REAL ESTATE ARE FROM EQUIPMENT LEASES ARE FROM JUPITER SATURN 15 DIFFERENCES BETWEEN & EQUIPMENT LEASES

Developed For: Table Of Contents

Real estate versus equipment assets 01 Real estate leases are from Jupiter. Equipment leases are from Mars 02 The similarities and differences 03 Selecting a software vendor 04 1) Size and scale 05 2) Organizational models 06 3) Ownership 07 4) Outsourcing 08 5) Systems 09 6) Rent payment complexity 10 7) structures 11 8) Assets per schedule 12 9) Non-lease components 13 10) Sourcing and initial 14 11) Mid-term events 15 12) End of term options 16 13) Past end-of-term 17 14) Complex multi-party transactions 18 15) Lease termination 19 Summary comparison 20

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM Real Estate Versus Equipment Assets

Although, real estate and equipment leases will soon be rolled up together into a single line item on the balance sheet, the assets and the way they are administered are very different. Some of the differences are obvious. Real estate leases are for land or structures such as corporate offices, distribution centers, plants, stores, bank branches, data centers, research labs, hotels and casinos. Equipment leases represent a much more diverse category of assets ranging from espresso machines to corporate helicopters. Equipment leases might include IT and data center assets such as servers, laptops and networking gear or fleets of corporate cars, delivery vans and freight trucks. Equipment might also include forklifts and pallet jacks in your warehouses; rail cars and ocean containers in the supply chain; and the photocopiers and furniture at your headquarters.

REAL ESTATE LEASES EQUIPMENT LEASES

Office Factory Vehicle Corporate Building Plant Fleet Aircraft

Distribution Bank Material Office Center Branch Handling Equipment

Data Hospital IT & Data Office Center Or Lab Center Furniture

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 01 Real Estate Leases Are From Jupiter Equipment Leases Are From Saturn

The processes, systems and organizations supporting real estate and equipment leases are very different. You would probably never think to have the people that manage your , also manage the delivery trucks in your fleet, the servers in your data center or the forklifts in your warehouse. Nor would you think about using the same database to track the addresses of your buildings and the serial numbers of your laptops. And you probably would not use the same system to track the monthly charges for the corporate jet used by your CEO and the custodial services provided to your factories.

You might say that real estate leases are from Mars and equipment leases are from Venus. Or vice versa. To avoid any positive or negative association with either gender (Think Men are from Mars and Women are from Venus), we decided to say that real estate leases are from Jupiter and equipment leases are from Saturn. Everyone knows Jupiter, much like your real estate lease portfolio, is big with lots of gravitational pull. And that Saturn, much like your equipment lease portfolio, is more complex with many different layers (or rings). But the purpose of this guide is not to focus on celestial analogies. Instead, we will focus on the differences and similarities between real estate and equipment leases.

Real Estate Leases are From Jupiter Equipment Leases are From Saturn

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 02 The Similarities And Differences

In fact, there are some similarities between real estate and equipment leases. Both have been neglected and under-funded at most organizations. There has been little investment in the people, systems and processes to support real estate and equipment leases. Real estate has gotten more attention over the past decade with centralized organizational models and new technologies such as Integrated Workplace Management Systems. But these new approaches have been limited primarily to large organizations. Equipment leases are not even recognized by most CFOs as a portfolio at most companies.

There are also many similarities between the accounting for both real estate and equipment leases. Both can have initial direct costs; fixed or variable rents; and end-of-term options to purchase, extend and terminate. But as you drill down there are some important differences that become important when you are selecting a software vendor for lease accounting. For example, equipment leases often have multiple assets per schedule, whereas real estate leases typically only have one.

Equipment Lease rents are based on lease rate factors whereas Real Estate rents are market driven and often based on a utility metric such as cost per square foot. Variable rents (or rents based on a floating rate index) for real estate are often based upon Consumer Price Indices or retail store sales, whereas equipment rents often vary based upon interest rate factors such as , T-Bills or Prime. Real estate lease holders often sub-lease to other tenants. However, sub-leases are rare in the equipment space.

