a useful life longer than five years Firms are comfortable using existing bank lines Working with banks, that are also firm clients, can be advantageous from a business/political standpoint
Disadvantages
Excessive paperwork and time Loans can be inflexible and include such things as partner guarantees, cross collateral securitization and other bank covenants The firm may not want to use up their bank line A client bank may charge more fees and a higher interest rate because of the relationship
Lease Financing Advantages from a Financial perspective:
Establish a monthly technology expense Conserve working capital Keep bank & other lines of credit open Provide an additional line of credit Expense lease payments rather than depreciate Avoid potential book losses Proceed with projects that exceed the firm’s budget Avoid partner guarantees & covenants Avoid phantom income Help maximize cash flow Gain flexibility Simplify financing documentation IT must manage its assets Establish asset management (Electronic or on-line asset tracking capability)
Lease Financing Advantages from an I.S.
perspective:
Fixed monthly technology expense Proceed with projects that exceed the firm’s budget Protection against equipment obsolescence Refresh technology as needed Simplify financing documentation Gain flexibility Establish asset management Transfer disposal of equipment to leasing company
Lease Financing Disadvantages
Some lease contracts contain onerous terms and conditions Some lessors may broker entire transaction Many lessors charge higher rates and/or fees on small transactions/schedules ($50,000 or less) Some lessors are not technology specialists nor have expertise in the legal community Some captive lessors do not offer competitive financing for products other than their own Some captive lessors have lease language or policies that restrict or limit the firm’s ability to exchange or swap equipment from another manufacturer/vendor Some captive lessors stipulate the FMV may be determined solely by the lessor.
What Can Be Leased
Desktops / PCs
Laptops
Servers
Storage Area Networks
Telecommunication systems
Accounting systems
Network systems
Document management systems
Videoconferencing equipment
Copiers
Printers
Software
Installation
Configuration
Training
Implementation
Consulting fees
Furniture
Office equipment
Typical Lease Terms
It is best to lease technology with a life span of 5 years or less.
Desktops Laptops Servers Accounting systems Network/SAN systems Document management systems Videoconferencing systems 36-48 months 24-36 months 36-48 months 36-60 months 36-60 months 36-60 months 36-60 months
End-of-Term Options
Purchase options: $1.00; 10%, 15%, 20%, etc.
- Expected useful life is greater than lease term (24, 36, 48, 60 months) - Firm wants to own the equipment but doesn’t want the cash outlay up-front
FMV option with return provision:
- Expected useful life meets the economic life of the equipment - Firm’s intent is to refresh equipment
Preparing for the Lease Process
Contact up to 5 leasing companies
Be available to answer questions
Let the leasing companies formulate their own solutions
Check that all lease documents are included
Compare each proposal to the Master Lease and other documents
Make sure lease costs were disclosed in the proposal
Determine which company is offering the best solution
Putting Together an Effective Leasing RFP
What to include in the RFP:
Brief financial overview of the firm Total project cost (cost breakdown) Lease term (s) Project installation period Type of lease structure References from at least ten other law firms that are of similar size and have had an end-of-term experience with a fair-market value lease
“Fine Print” To Be Aware of in Some Lease Documentation
Excessive Pro-Rata Rent Quarterly Interim Rent Miscellaneous Fees Unfair End-of-Term Provisions
Pro-Rata Rent
“…rent for portions of a month are based on a daily rental equal to one thirtieth (1/30) of the monthly rent.” Charged the lease rate factor multiplied by the equipment installed until lease commences Payments are in excess of the lease term Also beware of ‘minimum Schedule size’ language. This type of language give the Lessor the ability to keep your firm paying pro rata interim rent if a minimum dollar amount has not been spent.
