Sales Make it Happen
Lessees, Lessor's Not on the Same Wavelength
By Terry Winders, CLP
One of the most important tasks a lease salesperson has to master is the art of discovering what type of lease the customer needs. The language of leasing is usually confusing to the potential lessee. We use terms that are not found in the finance books of most schools and just assume that the lessee understands what they are requesting. Therefore we need to ask some probing questions to make sure what the customer is requesting.
What does the term "non-cancelable" mean? It is a subject that rarely discussed with a potential lessee and they usually disregard it anyway. But it helps separate a lease from a loan for legal purposes and also protects the Lessor from early terminations in times of lowering rates. So a discussion with the lessee is necessary to avoid future disagreements.
The better you probe for the correct answers the better understanding you will have on what lease product to fit the lessee's request. It will also demonstrate to the customer your knowledge and desire to find what is the best terms and conditions by the type of lease that they choose.
When analyzing the repercussions of a lease, many terms have multiple meanings. The first is the use of "depreciation." Income tax depreciation is different from GAAP depreciation and so when a lessee says I want to depreciate the equipment what are they talking about?
Many proprietors and partnerships pay an "alternate minimum tax," despite all this talk about taking the depreciation, or may want to spread it more equally over the term of the lease.
Also the term "operating lease" is misused by all of us. It is not a tax term. It is an accounting term. When the customer says they want to "expense" the rent payments and they use the term operating lease, very often they mean a tax lease.
We all know that any question has three answers they come from the differences between income tax, accounting, and legal. The terms used in each are the same but the response is different because the rules are different.
It is easy to grasp the differences if you keep in mind that for federal income tax they are looking at the "use" of the equipment to determine who has the right to the capital recovery benefit's (depreciation). Another point, you don't want to give them accounting advice, but give them options, explain the options, and hopefully make the decision because of your full explanation, and the confidence they have in you that you know what you are talking about.
The most confusing of all is the names we apply to types of leases such as Synthetic Lease, First Amendment Lease, TRAC lease???? The poor customer only wants what they want so you need to explain the terms and conditions of your transaction and try and avoid using the type of lease to convey the lessee' reasonability's. Try to keep it simple and not overwhelm them with words that are "foreign" or you are naming just to impress them. Don't put yourself in the position of having to try to sell their tax accountant, who in reality also wants their client to make the decision.
The many terms used in equipment leasing must be understood by both Lessor and Lessee. It is important to question your customer closely so that a clear picture, not an ambiguous brush stroke emerges.
Rely on a complete statement of goals, not a few bits of jargon that can mean different things to different people. The lessee's satisfaction and your profits are a direct result of this good communication.
Terry Winders, CLP
Lease training and Consulting