I don’t know what it is lately, but I certainly get the feeling that it is open season on lessors. Everyone is taking their turn giving the leasing industry a good kick in the ribs, the latest being an article in CFO magazine titled {Don’t} Look Deep Into My Lease. Although giving lessors some representation, the article primarily focused on tales of how lessees were robbed, raped, and pillaged through various and nefarious lessor schemes. It then piled on by inferring that these perceived injustices also were related to the accounting for leases. Kind of crazy!
Yes, lessees sometime suffer adverse economic consequences from leases into which they enter. Placing all the blame on lessors for a bad economic decision, however, is extremely unfair, albeit symptomatic of society’s growing reluctance to accept responsibility for its actions. One example in the CFO article related to a company that leased its equipment with a fair market value purchase option, intending to return the equipment. The company then found it needed use of the equipment beyond the lease term. The result was additional cost which, apparently, was the fault of the lessor.
What about the company that borrows money to buy equipment and then, halfway through the term of the loan, finds that technology has shifted and the equipment is obsolete? The result is additional cost in the form of a write-off of the obsolete equipment. Mistakes in judging actual equipment utilization needs were made in both the lease and the loan example. Why, then, are we not castigating the bankers who made the loan to finance the purchase?
Businesses make decisions based on projections and anticipated future events every day. It is the lessee’s responsibility to make proper decisions as to how its equipment will be used, and how long it will be needed. It is part of business and is not something the lessor can, or wants to do. Who do we blame if a wrong decision is made as to a new product line, or the acquisition of a new company?
Lessors also were bashed for wanting all their original equipment back at the end of the lease. What is the expectation if you loan your neighbor your power drill? Is it unreasonable to ask that he returns it to you in good condition, including the cord, the case, and the drill bits? I think not. The flexibility inherent in an FMV structure is another aspect that was glossed over in the article. This flexibility to return the equipment without obligation does not come for free. An FMV lease contains an option, and an option has a value in any economic model. Buying futures or selling short, the concepts are all the same. The lessee in an FMV deal is attempting to gain economic advantage by shifting market risk to the lessor, or betting it has superior knowledge of future equipment values. Sometimes it works, sometimes it doesn’t. Maybe I should have titled this blog “Have your cake and eat it too.”
Yes, there are economic penalties in leases, so lessees must understand the deal before they sign, or they may suffer unintended consequences. Read your contracts, negotiate aggressively, and manage your leased equipment. At the end of the day, however, it is no more GE Capital’s fault than yours if your payables system fails to recognize the lease has ended, you keep using the equipment, and continue to send out a check according to the terms of the contract.
It’s all about responsibility. Everybody has to think not only for the present, but for the future, as well. Otherwise they will eternally blame each other.
Posted by: Melinda | August 9, 2006 2:04 PM | Permalink to Comment