The Ins & Outs of Leasing Technology LawNet 2004 Annual Conference Phoenix, Arizona August 26, 2004 Thursday, 3:15 p.m. Grand Sonoran C, D Presented by:

The Ins & Outs of Leasing Technology

LawNet 2004 Annual Conference

Phoenix, Arizona

August 26, 2004

Thursday, 3:15 p.m.

Grand Sonoran C, D

Presented by:

Jennifer Volz-Arave

U.S. Bancorp Oliver-Allen Technology Leasing

Presentation Overview

Background of U.S. Bancorp Oliver-Allen Technology Leasing

The advantages & disadvantages of paying cash, using bank & leasing

What can be leased

The typical lease terms

End-of-term options: purchase or return?

Preparing for the lease process

Putting together an effective RFP

The “fine print” to be aware of in some lease documentation

A recap

U.S. Bancorp Oliver-Allen Technology Leasing

Longest company name in the history of technology leasing

Oliver-Allen was established in 1973 and acquired by U.S. Bancorp in March of 2000

Subsidiary of 6th largest U.S. financial services holding company

$192 billion in assets

Specializes in leasing technology to law firms

Over 230 law firm clients nationwide including 28 firms in the AM LAW 100 and 73 firms in the NLJ 250

Strong supporter of legal educational associations

Paying Cash for Technology

Advantages

The firm owns the equipment at the time of the purchase

No financing fees or interest

Price is easily understood

Disadvantages

May require five year depreciation even though the useful life may be

shorter

May be difficult to gain internal approval for entire cost of replacing

technology

The firm’s cash may be better put to use by investing or growing the

firm

Bank Financing

Advantages

Excellent for equipment with a useful life longer than five years

Firms are comfortable using existing bank lines

Working with banks, that are also firm clients, can be advantageous

from a business/political standpoint

Disadvantages

Excessive paperwork and time

Loans can be inflexible and include such things as partner guarantees, cross

collateral securitization and other bank covenants

The firm may not want to use up their bank line

A client bank may charge more fees and a higher interest rate because of the

relationship

Lease Financing

Establish a monthly technology expense

Conserve working capital

Keep bank & other lines of credit open

Provide an additional line of credit

Expense lease payments rather than

depreciate

Avoid potential book losses

Proceed with projects that exceed the firm’s

budget

Avoid partner guarantees &

covenants

Avoid phantom income

Help maximize cash flow

Gain flexibility

Simplify financing documentation

IT must manage its assets

Establish asset management

(Electronic or on-line asset

tracking capability)

Advantages from a Financial perspective:

Simplify financing documentation

Advantages from an I.S. perspective:

Lease Financing

Refresh technology as needed

Fixed monthly technology expense

Protection against equipment obsolescence

Proceed with projects that exceed the firm’s budget

Transfer disposal of equipment to leasing company

Establish asset management

Gain flexibility

Lease Financing Disadvantages

Some lease contracts contain onerous terms and conditions

Some lessors may broker entire transaction

Many lessors charge higher rates and/or fees on small transactions/schedules ($50,000 or less)

Some lessors are not technology specialists nor have expertise in the legal community

Some captive lessors do not offer competitive financing for products other than their own

Some captive lessors have lease language or policies that restrict or limit the firm’s ability to exchange or swap equipment from another manufacturer/vendor

Some captive lessors stipulate the FMV may be determined solely by the lessor.

What Can Be Leased

Desktops / PCs

Laptops

Servers

Storage Area Networks

Telecommunication systems

Accounting systems

Network systems

Document management

systems

Videoconferencing equipment

Copiers

Printers

Software

Installation

Configuration

Training

Implementation

Consulting fees

Furniture

Office equipment

Typical Lease Terms

Desktops

Laptops

Servers

Accounting systems

Network/SAN systems

Document management systems

Videoconferencing systems

36-48 months

24-36 months

36-48 months

36-60 months

36-60 months

36-60 months

36-60 months

It is best to lease technology with a life span of 5 years or less.

End-of-Term Options

Purchase options: $1.00; 10%, 15%, 20%, etc.

- Expected useful life is greater than lease term (24, 36, 48, 60 months)

- Firm wants to own the equipment but doesn’t want the cash outlay up-

front

FMV option with return provision:

- Expected useful life meets the economic life of the equipment

- Firm’s intent is to refresh equipment

Preparing for the Lease Process

Contact up to 5 leasing companies

Be available to answer questions

Let the leasing companies formulate their own solutions

Check that all lease documents are included

Compare each proposal to the Master Lease and other

documents

Make sure lease costs were disclosed in the proposal

Determine which company is offering the best solution

Brief financial overview of the firm

Total project cost (cost breakdown)

Lease term (s)

Project installation period

Type of lease structure

References from at least ten other law firms that are of similar

size and have had an end-of-term experience with a fair-market

value lease

Putting Together an Effective Leasing RFP

What to include in the RFP:

“Fine Print” To Be Aware of in Some Lease Documentation

Excessive Pro-Rata Rent

Quarterly Interim Rent

Miscellaneous Fees

Unfair End-of-Term Provisions

Pro-Rata Rent

“…rent for portions of a month are based on a daily rental equal to one-thirtieth (1/30) of the monthly rent.”

