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Things Leasing Companies Don’t Want You to know!

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Things Leasing Companies Don’t Want You to know!

Over the years I’ve been involved in arranging leasing for vehicles, office equipment and IT.  During that time, I picked up on many ‘tricks of the trade’. Some of the challenges start with fully understanding things like balloon payments, end of lease return conditions, extended term clauses, per diem payments and ascertaining the real impact of undivulged third-party payments.  These are present within a typical contract, but the impact is often clouded by legal phraseology.

Chris Ashton from Axiom Leasing Advisors, LGP’s independent leasing consultant, worked with LGP to establish the current and very successful operating lease arrangement with Vestone Capital (previously Macquarie Equipment Leasing).  This was done in accordance with the requirements of the Local Government Act.  The resulting Master Lease Agreement is market leading, in that it contains balanced terms and conditions and is considered low risk for councils compared to other standard leasing arrangements.

Some of the significant things you should know and understand before entering a lease agreement include:

Process:  Some organisations conduct a tender process for supply of equipment and ask for purchase price.  Having evaluated offers, they then ask the leading tenderer for the leasing rates.  Arguably this is now a flawed process with an alternate evaluation and unequal opportunity being provided to tenderers. The leading purchase price is not always the leading leasing price and unless you have the expertise to reverse engineer the lease pricing, you have no way of knowing whether the leasing arrangement is based on the tendered capital cost and its terms are market leading. To avoid this scenario from developing, either an optional tender covering both purchase and/or lease by the tenderer or concurrent tenders for purchase and for leasing finance should always be conducted to ensure you are not only paying the lowest capital price but that you are also sourcing the leasing terms, conditions, and pricing parameters to ensure you end up with the best lease price.

Interest rates:  Rates fluctuate daily and therefore so does lease pricing.  Rates that are fixed for a set period always come at a cost.  The important thing is to ensure that an industry benchmark swap rate is used to price the lease as this ensures that the rate used cannot be manipulated.  The LGP contract is structured this way so that good governance and verifiable pricing is always assured.

Return requirements:  You should look closely at contract wording and confirm the location to which the leased equipment must be returned as you (the customer) will bear any cost associated with returning the equipment.  You should not assume the location is close to you, let alone within your state. Importantly, when you return equipment, you only need to return the main device and its associated charger/power adapter. Peripheral items such as keyboards, mice and the original boxes are not usually required to be returned. 

 Contract terminology:  The following terms are explained: 

Ownership of the goods – the goods (assets you are leasing) remain the property of the leasing company. The plus side of this is the leasing company takes on the risk of reselling the equipment at the end of term.  

Use and care of the goods – the goods must be kept in good working order, and for business use only. They must be maintained and serviced in accordance with the supplier’s recommendations (the cost of this can be bundled together with the rental payment).  

Term – means the minimum lease term specified in the agreement. This is determined at the beginning of the contract and can be between 12 to 84 months depending on the asset type.  

End of term – at the end of the lease term, you can choose to return the assets to the leasing company, offer to purchase them, or continue to rent them on a casual daily basis or for a fixed term of your choosing. It is important to take note of T&Cs relating to Extended Term to ensure that you are not locked in for a prolonged period, and only for a period you’re needing to use those assets for. There may also be issues with compliance to local government accounting standards in the event of an intention to own the goods at the end of the lease. Advice should be sort from council’s finance team. 

Case studies: Axiom and Vestone Capital are available to discuss typical scenarios that develop with less-than-optimal leasing arrangements.  They’re able to show both the challenges for the un-initiated and for those that think the upfront quoted periodic payment is all you need to compare, when assessing offers or proposals. Whether you be from Finance, IT or Procurement, you need to be informed so that the real cost of any leasing arrangement you are considering is not hidden in cleverly worded terms and conditions.  A phone call to Axiom will shed the light on a multitude of bad practices to avoid. 

Need to know more? 

If you need to know more about leasing talk to Horst Rossmann (ITC Category Manager on Mob 0459 855 297) or Chris Ashton (LGP’s leasing adviser on Mob 0412 304 712). Chris’ primary role is to support the councils and he is your official conduit to Vestone Capital’s services. 

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