SIMILARITIES DIFFERENCES

Initial Base & Purchase, Assets Sale Rent Direct Variable Extend & Per Formulas Fees Rents Terminate Schedule & Sub-Leases

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 03 Selecting A Software Vendor

Selecting the right application for lease accounting and administration software requires a good understanding of the vendor’s true center of gravity. You will need to dig deeper than the marketing materials to understand the historical product strengths of each vendor. For example, you may be surprised to learn that many historically real estate-centric applications do not support the complexities of equipment leases such as asset-level accounting and partial buyouts or returns. Similarly, many historically equipment-centric applications may not offer complex real estate features such as CAMs charges reconciliation; sale/leaseback accounting and sub-lease administration.

As you evaluate your lease accounting and administration software needs, it is important to keep in mind the composition of your lease portfolio. Some companies predominantly lease real estate (90% or more of their portfolio) with a handful of other leases. Other companies have more of an even balance (50/50) between real estate and other types of leases such as vehicle fleets; material handling equipment; shipping containers and rail cars; IT and data center equipment.

In this guide, we will outline the fifteen key differences between real estate and equipment leases. Armed with the key differences you will be able to better target questions to software vendors.

VENDOR A VENDOR B VENDOR C

Real Estate Leasing Expertise

Equipment Leasing Expertise

Lease Administration Features

Lease Accounting Features

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 04 01 Size And Scale

In terms of dollar value, real estate lease portfolios tend to be much larger. Although the dollar value of an equipment lease portfolio is smaller, the number of leases and leased assets is typically much higher. A Fortune 500 company might lease 10,000 computers; 2000 vehicles and 500 other types of equipment representing a dollar value of $300M. The same Fortune 500 company, however, might only lease 100 buildings with a lease portfolio value of $1B. Equipment leases also tend to have many more lessors and many more stakeholders within the organization. Many companies will make the mistake of focusing primarily on their real estate lease accounting due to the big dollar values associated with the portfolio, only to find out that equipment leases represent a bigger compliance challenge.

REAL ESTATE LEASES EQUIPMENT LEASES

Portfolio Portfolio Value Value

Number of Number of Leases Leases

Number of Number of Lessors Lessors

Number of Number of Stakeholders Stakeholders

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 05 02 Organizational Models

REAL ESTATE LEASES EQUIPMENT LEASES

Historically, real estate was managed on a Equipment leases, however, remain highly decentralized, local basis in each geographic de-centralized. Equipment is typically not region. For example, each country around the organized at a geographic level, but rather within world may have managed facilities locally as different product divisions or functions. part of its procurement or finance organization. The logistics team manages the shipping But over the past decade there has been a containers and rail cars. The IT organization migration towards centralized models for Portfoliomanages the laptops, servers, and data center . Valueleases. And the fleet team manages the cars, trucks and vans.

CENTRALIZED DECENTRALIZED

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 06 03 Ownership

In recent years, many large companies have centralized real estate management into a shared services organization. Reporting to the CFO or Chief Procurement Officer, a single global real estate group manages all construction, purchasing, leasing, space planning, maintenance and repair for all facilities worldwide. Equipment leasing, however, has no clear owner at most companies. Treasury, procurement and accounts payable each play a role in the equipment leasing process (as they do with real estate). But due to the diverse range of assets and users across logistics, operations, fleet, IT and other functions, there is not a natural owner. As a result, applying consistent policies, controls and accounting across equipment leases becomes much more challenging than for real estate.

REAL ESTATE LEASES EQUIPMENT LEASES

IT Logistics Operations Fleet

CORPORATE REAL ESTATE MANY DIFFERENT GROUPS

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 07 04 Outsourcing

REAL ESTATE LEASES EQUIPMENT LEASES

Many large and mid-size companies have gone Equipment leasing is rarely, if ever, outsourced. The beyond centralization of real estate to actually maintenance, repair and upgrade of certain types of transition day-to-day responsibility for facilities equipment may be bundled as a service component to an outside provider. Firms such as CBRE, Jones of a lease - especially from vendor captives. But Lang LaSalle, Cushman & Wakefield can take over there are no true outsourcing providers that will administration of corporate real estate on an administer a portfolio of diverse range of IT, fleet, outsourced basis providing best practices learned transportation and material handling equipment from many different customer experiences. from many different manufacturers.