Charged the lease rate factor multiplied by the equipment installed until lease commences

Payments are in excess of the lease term

Also beware of ‘minimum Schedule size’ language. This type of language give the Lessor the ability to keep your firm paying pro- rata interim rent if a minimum dollar amount has not been spent.

Pro-Rata Rent Example PROJECT ASSUMPTIONS:

PROJECT COST BREAKDOWN:

Hardware: $ 500,000 (X) .02700 = $ 13,500

Soft costs: $ 500,000 (X) .03000 = $ 15,000

Total: $1,000,000 $ 28,500 $1,000,000 = .02850

Thirty-six (36) month lease term

An even installation over 5.5 months

The first piece of equipment installed in November

The last piece of equipment installs on the 15th of April

Other Lessor’s artificially low blended lease rate

Total Monthly Rent

Pro-Rata Rent Example continued…

PRO-RATA CALCULATION

          15 days

NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL

$181,818 $181,818 $181,818 $181,818 $181,818 $90,909

$5,182 $5,182 $5,182 $5,182 $5,182 $2,591

  $5,182 $5,182 $5,182 $5,182 $2,591

    $5,182 $5,182 $5,182 $2,591

      $5,182 $5,182 $2,591

        $5,182 $2,591

          $1,296

Total Pro-Rata rent could equal or exceed $91,981

Pro-Rata Rent Per Month = .02850 (x) $181,818

Monthly Rent Compounds

$181,818 installs per month($1,000,000 divided by 5.5 months)

The Language:

“The Lease Term shall become effective the first day of the calendar quarter following the installation date (‘Commencement Date’).”

What it means:

Your firm may pay up to three months of additional rent prior to lease commencement

The Language:

“Lessor shall create Equipment Schedules at the end of each calendar quarter that occurs during the Installation Period. Each such Equipment Schedule shall include the Equipment that was delivered, installed and accepted by Lessee during the respective quarterly period and shall have an Installation Date 15 days after the end of the applicable calendar quarter.”

What it means:

This guarantees that your firm will pay an additional 2 1/2 months of full interim rent.

Quarterly Interim Rent

Total Quarterly Interim Rent:

15 Days in April ($14,250) + May & June ($57,000) = $71,250

Quarterly Interim Rent

15 days

April May June

$14,250 $28,500 $28,500

July 1, 2005

36 month lease term begins

Commitment

Service Charges

Transaction

Miscellaneous Fees

Restocking

UCC Filing

Facility

Documentation

Legal

Executory

Extremely Difficult Return Provisions

The Language:

“Lessee must also ship the Property with all, but not less than all, of the manuals, cables,cartons and packing materials as originally furnished by the suppliers/vendors.”

What it means:

Your firm is required to hold on to all original shipping materials and supplies and the leasing company will charge your firm additional payments or fees (extra monthly rentals or purchase price) if you do not comply.

Returning anything other than the actual PC, keyboard, mouse and monitor is extremely difficult, if not impossible.

Software Language:Unfair End-of-Term Lease ProvisionsThe Language:

“In the case of software, Lessee will destroy all intangible software items and deliver them to the Lessor all tangible items constituting software. At Lessor’s request, Lessee must also certify in written form acceptable to Lessor that (i) all tangible software has been delivered to Lessor (ii) all tangible records have been destroyed (iii) Lessee has not retained the software in any form (iv) Lessee will not use the software after termination and (v) Lessee has not received from supplier(s) anything of value relating to or in exchange for Lessee’s use, rental or possession of the software during the duration of the lease including a trade-in, substitution or upgrade allowance until the Lessee has complied with all the requirements of the section, rent payment obligations

will continue from month to month at the rate delineated on the Schedule.” What it means:

The firm’s software usage rights are restricted after the Lease Term.

The Lessee must return and destroy all software on the lease.

The Language:

“Hardware and/or software will be referred to as ‘Equipment’” or “Hardware, software and/or other equipment will be referred to as Property”.

What it means:

Because the software is included as “Equipment” or “Property”, the Firm can expect to pay the Fair-Market Value for the software which is determined by whatever the latest version of that same software costs at the end of the lease term.

Software Language:Unfair End-of-Term Lease Provisions

Remember...

A blended lease rate for hardware and softcosts (i.e.- software, maintenance, etc.)

usually means the Lessor is going to have the firm pay FMV for software.

To read all lease documentation in its entirety.

To ensure that all issues agreed to verbally must be specifically addressed in the

lease documents.

Be cautious before using leasing companies offering below market rates.

To make sure to request other law firm references that have actually gone to term.

To review all leases with your accountant.

If it sounds too good to be true, it usually is!

If you are interested in a lease solution for your firm or would like more information, please contact:

Jennifer Volz - Arave

(800) 426-8733, x. 3818

[email protected]

Or Visit Us at Booth #306!