Lessons in Leasing

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Ever-rising costs and increasingly concentrated expertise are boosting the commercial truck-leasing market more than ever.

Take Sleep Country Canada as an example. Proprietors of one of the catchiest jingles on radio, Sleep Country delivers every mattress it sells in trucks owned by other firms, as it has done throughout its 12-year history.

Cost-effectiveness is the key. Their clients’ never-ending focus on cost led Penske to develop a Lease versus Ownership (LVO) system that lets customers do the math.

“The customer inputs his cost of capital, his cost of equipment, the residual he uses, the interest rate he uses, the maintenance he uses,” and other factors, according to Alan Stewart, vice-president of Penske Truck Leasing Canada. “They can then determine whether leasing is right for them.”

Large firms may have better uses for their money than maintaining private fleets says Al Boughton, president of Trailcon Leasing Inc. Boughton often asks private fleet executives: “Do you want to expand your business? Open more stores? Buy more equipment?”

Sleep Country’s Sieg Will, director of operations for Eastern Canada, agrees. Sleep Country does not deal with truck maintenance or repairs. “That is (the lessors’) expertise, their strength. We rely on our lessors to keep our vehicles up to our standards.”

That’s a typical line of reasoning according to Kirk Tilley, president of the equipment division of The Tandet Group. “If an outfit’s core competencies are not in repairing and maintaining trucks, that’s a good indicator to go to full-service leasing,” he says.

Ownership makes sense in at least two cases. Stewart suggests that if a firm keeps its fleet for more than 10 years, ownership is probably better.

Boughton offers an opposing view. “If you own something, you tend to keep it longer than you should. Then, at the end, how do you dispose of it?” he asks.

Stewart also recognizes the case for ownership of costly, specialized, unique equipment. “For example, companies that use expensive truck bodies typically own at least the box, and may flip it to different chassis, or may own the whole truck,” he says.

On the other hand, arguments for leasing continue to pile up. Sleep Country’s Will says his employer runs 28 trucks in Eastern Canada, with 36 in peak periods. Will sizes the fleet to seasonal business needs rather than have eight trucks sit idle for parts of the year.

The costs of keeping a fit fleet on the road pile up as trucks age, technology changes, and government regulations demand more of owners.

“Clients want newer equipment because breakdowns are costly,” says Stewart. “They want reliable equipment. They want to keep their fleet image up, while their accountants want better cost certainty.”

New emission standards expected in 2007 will hamper fuel economy, raise maintenance costs and drive the cost of trucks up eight to ten thousand dollars. “There’s another standard coming in 2010 that’s even more demanding,” he adds.

That will spike an already upward trend in the cost of technology, tools and technician training, a trend that’s driving smaller repair shops out of business. Tilley hears private fleets asking: “Do we want to make those investments?”

The choice between financial or operating leases boils down to financial considerations. Operating leases seem to suit most fleets. They’re 100% tax-deductible and, since they don’t appear on the balance sheet, they don’t affect the key balance sheet ratios bankers look at when asked for a loan.

Trailcon’s Boughton adds a third type of lease to the mix: net leases, which exclude the maintenance component. “Some choose net leases since they run trailers outside areas that we service,” Boughton explains. “If they run Toronto to California for example, Trailcon does maintenance in Toronto, and somebody else does it in California.”

Accountants tend to appreciate set financing and maintenance costs for a specified period, since it simplifies budgeting. “Mileage is the only variable,” says Tilley.

Where you lease may offer advantages, since tax implications vary state by state, province by province. Boughton figures: “It’s up to the accountants to say what’s best for their individual companies.”

There is no “one size fits all” lease on the market, despite the commonality of much of today’s truck lease language. When they negotiate the terms of a contract, lessees can both make sure they get what they need and find out if they can work with a potential lessor.

Fuel taxes, reporting, licensing, truck decals – all of these services can be included in the lease. “The bundle of services you can get on a lease can be nothing or can be very comprehensive,” says Stewart. “It’s custom as to what the customer wants and doesn’t want. You can negotiate all your services up front.”

Options in lease agreements bear scrutiny, says Will. Licenses, delivery, insurance – the contract must stipulate which party provides these things. “Some full-service lessors do, some don’t.” he says.

Most lessors concur that fine print is outdated. “Large companies today can’t try to mislead their customers,” Stewart says. “You just can’t operate that way.”

However, each firm offers points to watch for during negotiations.

Guaranteed residuals oblige a lessee to buy a truck at the end of a lease. The lease rate may be low, but if at the end of a lease, “the residual is $15,000 and the market rate is only $10,000, the customer’s on the hook for the difference,” says Boughton. Similar headaches could arise if the lessee has to dispose of the equipment at the end of the lease.

Rates tied to the Consumer Price Index (CPI) can vary as often as once a month. As the CPI rises, so does the lease rate.

Period billing means a lessee makes 13 payments a year, not 12, or one payment every four weeks, not one a month. Although common practice in certain industries, not all lessees understand the effects on what may seem to be lower “monthly” rates.

Many leases note the original value and depreciation rate for the equipment. “Some firms will unreasonably inflate the original value and put in a depreciation rate that’s way, way, way low,” says Boughton. Should equipment be stolen or damaged beyond repair, especially towards the end of the lease, the customer pays a rich premium to the lessor.

Tandet’s Tilley posits that from company to company, leases don’t differ much, since they use generally accepted language. However, he insists that conditions surrounding the end of a lease must be particularly clear.

To protect against such issues, Boughton recommends each lease include a clause he calls double-edged termination.

“If the customer isn’t happy with us, they can cancel the lease,” Boughton explains. “At our option, they have to buy the equipment. If we’re not happy with them, we can cancel the lease, and the customer has the option, but not an obligation, to buy the equipment.”

“It’s a really nice clause that makes sure both parties are always happy with one another,” Boughton says, adding that he’s used the clause once in his career. “It obliges us both to do the best job we can.”

“The only thing a customer is really responsible for is unpredictable costs, accidents or abuse, says Stewart. “If they clip a mirror off or back into a loading dock, they’re charged back for it.”

Will’s biggest contract frustration to date happened when a newly leased vehicle did not meet his specifications. “It’s very important that the specs you signed off on are the specs that the vehicle is equipped with,” he says.

Tilley offers some general contract advice: “Be wary of the contract that seems extremely cheap. Don’t pick a supplier that nickels and dimes you to death.”

Maintenance key performance indicators (KPIs) may matter if you own a truck, but since the costs that such KPIs track are covered in full-service lease rates, Penske’s Stewart maintains that customers don’t need to track maintenance performance measures.< /p>

Boughton says one of the few KPIs that matters to every customer is uptime. Fleet managers can gauge this by first inspecting a lessor’s operation.

Older, less reliable fleets often mean, for example, that a lessor must keep one trailer in the shop for every two on the road because of downtime. Tandet’s Tilley notes the end-of-lease catch-22: “If the truck’s unreliable, the lessor doesn’t want it either. Everybody should make sure only reliable trucks are out there.”

Breakdowns do occur, so Tilley advises fleet managers to look for a lease provider with an adequate rental fleet.

Sleep Country’s Will measures uptime in large part by when he can get service. “We sometimes need to drop off vehicles in off-hours,” he says. “A great company provides service 24 hours a day.”

“When you pick a full-service lease supplier, you’ve got to pick one you trust,” says Tilley. “It’s almost, dare I say it, like a marriage. There’s a lot of give and take. You’ve got to be able to work with your lessor.”

Luigi Benetton is a Toronto-based freelance writer with years of experience writing about business and corporate technology issues.

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