Negotiating a Cost-Effective Fleet Lease Agreement
There are a number of basic processes involved in effective fleet management — acquisition, operation, maintenance and repair, accident repair and reporting, and resale. All are important; however, there is one document that, particularly in a bundled fleet, is the foundation that governs all of them.
The master lease agreement is a document that has remained surprisingly consistent over the decades. It not only codifies the terms and conditions under which vehicles are leased, but it can also contain the terms of other fleet management programs, such as accident management, fleet administration, and more. There are important parts of the agreement that smart fleet managers know are subject to negotiating terms favorable to the company. Here are a few:
An Agreement vs. a Contract
Before looking at any specifics, it is important to understand that the document is an agreement, and not a contract. There is a distinction with a difference. A contract requires both parties to act. A lease contract requires that the lessor lease to, and the lessee lease from, a specific vehicle or vehicles at specific payments.
When a consumer goes to a dealer and decides to lease a new vehicle, he or she signs a lease contract. The contract covers a specific vehicle, at a specific payment, for a specific period of time.
A fleet master lease agreement, however, is usually different. While it contains the terms and conditions under which vehicles may be leased, it seldom if ever contains a requirement that any vehicles actually be leased at all. It is not entirely unknown for a master agreement to be signed, but never come into use with vehicles never being ordered.
Defining Fleet Leases
Most mid- to large-sized fleets lease under an open-end terminal rental adjustment clause (TRAC) lease. The basics of the fleet TRAC lease are:
- The agreement establishes the basis for the lease rate factors and how vehicles leased will be capitalized.
- Vehicles are ordered (or purchased from dealer stock), and a capitalized cost is established.
- That cost is amortized (reduced) to zero at a rate agreed upon by the lessee and lessor.
- After the minimum term, the lessee may choose to terminate the vehicle at any time.
- The lessor causes terminated vehicles to be sold.
- If the proceeds exceed the unamortized capitalized cost, the excess is credited back to the lessee.
- If the proceeds are less than the unamortized capitalized cost, the lessee is billed for the difference.
Looking at these basics, there are a number of areas fleet managers should be actively negotiating for terms favorable to the company.
The master agreement, as with any legal document, contains "boilerplate" provisions, most of which have little to do with actually leasing vehicles. Some of them can be negotiable.
For example, boilerplate language establishes which states laws will govern the agreement. For instance, if the lessor is incorporated in Ohio, that state’s laws are cited. This, however, is often negotiable, where if the lessee is a Delaware corporation, that state would be substituted.
Another provision is a cancellation notice; most agreements contain boilerplate language requiring some fixed notice both parties must give to cancel. This is, to be frank, unnecessary in a fleet agreement, since the lessee is not compelled by the master agreement to lease anything.
"Cancellation" would consist of simply not doing so, or to cease doing so (with the understanding that any remaining vehicles leased would continue to be subject to the agreement). Although boilerplate language is usually a time saver in negotiations, don't ignore what can be changed to make the agreement more advantageous to the company.
Components of a Fleet Lease
The primary purpose of the master fleet lease agreement is to set forth the terms and conditions for leasing fleet vehicles. Fleet lease rates generally consist of three components:
- Depreciation reserve: This is the rate at which the original cost of the vehicles in the lease will be amortized ("paid down"). Depreciation reserve is booked each month in equal increments from the first month until the vehicle is fully amortized.
- Administrative fee: The administrative fee is the fee a lessor charges to service the lease, i.e., billing, reporting, customer service, etc.
- Lease/interest factor: This factor covers the lessor’s costs in order to fund the lease.
All three of these factors are subject to negotiation. Fleet managers first need to know what the market for these factors is, for fleets of like size and makeup, before engaging the lessor.
The purpose of depreciation reserve is to "book" depreciation in such a way that, at the point of anticipated replacement, the unamortized balance reflects the actual market value. The key to this negotiation is to achieve maximum flexibility.
Different vehicles will hit replacement criteria at different times, depending upon mileage accumulated. Trucks will generally remain in service longer than cars. Fleet managers need to be able to match the reserve rate to these differing criteria and should make certain that the master agreement allows them to do so.
In addition, fleet lessors will often "cap" the length of the reserve, that is, they will not permit amortization of longer than some maximum (e.g., six or seven years). If the fleet has vehicles that it usually keeps in service for a lengthy period of time — a very low mileage truck, for example — an extension of the cap would be helpful.
The administrative fee is simply a price negotiation, and most lessors will be aggressive with pricing. The fee is expressed in cents per thousand dollars of cap cost, i.e., an administrative factor of 0.05 would translate to 50 cents per thousand dollars. Because the admin fee is expressed (as is the full lease rate factor) as a percentage of that cap cost, as vehicle costs increase, the fee will increase as well. An alternative that a fleet manager might consider is to negotiate a fixed fee, in dollars per month.
Probably the most attractive feature of the open-end TRAC lease is its flexibility, and nowhere is that more evident than in the interest factor (technically, there is no interest in a lease; however, we'll call it that for convenience’s sake).
Lessors offer a market basket of funding options. Choosing the most cost-effective combination of funding factors isn't really the product of negotiation; however, there is a pricing element. Funding is expressed as a negotiable markup over the source chosen. For example, some basis points over 90-day Treasuries. As with the administrative fee, lessors will compete for business, and, usually, a fleet manager can negotiate terms more attractive than those initially offered.
All in all, the lease rate factors in the master lease agreement will govern the cost of all vehicles leased, and the savvy fleet manager will understand what the market will bear and be vigilant in negotiating the best rates possible.