Lease Myth Busting: IT leasing companies make the majority of their money from reselling equipment at end of lease
The Myth is that IT leasing companies are somehow staffed with magicians. They can – in the case of IT leases for example – take 5 year old servers – refurbish them and sell them for 20-30% of original equipment cost to cover their residual exposure at end of lease along with their various costs and earn a nice profit. Sure leasing companies can make some money selling used and refurbished gear but almost always not enough to cover their residual exposure on the lease and earn a satisfactory net profit. Often a lessor’s refurbishment operations are separate profit and loss centers from the lease origination group. The lessor‘s core finance operation makes a profit on its own – most commonly based on extensions, interim rent and other charges. Many lessors simply outsource refurbishment and resale activity.
Example: The analysis below shows the lifecycle costs of a lease program for a firm which had never returned any equipment at all at end of lease but simply rolled the equipment from one lease into a subsequent lease. The benefit for the lessee was a reduced lease payment amount. The lessor earned a handsome profit without ever receiving any equipment back from the lessee. All told the lessee paid ~$75 million for equipment with an original cost of ~$40 million (Original Equipment Cost – OEC). This return on investment dwarfs any possible economic benefit which could have been realized by the lessor if the equipment had been returned. Is it any wonder that a lessor would prefer the lessee to keep paying rents rather than returning the gear? With those kinds of incentives in place, it is not surprising that many lessees find returning equipment difficult at end of term.
Conclusion: IT leasing companies do resell off-lease equipment but given the rapid decline in value for such equipment and the cost of processing, this activity is not the major source of most IT lessor’s profitability. The key to lessor profitability is a combination of extensions rents, interim rents and other charges – and carefully developing contracts that make all of these costs not just possible, but probable. All companies which lease equipment should measure the all in cost of their lease programs to determine how much the program costs and why. There are some lessors out there who are still focused on getting equipment back – finding them has taken us years of work.