How to lease in peace.

• Author: Leichtling, Michael A.
• Position: Leasing

Are you squeezing everything you can out of your equipment-leasing transactions? Find out how smart leasing arrangements can cut your costs -- for software, too -- and relieve the pressure on your balance sheet.

Today, almost every company leases some of its equipment -- and with good reason. Leasing can be a convenient financing alternative, partly because it doesn't involve capital-budget financing. Another advantage is the ability to match costs with the revenues the equipment generates. And if you structure your lease financing properly, you can account for it off the balance sheet and shift your tax deductions to the lessor, which lowers your after-tax cost compared with buying.

This benefit can help your company maintain its debt-to-equity ratio. And leases can protect against inflation because leased equipment usually retains its productive capacity, even as the dollars used to pay the rent lose their purchasing power. Interest-rate fluctuations won't affect the fixed leasing rate. Of course, leasing also offers you a hedge against technological change and obsolescence, because by upgrading to new equipment when your lease expires, you can shift to the lessor the risk of getting stuck with outdated equipment.

Given these advantages, how do you get the most financial leverage possible out of your leasing transactions? First, when you're at the negotiating table with your lessor, try to anticipate your needs before you sign the lease, because it's tough to get lessors to make changes later on. This reluctance stems from the fact that the lessor actually finances the purchase price of the equipment through a nonrecourse loan from (or discounted rental-stream assignment to) a bank or other funding source, which will then take a security interest in the lease, the lease rentals and the equipment. This normally doesn't create a risk for you, since the lender's primary interest is maintaining cash flow. But it does create some distance between you and the assignee of the lessor.

QUIET ENJOYMENT AND OTHER PROTECTIONS

Although the lessor will probably want to make these assignments without your consent, you should at least insist on being notified. You'll also want the lease to stipulate that your company has the right to "quietly enjoy" uninterrupted use of the equipment as long as you continue to pay the leasing fees and comply with the lease terms. You can ask that assignees of the lessor's interest confirm this in writing.

The next thing you need to know is that most...