Interim Rental

 Interim Rental

Lessees frequently engage in what they perceive as competitive leasing agreements, but their rate assumptions are often incorrect. The majority of lease rate computations do not include in interim rent. Interim rent is a sneaky way for lessors to increase the price of their leases. Its value is completely subjective and devoid of prediction. Get out of this sticky situation and enjoy the lease cost you thought you secured by learning how interim can affect your contract.
Interim Rent: What Is It?

The lessor will charge the lessee interim rent, which is also called stub rent, from the moment the lessee takes possession of the leased equipment until the official start date of the lease. The majority of leases commence on the initial day of the subsequent month after the acceptance of equipment. You may figure out the interim rent for a monthly-payment lease by multiplying the number of days in the term by the amount of the monthly payment, and then dividing the result by 30. The addition of interim rent to the lease can, at its most extreme, amount to nearly the entire periodic payment. The effective lease rate is boosted significantly in these instances.

Here we show the worst-case scenario effect of interim rent: Presume that you agree to lease $100,000 worth of equipment for 18 months. This calculation also assumes a monthly payment of $3,113 due on the 1st of every month. Pretend that, upon expiration of the lease, you will be able to purchase the leased equipment for one dollar. Thus, the effective rate of your lease is 8%.

With that out of the way, let us pretend the interim lease is for 29 days. To make things easier, we will round the period to the nearest full month and include it in the lease. For 37 installments totaling $3,113, the updated effective rate is 9.7 percent. Compared to the lessor's initial quote, the new rate is over 20% more. A trap door in your lease, this increased rate increases the lessor's profit at your expense.

Interim Rent and Its Function

In lease negotiations, many lessors will obligate themselves to pay equipment vendors on lessees' behalf, and interim rent is a kind of compensation for this. Lessors often cite the fact that lessees get to use the equipment in the meantime as more evidence in their favor.

Issues with Lease Renewal

The logic put forth by these lessors is flawed in two ways. To begin, the lessee's borrowing rate is not used to calculate the outrageously high interim rent; instead, it is based on the periodic lease payment. The periodic payment should not be used as a basis for interim rent estimates because each lease payment includes a return-of-capital component. It would be more accurate to use the lessee's borrowing rate as the basis for the calculation.

The second problem with this line of thinking is that, in the meanwhile, lessors usually have not paid for the machinery. It is possible that they did not incur any extra expenses over this time. Lessors are able to smuggle extra yield through a trap door in the lease, while lessees see huge rises to their effective lease rates. Adding interim rent to an already competitive lease can make it seem like a much more expensive deal.

Reasons for

Smart tenants try to find ways to reduce or do away with interim rent altogether. They are doing their best to get the leasing arrangement they were hoping for. Five ways to lessen the blow of interim rent:Get rid of short-term rentals. Opt for a lease that does not include interim rent if at all possible. If the interim period is seen as a half payment period, it can be used to eliminate interim rent. At the conclusion of the lease, you have the option to add an additional partial payment period, bringing the total number of payment periods to one.For the time being, pay interest rather than rent. The implicit transaction rate or your borrowing rate should be used as the basis for the interim payment rather than the periodic payment for calculating the rent. The return-of-capital component, which is a problem with most interim rent computations, will be eliminated using this method.Put a cap on or set a fixed amount for partial rent. Try to negotiate a cap on interim rent if you can not get rid of it entirely. Regardless of when the equipment is due, you can still offer the lessor a certain grace period.Oversee the delivery of machinery. Another tactic is to work with the supplier of the necessary equipment to arrange for its delivery and acceptance to take place at the month's end. Since the interim periods would be short, accepting at the end of the month would guarantee a reduction in interim rent.End of the month sale-leaseback phase. Finally, you might try to get the lessor to agree to a sale-leaseback of the newly purchased equipment for the end of the month. Additionally, this approach would ensure a brief transitional phase.



Make sure you know how interim rent may affect your lease. You should not take the quoted lease rate for granted; instead, you should study the lease thoroughly. You should be prepared to negotiate the inclusion of interim rent in your agreement. Reduce this potentially expensive component of your lease by using one of the solutions mentioned above. The interim-rent trap door might be sealable, even if you can not remove it.

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