REAL ESTATE BROKERS WILL POINT SERVICES ARE AVAILABLE FROM PROVIDE FULL SERVICE OUTSOURCING EQUIPMENT MANUFACTURERS & VARS.

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 08 05 Systems

Most Fortune 500 companies have implemented a centralized real estate administration application. Some companies have invested in a fully-featured Integrated Workplace Management System (IWMS) that manages not only leases, but capital planning, building construction, space planning, facility maintenance and environmental reporting. Whether you are using a Lease Administration application or IWMS, the system should track most of the key terms for real estate leases from expansion clauses and renewal dates to variable rents and CAMs charges. Very few companies, however, have invested in an Equipment Lease Management application. As a result, data about IT, fleet and other equipment leases is scattered across the enterprise. Some data is stored in fleet management and IT asset management applications, while other data is stored in a file cabinet in its original form.

REAL ESTATE LEASES EQUIPMENT LEASES

SINGLE CENTRALIZED FRAGMENTED SYSTEM REPOSITORY NOT INTEGRATED

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 09 06 Rent Payment Complexity

Both real estate and equipment lease employ base and variable rents. Real Estate base rents are typically market based and are structured as a cost per unit (such as square feet). Equipment lease base rents are typically based on a percentage of the original equipment cost. The inputs and calculations used for the variable rents can also be very different. It is common for real estate rent to be adjusted at some regular frequency based upon a market index such as the Consumer Price Index (CPI). In the retail , real estate rents are frequently based upon company performance or sales. A chain store in a shopping mall may pay more or less based upon their actual sales at the location. Variable rent for equipment leases is less common. And when utilized, the variable rents are typically based upon an interest rate and/or the usage of the product. For example, vehicle lease rent may vary based upon miles driven. Photocopier rent may be based upon pages.

REAL ESTATE LEASES EQUIPMENT LEASES

INDEX OR SALES OR USAGE OR SALES OR MARKET RATE PERFORMANCE CONSUMPTION PERFORMANCE

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 10 07 Lease Structures

The types of leases used for commercial real estate are very different than the leases used in IT, fleet and equipment. Common examples of real estate leases include Modified Gross Leases, Triple-Net Leases and Full Service leases. The differences relate to whether costs such as Common Area Maintenance, and taxes are bundled into the lease payment. Common examples of equipment leases include True, Finance, Master, Skip, TRAC, Step-Up, 60 or 90-Day Deferred leases. The differences in equipment lease structures typically relate to payment schedules and the residual value of the asset at the end of term. There are many different equipment purchase options such as Fair Market Value, 10% Put and $1 Buyout. As a result, the accounting challenges for real estate will relate more to unbundling non-service components and identifying re-measurement requirements. For equipment leases, the challenges will relate more to estimating residual values and end-of-term plans.

REAL ESTATE LEASES GROSS DOUBLE TRIPLE LEASE NET LEASE NET LEASE

EQUIPMENT LEASES SKIP TRAC 60 OR 90 DAY LEASES SPLIT TRAC DEFERRED LEASE

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 11 08 Assets Per Schedule

Real estate leases typically have one building, or asset, per lease schedule. However, it is common for equipment leases to have multiple assets per schedule. You don’t negotiate a separate lease for each laptop or truck or piece of furniture that you lease. One lease might have one hundred laptops or fifty office chairs bundled onto a single schedule. The number of assets per schedule becomes much more relevant with the new lease accounting standards. Leases must be managed not as monolithic contracts, but as if every asset (every piece of equipment) is a lease. However, software applications designed to manage real estate leases are not capable of asset-level debits and credits.

