How to Measure the Performance of Equipment Leases
For organizations that lease equipment, it is imperative to accurately measure the financial performance of these equipment leases, including any costs in addition to regular term rent that are incurred over the lease lifecycle.
Dig Deep Into Lease Portfolios
To achieve an accurate measurement, it’s necessary to perform a thorough financial analysis of the performance of the enterprise’s lease portfolio historically. This analysis should be of the “all-in” costs – the total cost of ownership — not simply the sum of base rents.
Knowing the all-in costs of leasing is beneficial for the obvious reason that it allows better decision-making. It also allows an enterprise to better develop an enterprise-wide leasing strategy and corresponding policies.
To arrive at the all-in costs, each individual cost element of an equipment lease must be broken out and quantified, including:
- Interim rent
- Security deposits
- Fees (documentation, restocking, etc.)
- Regular-term rent
- Penalties and loss of leverage due to missed notice requirements
- Penalties and loss of leverage due to threat of default
- Transition-term rent
- Lease extensions
- End of lease costs (return charges, fair market value definitions, etc.)
Enterprises that haven’t tracked these costs will need to perform a detailed historic forensic analysis. This entails looking through all existing master lease agreements, active and expired lease schedules, invoices, payment records, and other data. In some cases, lessees must contact lessors for the information needed to complete the analysis.
Take a Big-Picture Approach
Every equipment lease should be evaluated based on the general risks of equipment leasing, the other leases in the portfolio, and the enterprise’s overall leasing strategy. Measuring the performance of equipment leases throughout an enterprise is the only way to provide this perspective, which is essential to developing effective leasing policies and strategies.
Take Advantage of Available Help
For many enterprises, the best course of action regarding how to measure the performance of equipment leases is to engage the services of professionals who specialize in commercial equipment leasing, such as Lease Portfolio Recovery Services. The benefit of expert assistance is cost-saving guidance in developing an accurate measurement system, as well as in applying the results.