Evaluating Leasing Alternatives
Many times when lessees are presented with the need to evaluate equipment or real estate leasing alternatives, the analysis of the lease focuses solely on the base rent payment terms. Limiting the analysis can be a dangerous trap and ignores key considerations that are required to fully understand financial impact of a lease. For an example when evaluating or negotiating a lease, the lessee should consider all of the concessions and expenses defined in the lease contract. For example when considering a real estate lease, particularly in geographic areas where supply outweighs demand, a period of free rent should be an integral part of any negotiation. In the same vein, the funding of tenant improvements should be considered. If the leased space requires modifications, many times the lessee can have the landlord provide the needed funding for the improvements. It is also critically important to evaluate the expense side of the lease to determine the lessee’s overall financial obligation and the year over year operating charges associated with its portion of the leased space. For example, operating expense chargebacks will be period costs that must be expensed by the lessee and any tenant improvements that are funded by the lessee will generally be amortized by the lessee over the term of the lease. As you can see the analysis of a lease cannot be solely on one factor, like rent payment, but requires the consideration of all factors defined in the contract.
Now consider that what we have just discussed is the process to evaluate just one lease, maybe a renewal, which in itself may become very complex. What about the potential lessee who is evaluating multiple leases? How does the potential lessee determine which lease is financially suitable when each lease will be structured differently containing different lease terms, concessions and expenses, etc? The lessee must bring each lease down to the least common denominator to enable an apples-to-apples comparison.
The lesson here is that there are many facets that should be considered in any lease negotiations and a casual, “back of the envelope” approach to the evaluation does not provide a complete picture. What is very helpful is a comprehensive and structured approach that a lease analysis technology solution can provide. This type of tool provides the lessee with a primer of all the issues that should be considered and should incorporate sophisticated calculations to produce key metrics such as net present value that will allow the lessee to fully comprehend the “all-in” leasing costs of a single lease or enable a consistent method of the comparison of multiple leases.
We at iLease Management LLC recognize that the detailed analysis and reporting of a lease or group of leases is a critically important tool for the success of our clients which is why our Lease Analysis module is a key feature of the iLeasePro Lease Management and Accounting solution. The Lease Analysis module is a fully integrated feature of the iLeasePro solution and eliminates unnecessary or redundant data entry while ensuring consistent and accurate information passed from the lease abstracting to the analysis reporting of the lessee’s lease contracts. Don’t shortcut the analysis of your alternatives! And make sure that the lease analysis solution that is employed is a state of the art solution.