Pro-Rata Rent Example
Hardware: Soft costs: Total: PROJECT ASSUMPTIONS:
Other Lessor’s artificially low blended lease rate
PROJECT COST BREAKDOWN:
$ 500,000 (X) .02700
$ 500,000 (X) .03000
$1,000,000 = = $ 13,500 $ 15,000 $ 28,500 $1,000,000 = .02850
Thirty-six (36) month lease term An even installation over 5.5 months
Total Monthly Rent
The first piece of equipment installed in November The last piece of equipment installs on the 15 th of April
Pro-Rata Rent Example
continued…
$181,818 installs per month ($1,000,000 divided by 5.5 months)
NOVEMBER $181,818
$5,182
DECEMBER $181,818
$5,182 $5,182
PRO-RATA CALCULATION JANUARY $181,818
$5,182 $5,182 $5,182
FEBRUARY $181,818
$5,182 $5,182 $5,182 $5,182
Pro-Rata Rent Per Month = .02850 (x) $181,818 Monthly Rent Compounds
MARCH $181,818
$5,182 $5,182 $5,182 $5,182 $5,182
15 days APRIL $90,909
$2,591 $2,591 $2,591 $2,591 $2,591 $1,296
Total Pro-Rata
rent could equal or exceed
$91,981
Quarterly Interim Rent
The Language:
“The Lease Term shall become effective the first day of the calendar quarter following the installation date (‘Commencement Date’).”
What it means:
Your firm may pay up to three months of additional rent prior to lease commencement
The Language:
“Lessor shall create Equipment Schedules at the end of each calendar quarter that occurs during the Installation Period. Each such Equipment Schedule shall include the Equipment that was delivered, installed and accepted by Lessee during the respective quarterly period and shall have an Installation Date 15 days after the end of the applicable calendar quarter.”
What it means:
This guarantees that your firm will pay an additional 2 1/2 months of full interim rent.
Quarterly Interim Rent
15 days April $14,250 May $28,500 June $28,500 July 1, 2005 36 month lease term begins Total Quarterly Interim Rent:
15 Days in April ($14,250) + May & June ($57,000)
= $71,250
Miscellaneous Fees
Documentation Legal Executory Commitment Service Charges Transaction Restocking UCC Filing Facility
Extremely Difficult Return Provisions
The Language:
“Lessee must also ship the Property with all, but not less than all, of the manuals, cables,cartons and packing materials as originally furnished by the suppliers/vendors.”
What it means:
Your firm is required to hold on to all original shipping materials and supplies and the leasing company will charge your firm additional payments or fees (extra monthly rentals or purchase price) if you do not comply.
Returning anything other than the actual PC, keyboard, mouse and monitor is extremely difficult, if not impossible.
Software Language: Unfair End-of-Term Lease Provisions
The Language:
“In the case of software, Lessee will destroy all intangible software items and deliver them to the Lessor all tangible items constituting software. At Lessor’s request, Lessee must also certify in written form acceptable to Lessor that (i) all tangible software has been delivered to Lessor (ii) all tangible records have been destroyed (iii) Lessee has not retained the software in any form (iv) Lessee will not use the software after termination and (v) Lessee has not received from supplier(s) anything of value relating to or in exchange for Lessee’s use, rental or possession of the software during the duration of the lease including a trade-in, substitution or upgrade allowance until the Lessee has complied with all the requirements of the section, rent payment obligations will continue from month to month at the rate delineated on the Schedule.”
What it means:
The firm’s software usage rights are restricted after the Lease Term. The Lessee must return and destroy all software on the lease.
Software Language: Unfair End-of-Term Lease Provisions
The Language:
“Hardware and/or software will be referred to as ‘Equipment’” or “Hardware, software and/or other equipment will be referred to as Property”.
What it means:
Because the software is included as “Equipment” or “Property”, the Firm can expect to pay the Fair-Market Value for the software which is determined by whatever the latest version of that same software costs at the end of the lease term.
Remember...
A blended lease rate for hardware and softcosts (i.e.- software, maintenance, etc.) usually means the Lessor is going to have the firm pay FMV for software.
To read all lease documentation in its entirety.
To ensure that all issues agreed to verbally must be specifically addressed in the lease documents.
Be cautious before using leasing companies offering below market rates.
To make sure to request other law firm references that have actually gone to term. To review all leases with your accountant.
If it sounds too good to be true, it usually is!
If you are interested in a lease solution for your firm or would like more information, please contact:
Jennifer Volz - Arave (800) 426-8733, x. 3818 [email protected]