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11/26/2004 |
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Patrick K. O'Hare Appeared in the Baltimore Business Journal Health care providers are challenged by the constant demand for new technological equipment and a decrease in available capital. Many are turning to equipment leasing as an attractive alternative. To better negotiate a mutually successful transaction, lease parties need to understand the structure and business reasons behind standard lease provisions. Operating leases (noncapital leases) offer an economical way to acquire sophisticated equipment without negatively impacting a lessee’s balance sheet. For the lessor, the payment of rent provides a positive return on its investment. At lease-end, the lessor benefits from the sale or release of the equipment and, during the term, enjoys the tax benefits associated with equipment ownership. Generally, the lessee can expect a “triple net” lease and will be responsible for maintenance; payment of sales/use and property taxes (where applicable); and, insurance (for both property and liability coverage). Payment of rent is absolute and unconditional; rent is due whether or not the equipment functions as expected. The lessee does retain certain remedies, however, including the pursuit of claims and warranties directed against the manufacturer or supplier. Accordingly, the lease should assign warranty rights to the lessee and obligate the lessor to cooperate in enforcing such warranties. The lease will specify the lessee’s obligations for equipment use and maintenance. If the equipment is returned upon lease termination, it must be returned in the same condition as when originally accepted (ordinary wear and tear permitted). Both parties should avoid onerous return provisions, such as returning the equipment to any geographic location specified by the lessor. If the costs of the return effectively compel the lessee to either renew the lease or purchase the equipment, the IRS could recharacterize the transaction as something other than a true lease. The lessee is usually obligated to insure the equipment. Depending on the lessee’s circumstances and its creditworthiness, insurance provisions may be negotiated, especially if the lessee is self-insured. The lessor is typically named as loss payee for property coverage and as additional insured for liability coverage. Leases virtually always require the lessee to indemnify the lessor for a wide range of contingencies. Indemnity obligations generally fall into two categories. The first requires the lessee to indemnify the lessor from third-party claims that are related to the lessee’s use of the equipment. The second relates to the lessor’s ability to enjoy the income tax deductions related to the equipment. The benefits associated with depreciating the asset are a material part of the transaction from a lessor’s perspective. |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia |
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