REAL ESTATE LEASES EQUIPMENT LEASES

SINGLE SINGLE SINGLE MULTIPLE SCHEDULE ASSET SCHEDULE ASSETS

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 12 09 Non-Lease Components

The new lease accounting standards require separation of lease from non-leased components. The types of non-lease components bundled into real estate and equipment leases vary significantly. As a result, the analysis to perform the accounting will focus on different components for real estate than equipment. Many real estate pass along costs for property taxes and insurance in their rent payments. Net leases also include Common Area Maintenance (CAMs) charges for expenses shared across tenants. Examples of CAMs charges might include utilities, , landscaping, artwork, snow removal and trash collection services. Equipment lessors will sometimes bundle in software, training, maintenance, repair and into leasing contracts. Additionally, some equipment leases include contracts for re-supply of materials. Think toner ink and paper for photocopiers.

REAL ESTATE LEASES EQUIPMENT LEASES

TAX PROPERTY TAXES MAINTENANCE & REPAIR

COMMON AREA SOFTWARE MAINTENANCE SERVICES

PROPERTY INSURANCE RE SUPPLY CONTRACTS

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 13 10 Sourcing And Initial Fees

Commercial real estate are typically selected with the help of a specialized broker. Although a company may compare multiple different properties there is only one potential landlord () for any specific asset to be leased. Similar, companies may compare many different makes and models of equipment to fulfill a specific business need. However, unlike with real estate, there are hundreds, if not thousands, of potential lessors to provide the financing. Equipment leases can be put out to a competitive bid between commercial banks, vendor captives and independent lessors. The upfront fees collected with real estate leases are often very different than with equipment. Real estate leases involve broker commissions and security deposits as well as concessions such as free rent periods and tenant improvement allowances. Equipment leases might include fees for installation, shipping and services.

REAL ESTATE LEASES EQUIPMENT LEASES

COMMERCIAL BANKS

INDEPENDENT LESSORS

SINGLE LESSOR VENDOR CAPTIVES

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 14 11 Mid-Term Events

Real estate leases tend to be for longer terms (e.g. 10 years) than equipment leases (e.g. 3-5 years). However, real estate leases typically have far fewer changes during the term of the lease than equipment. With real estate leases not only may the pricing change (as discussed in #5), but the tenant may have an option to expand or contract the amount of floor space at certain milestones in the lease. Additionally, many real estate leases offer the tenant the option to sublet or reassign a portion of the space to another tenant. Equipment leases undergo a different set of events. Assets such as forklifts and trucks may change locations several times during a lease. Computers and office equipment may be reassigned to different cost centers. Partial buyouts of equipment mid-term can occur if asset(s) are lost, stolen or damaged. Partial returns can also occur, in which some equipment is kept on lease, but other assets are returned to the manufacturer/lessor.

REAL ESTATE LEASES TENANT OPTION FIRST RIGHT IMPROVEMENT TO EXPAND OF REFUSAL

EQUIPMENT LEASES LOCATION PARTIAL PARTIAL CHANGE RETURN BUYOUT

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 15 12 End-of-Term Options

At the end of a real estate lease, the tenant typically has the option to extend or terminate the lease. Additionally, a tenant may elect to renew while expanding or contracting the amount of space on the lease. At the end of term for an equipment lease typically one of three scenarios occurs. First, the lease may be terminated in which case the equipment is returned. Second, the lease may be extended, typically at a lower rent and different residual value. Third, the equipment on the lease may be purchased and ownership transferred from the lessor to the lessee. In many equipment leases, two or all three of the scenarios can occur. Equipment leases have multiple assets per schedule. Some of the assets may be renewed while others are purchased or returned. These partial buyouts, partial renewals and partial returns have a much higher level of accounting complexity.

