Lease pricing software is needed now more than ever. The days of pricing a zero residual and keeping all the upside are past. Winning tax deals priced on a calculator without regard to the tax benefits is mostly a memory. Now you need to prepare each quote and calculate the return on each investment using current estimates and assumptions. Lease pricing software provides the measures you need to determine if the deals are viable from an economic standpoint.
Pricing software -- that anyone can use anywhere, any time -- is becoming essential! Waning are the days of the lone pricing wizard in that windowless room plugged into the timeshare terminal, eking the last basis point out of the lessee's PV. Now everyone has a PC in front of them and at least recognizes the keyboard and mouse. With a larger group of users with different skill levels and various job descriptions, your pricing program now has to be easy to use, flexible and portable as well as thorough and accurate.
The initial requirement of lease analysis software is that it calculate the economics of an investment. In addition, after calculating, the software must display the results so that they can be communicated clearly to a broad group of users.
Calculation
The calculations start with cash flows and statistics relating to the
investor as well as payment flows relating to the lessee or borrower.
Based on the assumptions you enter for each transaction, the software
determines the cash flows and then computes various types of statistics
(such as a MISF or IRR yield, Return on Equity or Return on Asset yield,
present value of rent) which you deem useful in your decision-making.
The point is to determine the economic measure of this investment so
you can decide if this deal meets your profitability standards.
From the basic cash flows, any number of statistics may be calculated. You may, in fact, need to calculate different profitability measures for different audiences: one set for the leasing company and another for its parent. Or you may need to measure against various investment parameters -- such as capital constraints or tax shelter limitations.
Leasing does not exist in a vacuum, so several rules, regulations and tests (such as IRS and FAS accounting) are also applied in the calculations. Additionally, you want to be able to compute the economics using current lease structuring techniques as they evolve within the marketplace (e.g., single investor, leveraged or finance leases; stepped/sawtooth rents; interim period and interim rent structures; optimized repayment of rent and/or debt; early buyouts and terminations; casualty schedules; foreign sales corporation deals, double dips).
While lease pricing software is often used for pricing leases from their inception, it is also invaluable for measuring the economics of restructured deals, such as credit workouts. Evaluating the economics of buying and selling existing leases allows you the opportunity to manage your portfolio or market presence. Also, grouping individual deals into a portfolio provides aggregated cash flow and accounting data for forecasting or portfolio statistics.
Lessee calculations are also provided in lease pricing software. Rent statistics and the lessee's FAS classification test are frequently computed along with the lessor's statistics. Many pricing programs include a lease versus purchase analysis as well.
Communication
Besides calculating the cash flows and desired statistics, the lease
pricing software must display the economic results in a clear and straightforward
manner. Given the multiple uses of lease pricing software, the reports
must communicate the assumptions to several different audiences.
On the bid quoting side, management can use a review of the parameters for quality control purposes. A summary of the deal assumptions and the economic results is often included in the investment review or credit package. The lessor may want to include a review of the lease as booked using actual parameters as supporting documentation. Many schedules to the lease documents may be generated by the lease pricing program (e.g., termination or casualty schedules, rent payment and/or debt amortization schedules).
Another valuable use of pricing reports is for company projections of expenses, profitability, borrowing needs and the like as reviewed in the finance or treasury department. Frequently, pricing reports may be useful for demonstrating the economic and accounting benefits of the leasing company to your parent.
And certainly, you need to see the deal assumptions, cash flows, etc. in transactions, new or pre-existing, which you are buying. (Conversely, you need to display that information to the buyer when you are selling a transaction.)
Current Trends
A continuing trend in lease pricing software is the movement toward
PC accessibility. No longer are pricers relegated to the computer room.
On the contrary, the more portable, the better. At the same time, network
compatibility is required for supportive uses of the software -- documentation,
credit, accounting, finance.
As the applications of pricing software expand, the mysteries of lease economics and the art of pricing and structuring must be revealed to a larger audience. Lease analysis software provides a good basis for continuing education in leasing itself as well as for explanations of company policies.
Software development tools have made gigantic strides in the last few years which speed up computational capabilities and interconnectivity. But more importantly, these developments are more friendly to the exploding population of software users.
While originally developed as DOS software, lease analysis programs for Windows are now available. Lease pricing software users are being offered programs which are easier to use and which can communicate with other applications such as word processing, spreadsheets, and database environments.
In general, software is moving away from hardwired designs with proscribed data entry and output formats to software which can be easily tailored to your needs. Already, communication with other applications and platforms used within your organization is available in lease pricing software.
Summary
For evaluation of lease economics today, you need to calculate cash
flows and statistics; apply IRS and FASB tests; have structuring capability
using new developments in the leasing marketplace; display and communicate
assumptions and results to various audiences. You need to have more
people understanding lease economics from different viewpoints throughout
your organization.
Don't be left behind. Take advantage of the burst in technological progress and let lease pricing software work for you.
