by Shawn Stockman, OnePak

A funny thing happens to many copiers prior to the scheduled termination of their original lease. A dealer (sometimes the original dealer and sometimes an enterprising dealer eager to displace the incumbent) convinces the customer (lessee) that he or she needs a newer model with more bells and whistles, and needs it now. 

The customer requires the dealer to remove the “old” copier before installing the new one, so the dealer agrees to roll the remaining lease payments into the cost of the new machine, move the old one to a warehouse, and handle the remaining payments and the return to the original lessor. 

Normal course of business, right?

Actually, while it’s quite common (one lessor estimated that nearly half of all their copier leases “terminate” early — some officially, and some unofficially), removing and storing a copier midway through a lease is typically prohibited by the terms of most leases. Standard language requires that the lessee (customer) “keep the equipment at the location shown in this Agreement, and shall not remove the equipment without the Lessor’s prior written consent.”

Ownership

One reason for this stipulation is that leasing companies, as the owners of the equipment, must pay property tax, which is then usually collected from the lessee. If an asset moves from one tax jurisdiction to another, the lessor should adjust their tax reporting accordingly. Technically, property tax would be payable in the new jurisdiction, potentially exposing the lessor to “double tax”, for which they would then have to pursue the lessee under the terms of the lease. The additional administrative burden and financial exposure often create an environment ripe for the Sergeant Schultz (from Hogan’s Heroes) approach: “I hear nothing, I see nothing, I know nothing!” 

Lessors want to minimize incremental administrative resources required for an existing lease. What they want are the payments for the full term of the lease, or to renew that lease, or replace it with a new lease that extends the length of time they will be collecting payments. Ideally, a lessee works with a dealer to “upgrade” with a new machine and they go back to the original lessor who writes a new lease, having already agreed on documentation and underwritten the credit. The old machine is returned early with the lessor’s consent, and the lessor is likely to recover its originally expected economic return while getting a new lease on the books.

However, when a dealer chooses a different lessor to do the new deal because they do not want to draw attention to an effective early termination, the original lessor is both uninformed and denied the opportunity to provide the new financing.

Consequences

While dealers and lessors know that this is almost a standard practice, all parties often tolerate it for the sake of convenience. However, convenience does not come without complications. Storing a copier for months or even years may not be as simple as it sounds. Smaller dealers simply don’t have room, so they either store these machines in their back room or even their showroom, or they need to rent warehouse space or outsource the storage.

Not all warehouses are capable of keeping machines clean during their interment. Dust gathers. Mice nest. Peripherals and attachments “wander.”

Not all dealers can securely separate these machines still on lease from the rest of their used stock. Consequently, their service techs may unintentionally (or intentionally) “borrow” parts off of them in a pinch, so when the time comes to ship the unit back, it could be missing parts that are required to pass inspection upon return. More moves create more opportunity for damage. Worst case, the machine is inadvertently resold, rented or buried behind other inventory over time and is simply missing at the time of required return. 

Who loses?

The unfortunate aspect of all these potential outcomes is that the original lessee actually remains exposed. When copiers arrive at returns facilities, which are most often remarketers’ shops, they must pass a routine inspection to ensure that they are still functioning and have all the parts and accessories recorded on the original lease. The lessee can be charged for a missing finisher or damaged drum. The lessee may blame the dealer, who is then in the awkward position of not only paying for the loss, but facing up to the fact with the lessor that the machine was removed early (in violation of the lease terms) and that the original lessor did not get the new deal. That does not strengthen dealer/lessor relationships.

Much of the time this entire remove-store-return scenario plays out without a hitch. But when problems or discrepancies arise, they tend to put a real strain on every link in the sales channel: between lessee and lessor, lessee and dealer, dealer and lessor, even between remarketer and dealer. Over time trust is either built or destroyed. Remarketers may be accused of claiming damage or missing parts just for the extra fees. Dealers may develop reputations for flipping from one lessor to another in mid-lease just to turn inventory faster. Lessors may be perceived as unforgiving or difficult to work with when they are simply looking for compliance with the terms of their original lease. 

Who wins?

At least two parties gain by this practice. Equipment manufacturers sell more machines than they would if all leases went to term. OEMs have successfully marketed their networking, scanning, printing and copying enhancements as got-to-have-it technology to drive a faster replacement cycle.

The hardware aftermarket is flooded with cheap equipment, because according to one remarketer, most copiers lose between 20 and 35 percent of their value each year. Consequently, many five-year-old copiers may be worth less than it costs to return them one at a time.

One could argue that lessors actually win because more leases are written industry-wide than would be the case if all their equipment stayed in the field for the full term. But they aren’t getting all the replacement deals, so their administrative costs are higher as they process more applicants. Would their volume be the same if they were replacing their own leases rather than writing new deals to replace a competitor’s? It would be interesting to know what percentage of any given lessor’s portfolio consists of equipment sitting in warehouses versus equipment that is in active use.

What if?

One wonders how different the market would be if somehow dealers only replaced equipment mid-term by working cooperatively with the original lessor. Most lessors will happily upgrade mid-term to replace an old lease with a new one. Lessees would have less paperwork and hassle than undergoing a fresh underwriting and documentation process with a new lessor. Relationships among all parties might be stronger (can’t we all just get along?).

What if the practice of upselling a copier and terminating a lease early were openly accepted in the industry regardless of which lessor writes the deal? What if the language in leases permitted more flexibility during the term of the lease including early termination? What if dealers or lessors were able to resell that two-year-old machine for 40 to 50 percent of MSRP rather than waiting until year five when its market value may be about equal to the cost to ship it? 

Lessors will privately tell you that they would love to know where all their equipment is, and that honest transparency is better than blindly assuming all lessees are complying with the terms of their leases. As long as they can protect their economics and maintain tax ownership, they would be willing to “invest” in securing the follow-on financing for the replacement equipment.

Dealers say the burden of having to store and care for equipment pending return to the original lessor is not worth the incremental profit on the new sale. Most don’t like the secretive nature of the practice and would prefer to operate completely above board. Some simply refuse to participate in this practice, knowing they lose business to competitors who do.

Remarketers, while seeming to have a hungry market abroad for older equipment, would also prefer to sell newer machines at higher prices (and margins).

The evolving market

The market is extremely competitive among dealers, and consolidation continues at a robust pace. Larger dealers can operate on thinner margins, and the incidence of one dealer displacing the equipment sold by another seems more prevalent, which means more midterm removals and fewer replacement deals with the original lessor.

Meanwhile, the leasing industry is evolving, with more lessors attempting to craft offerings for services where the equipment may be substituted or replaced during the term of the lease. Adding some flexibility to the traditional “hell-or-high-water” equipment lease creates an opportunity for premium pricing in exchange for that flexibility.

If dealers, lessors and lessees could adopt a common “language” or means of communicating their various hopes and desires regarding end-of-lease terms and options, overall channel relationships and the ultimate customer experience would benefit from greater transparency, accuracy, and commonality of interests. 

The key question is what do dealers truly want? Most I have spoken with want the best of all worlds: to provide great service, sell great products, and to be a good business partner in the channel and a good corporate citizen in their community. Wouldn’t it be nice if that could all be achieved in a way that generates more business where all the participants win? 

Contact Shawn Stockman at shawn.stockman@onepak.com

This article originally appeared in the July 2014 issue of The Imaging Channel.