- Spell out expectations in a vehicle policy manual on proper care of the company vehicle and acceptable driver behavior.
- Perform a background check on employees before providing them with a company vehicle.
Those are two ways Robert Greco of Belimo Americas avoids trouble at the end of the closed-end lease for his company’s 55 vehicles.
“We indicate what people are allowed to do with the car and what they’re not allowed to do,” says Greco, who oversees the fleet as part of his role as vice president of finance for Belimo Americas. “We just make sure everyone has a clear understanding that this is a nice benefit for them, so just take responsibility and handle it wisely.”
Greco’s company, which sells heating, ventilation, and air conditioning products, leases vehicles through Motorlease, a fleet management company that serves small- to medium-sized fleets.
Joe Pelehach, vice president, director, for Motorlease, defines the basic difference between an open-end vs. closed-end lease: “It gets down to who’s responsible for the loss or gain in resale at the end of the term of the lease,” Pelehach says. “In a closed-end lease, the lessor takes that responsibility. In an open-end lease, the lessee takes responsibility.”
Unlike open-end leases where mileage and condition are addressed when the vehicle is sold, in a closed-end lease there is an agreement established upfront about usage. How fleets manage these factors spells the difference between a smooth return at lease end or unexpected charges.
The Right Lease?
In determining whether a company’s vehicles should be in open-end or closed-end leases, Pelehach works to understand the nature of the business, the desired length of service for the vehicles, and their expected condition upon de-fleeting.
Many of Pelehach’s clients tell him they “don’t want to be in the car business.” For those clients, the set payments and avoidance of residual value loss make a closed-end lease the right choice for them.
Some small fleet operators think their vehicles run too many miles to be in a closed-end lease. Pelehach says high mileage shouldn’t be an issue because closed-end leases can be written based on the mileage expectations and adjustments can be made.
Bill Stueber, regional vice president at Merchants Fleet, says the closed-end lease is better suited to more predictable duty cycles.
“If they’re not sure what their use is going to be over the next couple years because of growth plans, I’d probably switch gears and talk about other options that might give more flexibility,” Stueber says.
“Mileage restrictions are probably the last thing on their minds. They’re thinking go, go, go until it comes time to turn that vehicle back in.”
If a company’s drivers are hard on their vehicles and aren’t proactive in managing damage, the company probably won’t be a good fit for a closed-end lease, Stueber says.
Repair, or Not?
Communication is imperative in making a closed-end lease successful, particularly when addressing repairing vehicle damage before the lease return.
Stueber recommends communicating with the lessor before fleets make any repairs on their own. While a repair might make sense, other options might be more cost effective: The lessor can terminate the lease early and put the driver in a different car, or even move to an open-end lease.
Businesses with vehicles in the Class 5 to 8 range do well when they stay on top of equipment damage such as broken headlamps or minor dents and cracks, says Olen Hunter, director of operations for PACCAR Leasing Co.
“You’ve got two choices: Fix it along the way or make a financial reserve on your books for lease return damage,” Hunter says. “Because all fleets that lease equipment and own equipment will tell you that damage happens. It just does.”
Hunter suggests lessees keep a document handy that outlines lease return standards and keep a checklist of common damage issues handy to use when inspecting the vehicle before returning it. Some clients will repair minor body damage, replace broken items inside and outside the vehicle, and make paint touchups before returning the vehicles, Hunter says.
Fleet operators could save money repairing themselves and by using reconditioned or aftermarket parts, but it’s important to be transparent with the lessor to ensure that they meet the lessor’s standard of quality for resale.
“The lease return inspection process is most important on a closed-end lease because the leasing company is responsible for selling it,” Hunter says. “And they base the resale value on the fact that it’s going to come back with fair wear and tear.”
Communication is also necessary if annual mileage changes, such as if a company secures new business and knows that the vehicles will be traveling more miles than expected.
In that situation, switching to an open-end lease or other non-restrictive leasing options might help, Stueber says.
Instead of considering the mileage of each vehicle individually, lessors may count the aggregate miles of the closed-end leases toward the mileage cap. This allows fleets to cycle vehicles internally. If one vehicle has more miles than another, consider swapping drivers to slow down the mileage on the high-mileage vehicle, Stueber says.
Belimo Americas uses a pooled mileage program with Motorlease. Allowing the fleet to manage the aggregate miles to stay under the total mileage cap can be a lot easier than managing individual vehicles.
Stueber suggests that companies consider creating an incentive program that rewards drivers for performing regular car washes, preventive maintenance, and generally treating vehicles as if they were their own. This would motivate more people toward positive behavior, he says.
Hunter suggests using a third-party company to inspect fleet vehicles for damage or maintenance issues before returning them, or to use a lessor that employs this practice.
And from the lessee side, Greco from Belimo Americas goes back to the vehicle policy manual, which drivers must sign outlining expectations on vehicle use.
Some of the restrictions written into the policy include no off-road driving. Other common policy restrictions regarding safety, such as addressing texting, driving under the influence, and obeying traffic laws do factor into avoiding trouble at the end of a closed-end lease.
