During my tenure as a dealer principle, I had a conversation with an office equipment leasing company executive. We were discussing the return of a large population of multi-function copy equipment from a mutual customer. For this customer, my dealership had stayed on top of all the lease requirements for notification of intent to return equipment at lease expiration. On my customer's behalf, I was making the arrangements for the return of the equipment. The leasing company executive was reluctant to provide return authorization information for the equipment.
Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership. Venture leasing is also very flexible. By structuring a fair market value purchase or renewal option at the end of the lease, the start-up can slash monthly payments. Lower payments result in higher earnings and cash flow. Since a fair market value option is not an obligation, the lessee has a high degree of flexibility and control. The resulting reduction in payments and shift of lease expense beyond the expiry of the transaction can deliver a higher enterprise value to the savvy entrepreneur during the initial term of the lease. The higher enterprise value results from the start-up's ability to achieve higher earnings, upon which most valuations are based. Customers benefit more from venture leasing as compared to traditional bank financing in two ways. First, venture leases are usually only secured by the underlying equipment. Additionally, there are usually no restrictive financial covenants. Most banks, if they lend to early stage companies, require blanket liens on all of the companies' assets. In some cases, they also require guarantees of the start-ups' principals. More and more, sophisticated entrepreneurs recognize the stifling effects of these limitations and their impact on growth. When start-ups need additional financing and a sole lender has encumbered all company assets or required guarantees, these young companies become less attractive to other financing sources. Correcting this situation can sap the entrepreneurs' time and energy.
Commercial leases can be further described by the type of use associated with the property - office, retail, warehouse, pad, or "ground". An office lease is generally used in buildings intended for non-industrial business use. Retail leases are generally utilized for shopping malls and strip centers. Warehouse leases are generally seen for industrial or light industrial uses. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for building and maintaining the structure. Texas law does not require a commercial landlord to utilize any specific form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord. The lease's duration and base rent are of primary importance to the commercial tenant. Usually, a commercial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the consumer price index. Also, the tenant may be offered options to extend the lease term or expand into adjacent or other areas of the property. Depending on the property and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a property enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the commercial world: (1) everything is negotiable; and (2) if you don't ask, you won't know.
Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation. Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership. Venture leasing is also very flexible. By structuring a fair market value purchase or renewal option at the end of the lease, the start-up can slash monthly payments. Lower payments result in higher earnings and cash flow. Since a fair market value option is not an obligation, the lessee has a high degree of flexibility and control. The resulting reduction in payments and shift of lease expense beyond the expiry of the transaction can deliver a higher enterprise value to the savvy entrepreneur during the initial term of the lease. The higher enterprise value results from the start-up's ability to achieve higher earnings, upon which most valuations are based. Customers benefit more from venture leasing as compared to traditional bank financing in two ways. First, venture leases are usually only secured by the underlying equipment. Additionally, there are usually no restrictive financial covenants. Most banks, if they lend to early stage companies, require blanket liens on all of the companies' assets. In some cases, they also require guarantees of the start-ups' principals. More and more, sophisticated entrepreneurs recognize the stifling effects of these limitations and their impact on growth. When start-ups need additional financing and a sole lender has encumbered all company assets or required guarantees, these young companies become less attractive to other financing sources. Correcting this situation can sap the entrepreneurs' time and energy.
Commercial leases can be further described by the type of use associated with the property - office, retail, warehouse, pad, or "ground". An office lease is generally used in buildings intended for non-industrial business use. Retail leases are generally utilized for shopping malls and strip centers. Warehouse leases are generally seen for industrial or light industrial uses. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for building and maintaining the structure. Texas law does not require a commercial landlord to utilize any specific form of lease, and the type of lease a prospective tenant may be faced with signing will vary by the type of building, intended use of the premises, and preference of the landlord. The lease's duration and base rent are of primary importance to the commercial tenant. Usually, a commercial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the consumer price index. Also, the tenant may be offered options to extend the lease term or expand into adjacent or other areas of the property. Depending on the property and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a property enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the commercial world: (1) everything is negotiable; and (2) if you don't ask, you won't know.
Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation. Many landlords offer a tenant "build out allowance" as an inducement to lease the premises. These sums, however, do not represent "free" money and landlord's payment of the allowance is tied to specific conditions in the lease. For example, if the tenant breaches the lease and abandons the premises prior to the end of the lease term, the tenant may have to repay the build out allowance, along with landlord's other damages. The tenant should make sure it understands when and under what circumstances the build out allowance will be paid. Additionally, the tenant should understand his "lease commencement date" and "lease expiration date". The lease commencement date may or may not be on the date tenant occupies the premises. Also, the landlord may have promised the tenant a 60 month term but the lease could provide a fixed expiration date for a term of less than 60 months. Again, careful scrutiny of the lease is required.
What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
To keep your company from getting snared in the lease renewal trap, set a calendar reminder in several support staff's computers to remind you to send the lease expiration notice on time (usually 90 to 120 days in advance of lease expiration-check your lease for specifics). This should prevent staff turnover from erasing memory of that necessary step. Another option is to set up "delayed send" e-mail messages from several computers to be sent to several staff members reminding them to send the lease expiration. There are also free external calendars that you can set up to send an e-mail reminder to several people in case your organization deletes all information from previous users of a computer. Applications like calendar.yahoo.com and Google calendar can be set up to provide e-mail reminders to multiple people to assure you cover your turnover and promotion events. This way you can notify the leasing company in a timely manner. As you execute a new equipment lease, make a 30-day renewal mandatory before you approve it. If you do miss the notification deadline your lease only renews for 30 days. Remember you do have to provide the written intent to return equipment to prevent or end the renewal cycle.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: How To Achieve A Good Credit Standing You have full permission to reprint this article provided this box is kept unchanged.
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