A lessor (owner of asset) can take a number of the rentals at the beginning of the lease and the others taken in arrears e.g. in a 12 month lease, the lessor can take 2 month rentals in advance and the remaining 10 rentals in arrears. One of the implications of this is that, the lease ends at month 10 thus mitigating the risks of running for the entire 12 months. Also, the yield in the transaction will increase e,g. assume
Equipment cost – N2m
Lessor IRR 30%
Tenor 12 months
2 rentals in advance
Using the ELAN calculator or HP, the monthly rental without the advance rentals is N194,974.25. The tendency is to have two of this amount i.e N 194,974 x 2 = N398,948.51. This is wrong because not all rentals occur in arrears. It is important to take into cognisance that 2 of the rentals are being taken now and that have the effect of lower rental than N398,948.51, as any rental that is paid at time zero will not bear interest.
Again with ELAN calculator as shown below;
The figure will be N 186,010.80 monthy x 2 = N372,021 payable at the beginning and thereafter N186,010.80 for the remaining 10 months. Notice from the amort schedule that the 2 rentals in advance did not contain element of interest so the customer is not being cheated.
The yield in the transaction could be much higher given the fact that the net cash outflow to the lessor is actually N1,627,979 (N2,000,000 – N372,021). Using this as the PV in the transaction the yield will be 62.69% as against 30% used in structuring. The use of equity contribution maintains same yield, exposes the lessor to greater risk and negates its title.
It is important to note that the use of advance rentals depends on the cash flow of the lessee and other transactional dynamics. Lessor should always consider it as a first option.
For further information, any clarification on how to get this invaluable software either for your phone, laptop or PC, contact Yemi on 08038092123; Andrew on 08023176691 or Akinde on 08023179048, info@elannigeria.org, elan_nigeria@yahoo.com