REAL ESTATE LEASES EQUIPMENT LEASES

TERMINATE RETURN

RENEW RENEW

EXPAND BUYOUT

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 16 13 Past End-of-Term

With equipment leases, it is quite common for no action to be taken at the end of term. The lease moves into an “evergreen” period. The lessee can continue to use the equipment assets indefinitely as long as they continue to make the regularly scheduled rent payments. Most Fortune 500 companies have 20% or more of their equipment leases in evergreen for periods of six months or longer. Paying evergreen fees past the end-of-term erodes the economic benefit of leasing equipment. However, most companies do not track these losses so they are unaware of the issue. When real estate leases extend past end-of-term there is a more punitive assessed. Holdover penalties range from 125-200% of the original rent providing an incentive for tenants to decide on whether to renew, terminate or expand/contract.

REAL ESTATE LEASES EQUIPMENT LEASES

Holdover Penalties

Evergreen Fees

-3 -2 -1 0 +1 +2 +3 -3 -2 -1 0 +1 +2 +3

End of Term End of Term

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 17 14 Complex Multi-Party Transactions

Complex arrangements such as sub-leases and sale/leaseback transactions are common with real estate leases. Real estate sub-leases occur when the tenant sublets part, or all, of a leased property to another tenant. In these scenarios, the tenant effectively becomes a landlord responsible for collecting monthly rent inclusive of variable CAMs charges. Not only does the tenant become a landlord, but they act as a lessor from an accounting standpoint. Equipment is rarely, if ever, sub-leased or sold to a lessor. And therefore many of the more complex accounting scenarios are not relevant to equipment leases.

SALE/LEASEBACK REAL ESTATE EQUIPMENT

COMMON RARE

SUB-LEASE

COMMON RARE

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 18 15 Lease Termination

REAL ESTATE LEASES EQUIPMENT LEASES

At the end of a real estate lease, the landlord The issues and fees associated with the end of an is obligated to return the after equipment lease are different. The equipment the tenant vacates the premises. However, needs to be packaged and shipped back to the the tenant may be assessed surcharges if leasing company. Additional surcharges may be they fail to remove trade fixtures; personal assessed if the equipment experienced excessive property; telephone wiring; debris and rubbish. wear and tear; exceeded mileage limits or lacks packaging and documentation.

Trade Fixtures Excess Use

Personal Property Documentation

Debris Packaging

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 19 Summary Comparison

ISSUE REAL ESTATE EQUIPMENT LEASES LEASES

Portfolio Value Large Dollar Small Dollar

Number of Leases 10s-100s 100s-1000s

Number of Lessors 10s-100s 10s-100s

Number of Stakeholders 10s 100s-1000s

Organizational Model Centralized De-Centralized

Ownership Corporate Real Estate No Clear Owner

Outsourcing Common Rare

Systems Real Estate Lease Admin No System of Record

Rent Payments CPI or Sales Usage or Performance

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 20 Summary Comparison

ISSUE REAL ESTATE EQUIPMENT LEASES LEASES

Lease Structures Gross, Triple Net Skip, TRAC, Deferred

Assets per Schedule 1:1 Asset/Schedule N:1 Asset/Schedule

Non-Lease Components Tax, Insurance, CAMs Maintenance; Re-Supply

Sourcing Single Lessor Many Lessor Options

Mid-Term Events Expand; Tenant Improvement Partial Buyout or Return

End-of-Term Events Terminate, Renew, Expand Return, Renew, Buyout

Past End-of-Term Holdover Penalties Evergreen Fees

Sale/Leaseback Common Rare

Sub-Leases Common Rare

15 Differences Between Real Estate And Equipment Leases WWW.LEASEACCELERATOR.COM PAGE 21 www.leaseaccelerator.com

LeaseAccelerator offers the market-leading SaaS solution for Enterprise Lease Accounting, enabling compliance with current and new FASB and IFRS standards. Using LeaseAccelerator’s proprietary asset-based Global Lease Accounting Engine, customers can account for all categories of leases including real estate, fleet, IT, material handling and other equipment at an asset-level. On average, LeaseAccelerator’s lease Sourcing and Management applications generate savings of 17% on equipment leasing costs with smarter procurement and end-of-term management.