Is Month-to-Month Rent Your Best Option Come Lease End?
When a lease matures, the lease payment will extend on a month-to-month rent basis until the Lessee gives notice to return the equipment or extend the lease. If a Lessee fails to make a decision, then they are leaving money on the table.
Before your lease automatically converts to a month-to-month rent, consider what your operating expenses are and identify opportunities to save.
Month-to-Month and Expected Useful Life
Month-to-month rent occurs as a default provision of the law. If a lease matures and there is no secondary agreement, a lease will automatically renew on a month-to-month basis until the lease is extended or terminated.
In terms of equipment leasing, leased assets are typically new. This means that rents are calculated based on a new asset. If a lease has gone month-to-month, then a Lessee is paying the same rent for a used asset that they were paying for a new asset.
An asset begins to depreciate the moment a user turns a unit on. In terms of forklifts, if an asset has been in rotation for 3-5 years, the asset will reach its economic useful life. Once an asset hits its economic useful life, the maintenance costs begin to spike, and the asset begins to cost more to maintain than to replace with a new asset.
If you allow your lease to automatically convert to a month-to-month rent, it is very likely that your monthly payment will remain the same as when the asset was new.
Month-to-month rents should be managed closely. PRC’s proactive, consultative, and professional approach to asset management will help you identify cost-saving renewal opportunities to help you maximize your working capital and minimize opportunity costs.
Is Month to Month Ever Necessary?
In some cases, month-to-month rent may make sound business sense for a short period of time. These scenarios include:
- Lessees who have a new equipment requirement and need to cover the time period between their current lease and a new equipment order
- Lessees who need a piece of equipment that is not quite released yet
Both situations consider month-to-month rents as short-term or intermediary solutions where a lessee is waiting to decide for something or waiting for something to deliver. It rarely makes sense to use month-to-month rents as a long-term business solution.
How Can PRC Help You Maximize Cost-Savings at End of Term?
The key to maximizing your cost-savings is managing your assets. We are dedicated to managing your portfolio to maximize your cost savings. We scrutinize data to ensure there are no surprises at lease end and help to make sure you are not leaving money on the table.
PRC will manage your portfolio and provide custom cost-saving solutions. When your lease comes to term, PRC will arm you with expert knowledge to provide you with the best possible solution for your equipment.
Conclusion
Lessees should avoid over exposing themselves to month-to-month rent. The overall goal is to maximize your ROI in the long run and be aware of where your lease is in every stage. Don’t get stuck overpaying on assets that should have been replaced years (or decades) ago.
There are scenarios where month-to-month rent is beneficial – but those are typically in short-term solutions. The way to maximize your ROI is to consider renewing or replacing before your equipment has reached its economic useful life and avoid spiking maintenance costs.
PRC is here to help you navigate through your lease and do the asset management for you. And, since we are not brokers or banks, we can do so with a simple and straightforward goal of helping you, the customer, to get better results.