“If I get feedback that something is really out of whack with the vehicle, I will actually reach out to the person and say ‘Hey, there’s an issue.’ We can actually check to see what’s going on and remind them of the policy and what they need to do,” Greco says.
Greco also talks about a “credibility culture” at his company that results in employees who take good care of the vehicles. Vehicle abuse at the company is rare, he says.
“The people we hire tend to be people who take care of their vehicles,” Greco says. “We’re looking at people who fit our credibility culture, and there’s a lot that goes with that. I think a lot of the responsible behavior starts way upfront in the hiring process.”
Regarding Damage on Return
At the end of the lease, the lessee receives a settlement statement that would show any added costs, if applicable.
Regarding how leasing companies address damage, as a general rule anything outside of “normal wear and tear” would be billed back to the client — but what constitutes normal wear and tear varies by lessor.
“Because every contract is different, fleets need to make sure they read and understand the contract before getting into any agreement to avoid any surprises,” Stueber says.
FMCs that specialize in the closed-end lease understand that clients are looking for a “no surprises” agreement with their partner, Pelehach says. As such, there is an expectation that a commercially used vehicle will have some scratches, nicks, and dings.
“Lessors will typically not bill back for that type of damage,” Pelehach says.
When a lessee returns a vehicle that has insurance-type damage, such as a dented-in body panel or cracked glass, for instance, this is crossing the line beyond ordinary wear and tear, he says.
When considering a closed-end lease solution with an FMC, Pelehach recommends clients speak to a couple of longtime clients of the FMC to get a sense of their experience with DOR.
Commercial Closed-End vs. Retail Lease: A Quick Study Guide
We’ve all seen the TV ads that scream, “Lease this car for only $199 a month for 36 months!” Wow, you think, why don’t we get those great deals in the fleet world?
To answer that question, a little education is in order. Dave Deslauriers of Motorlease explains the differences between a commercial closed-end lease and a retail lease agreement that a consumer would typically sign at a dealer.
Deslauriers says the main differences are in ease of transaction, cost, and flexibility.
The retail lease is often called a non-recourse lease, because the lessee has no recourse back to the dealer that he or she leased the vehicle from, he says. The retail or non-recourse leases that are sold to a third party (oftentimes a manufacturer’s financing arm) are typically quite different than what fleet management companies offer to their commercial clients.
In the area of ease of transaction, Deslauriers notes that with retail leasing, each vehicle requires its own separate contract. That means paperwork completion is necessary for each leased vehicle. and each vehicle will be billed and paid for separately. For companies operating more than just a few vehicles, that could be time-consuming.
When leasing commercially through a fleet management company, however, the process is far more streamlined and efficient, Deslauriers says. Master contracts mean no piles of paperwork for each and every transaction. Fleet management companies make billing more convenient by including all company vehicles on a single invoice, or even by splitting it up by billing divisions, he says.
In terms of cost, most people don’t take the time to read the fine print of leases with low rates advertised on TV. Those often require a large down payment, high excess mileage fee, and low mileage terms of usually 10,000 to 12,000 annually. Factoring in damage-on-return charges and lease initiation and termination fees, the advertised deals are not always what they appear to be.
With commercial leases, however, lessors often only require a month’s payment in advance and a security deposit rather than a large down payment. Dealers might charge 25 cents per mile or more for excess mileage, but commercial leases charge a much lower amount, and some forms of commercial leases don’t carry any excess mileage charges, Deslauriers says.
Why? Because with a commercial lease, the fleet management company simply seeks to cover the additional depreciation to the vehicle, as opposed to using excess mileage charges as an additional source of revenue.
In terms of flexibility, Deslauriers says a retail lease would not be the best way to go. Often coming with strict terms that are iron-clad once signed, retail leases also tend to have fewer options when it comes to available terms to choose from. Also, the only way to get out of the dealer lease contract early is to pay the entirety of the remaining payments owed.
How are automakers’ captive finance companies able to offer such low lease rates? They typically incorporate several techniques:
- Down payment money to reduce the vehicle’s capitalized cost
- Acquisition fee: In some agreements this is nearly $1,000.
- Residual value calculated as a percentage of MSRP
- Typically very low mileage allowance
- Typically very high excess mileage charges
- Extremely inflexible terms
- Each vehicle leased has its own individual agreement
- Personal guarantee or board resolution may be required
- Opaque language defining terms
- Disposition fees (typically $350 to $750.)
Conversely, these factors are incorporated into the typically higher commercial closed-end lease payment:
- Low or no money up front
- Low or no acquisition fee
- The fleet management company is almost always owner of the vehicle
- A fair amount of flexibility to change lease agreement
- Residual value typically calculated based upon wholesale valuation
- Mileage allowances written to meet client’s expected usage, even high mileage
- Master agreement with a partnership approach to the agreement
- Corporate credit is preferred
- Fleet management programs and expertise provided