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When Is Rent Not Really Rent? When It Is Interim Rent

If you’ve ever leased any IT equipment for your organization, you may have heard the term interim rent. The lessor may have made the term sound fair and reasonable, but let’s expose interim rent for what it really is: pure profit for a lessor.

A standard lease is a financing arrangement between the lessor (the company providing the equipment) and the lessee (the organization leasing the equipment). The lessor establishes a lease rate factor to calculate the periodic rent paid by a lessee. For example, the financial arrangement for a three-year lease with monthly payments might look like this:

(A)

Price per Unit

(B)

Quantity

(C)

Total Cost

(D)

Lease Rate Factor

(E)

Monthly Rent

(F)

Total Rent (36 Months)

$650

500

$325,000

0.02848

$9,256

$333,216

* Column C is the product of Column A and Column B. Column E is the product of Column C and Column D. Column F is the product of Column E and the number of payments.

If the 500 pieces of equipment get delivered to the lessee on April 16, a common expectation is that the first rent payment of $9,256 would be due on April 16 and 35 additional payments would be due on the 16th of each month thereafter. However, when interim rent is involved, this common expectation gets upended.

Lessors like things to be “nice and tidy,” and middle of the month rent payments are not nice and tidy. As a result, the official start date for the 36 rent payments will be pushed to May 1. Since the lessor is in the business of making money and wants to be compensated for ALL of the time the lessee has use of the equipment, the lessor will request/require interim rent for the period April 16-30. Interim rent is a fractional rent payment based on when the equipment is received by the lessee.

Our Take

Using the example above, there are several important issues related to interim rent that must be understood:

  • The lessee will pay interim rent of $4,628 for the period April 16-30 (0.5 months times the monthly rent of $9,256).
  • The effective lease term is 36.5 months, not 36.
  • Interim rent is the result of a timing issue, and it was not used to calculate the lease rate factor: the lease rate factor was based on 36 months not 36.x.
  • If the equipment had been received May 1, no interim rent would have been due.
  • The lessor will generate $8,216 of income from the 36 “standard” rent payments.
  • With interim rent, the vendor boosts its income by $4,628, an overall increase of 56%.

There are two things you can do to protect your organization: 1) negotiate to remove interim rent from being applicable to your lease, or 2) negotiate the commencement date of the rent payments so that the rent begins on receipt (and acceptance) of the equipment. Returning to the example above, under scenario 1, the lessee would have use of the equipment from April 16 to April 30 without charge and rent payments would commence on May 1; under scenario 2, rent payments would begin on April 16 and would continue to be due on the 16th of each month until the end of the 36-month term. Either scenario protects you from overpaying and returns the lease agreement to its purest form – a financing arrangement.