Returning equipment on time doesn't always prevent add-on costs, either. Lease terms often have "all or nothing" clauses, meaning, for example, that the return of 95 of 100 leased computers doesn't keep the company from incurring full lease payments. Sometimes a few items may be lost or damaged, or there might be an unexpected need to retain a few computers, yet with an all-or-nothing clause the company still pays in full.

"If you have a company leasing 100 computers, all installed at the same time, unless you're brain-dead you'll understand that a moment will come at the end of, say, three years when you have to transition to the next wave of technology," counters ELA president Fleming. Companies should be able to see in advance the need to keep back a few computers, and then they can negotiate "a staged end of the lease," he says. "You can put in language that allows a transition."

Beware Automatic Renewals
Other lease terms, too, burden lessees with requirements that seem onerous or subjective. Some lessors, for instance, require the use of the original boxes for returns, or designate a return location far from the lessee. Leasing companies may set tough standards for determining "normal wear and tear" for returned items, or add steep charges in the case of missing parts, even if those parts are superfluous.

Lessees also may find that the up-front deposit isn't applied to the last month's payment, as they expect. Sometimes deposits go for such things as restocking instead — offsetting the lessor's cost.

"To understand the full costs, you need to load up the lease, operational, and financing costs," says Ecologic's Keeler.

"Make sure you have control over the management of leases so you don't go into automatic renewals," adds Michael Caglarcan, CEO of Captara, a provider of enterprise lease management services, in San Francisco. "In our experience, 20 to 30 percent of existing leases are in evergreen state. You pay through the nose as soon as you renew."

Lease terms usually call for buyout prices to be based on fair market value at the end of the lease, with values agreed on by lessor and lessee. Lessees, however, are often in a vulnerable negotiating position — especially if alternatives to buying the leased equipment are limited. Lessors may make matters worse by foot-dragging in negotiations, leading to continued uneconomic lease payments, or perhaps triggering automatic lease renewals.

"Lost (Track of) Our Lease"
Joseph C. Lane, chairman of the Equipment Leasing and Finance Foundation and former chairman of the ELA, agrees that lessors plan to profit from the back end of leases. Echoing the ELA's Fleming, he argues that they deserve to benefit to offset their risks as equipment owners. To qualify for operating lease accounting, the present value of a lessee's committed payments may not be greater than 90 percent of the original equipment cost. So the lessor must plan to recover at least 10 percent of the original equipment cost by remarketing the assets at the end of the lease simply to recover the initial investment. While it plans to make more than that, the lessor also bears the risk that the value will not be there in the future.

"On any playground there are kids that play badly," says Lane. "In this industry, there have been some that have intentionally dragged their feet in negotiations in order to get rent payments for an extended negotiation period. And, there have been those who have found 42 scratches on a bulldozer after a three-year lease and defined 26 scratches as normal wear and tear." But, he adds, "nearly all [lessors] try to conduct themselves in a fair way, because they are driven by repeat business."

Unlike most leasing companies, many lessees manage their process through decentralized operations. They lack systems for monitoring deadlines, or lose track during personnel changes or mergers. Such complications make lease-related errors, like missing a notification deadline, as common as they are expensive.

When Bob Parmenter became Eaton's treasurer nine years ago and assumed oversight of leasing, he found that the company had inadvertently renewed some leases again and again. In effect, it was paying for the same equipment many times over. "There was an enormous amount of cost leakage as a result of renewing on a month-to-month basis," he says. "We could have acquired the equipment for as little as 2 months' payments, and we found some leases going on for 8, 10, 12 months."

Know Thyself — and Thy Lessor
From their companies' problems, Almquist and Parmenter learned they must understand both how lessors make money and how they as lessees manage their leased equipment in the real world. Did their companies tend to use computers for 48 months rather than 36 months, making a 36-month lease inefficient, for example?

Such risks must be factored into a company's analysis not only in determining favorable lease terms, but in making the calculation about the relative merits of leasing versus buying.

"Some companies are very diligent about looking at rates, but fail to go back and test the performance of leases," says American River's Franklin. They figure that "as long as they're staying within budget, there's nothing glaringly wrong." Costs can be reduced in two main ways: by negotiating contracts that are not full of traps and by improving the management of company leasing internally, so that the chances of missed notification deadlines are reduced and equipment is returned promptly as scheduled.

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