Fleet Management Services
Not all leases
are alike
Evaluate government fleet contracts with confidence
Lease agreements can include terms and assumptions that significantly affect costs. Understanding these details upfront, and knowing the right questions to ask, can help your agency plan and budget more effectively.
Use our guide to understanding government fleet leases to learn about:
- Common lease components and terminology
- Questions to consider when reviewing lease proposals
Definitions
Capitalized cost
Capitalized cost (cap cost or original value) is the total starting cost of the asset, including the vehicle, equipment, graphics and transportation, and should reflect all applicable government incentives and state contract pricing.
Interest rate
Leases technically don’t have stated interest rates; the implied rate represents the cost of borrowing the funds to finance the lease and is sometimes referred to as the money factor or lease factor. Represented as a small decimal number (e.g., 0.0025), simply multiply the money factor by 2400 (e.g., 0.0025 x 2400 = 6%) to compare a money factor with an interest rate.
Residual value
The residual value (termination value) is the estimated wholesale value of the leased asset at the end of the lease, taking into consideration the term, estimated mileage, usage and equipment, and the lessee’s intentions. It directly affects the annual lease cost. A higher residual value results in lower payments, but setting it too high may result in a deficiency at lease termination.
You may have the option to purchase the asset for its residual value at lease-end or return it to the lessor. Off-lease vehicles are sold on the wholesale market, usually at industry auctions, with the net proceeds applied to the residual value, which may result in either a surplus or a deficiency. Appropriately set residuals are critical to protect you from unbudgeted deficiencies.
Lease term
Longer terms normally lower the payments, spreading depreciation over time. Shorter terms normally result in higher payments. Leases are structured to run their full term. Be cautious of promises of early exit without consequence and wary of lease payments that appear unusually low or "too good to be true."
Fees and markup
Fees, such as acquisition charges, disposition charges, documentation/handling fees and fleet management fees, can inflate the total lease cost. Markup is another amount added by the lessor over and above the actual cost of the vehicle and equipment. Fees and markups can be hidden or obscured in ways that make it difficult for customers to fully understand the true costs of the lease. Transparency is key to understanding your true lease cost.
Questions to consider
Q. What is my total capitalized cost, and are all applicable government incentives or state contract pricing reflected in it?
A. It is appropriate to ask to see dealer sales contracts, upfit invoices, transport invoices and other documents used in calculation of the capitalized cost.
Q. Are you being asked to make a down payment (also known as a capitalized cost reduction or cap reduction)?
A. If yes, ask why. Unless your credit ratings are unfavorable, you generally should not need to provide a down payment.
Q. What is the interest rate or money factor used in this lease?
A. Ask for the specific interest rate or money factor to understand the cost of borrowing. It’s appropriate to ask for a breakdown of how this rate impacts your annual lease payments.
Q. What is the residual value of the asset at the end of the lease, and how is it determined?
A. Request the estimated value of the asset at lease-end and the method used to calculate it. Ask for documentation or data supporting the residual value to ensure it is realistic as it directly affects your payments and potential lease termination exposure and/or buyout costs.
Q. How does the length of the lease term affect my annual payments, and are there any risks with shorter or longer terms?
A. Request a comparison of payments across different term lengths and clarification on risks, such as higher payments or unrealistic residual values in shorter leases. Longer term leases generally offer lower payments but also bring the risk of higher vehicle maintenance and repair costs.
Q. What fees and markups are included in the lease?
A. Request a detailed list of all fees and any markups added to the asset’s base cost as well as those at lease termination. Ask for a clear breakdown in the lease agreement to identify if these costs are obscured, bundled or embedded and expect transparency to understand the true total cost.
Q. How do you deal with potential non-appropriation of funds?
A. Review master lease agreements for language related to non-appropriation situations.
Q. What else can we lease?
A. Ask if you can get lease funding for items such as drones, patrol boats, 911 phone systems, off-road side-by-sides and animal control vehicles.
Review the factors behind the numbers. Download our guide to understanding government fleet leases.
Have questions about your agency’s fleet needs? We can help you explore customized leasing options with clarity and confidence.