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Just Answers - Interim Rent: Equipment Leasing's Trap Door
Many lessees enter into lease transactions that they believe are competitive based on faulty rate assumptions. Most lease rate calculations don’t take interim rent into consideration. Interim rent is the trap door that allows lessors to receive incr
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
eases in lease pricing. It is unpredictable and the amount can be arbitrary. By understanding how interim rent can impact your lease, you can close this trap door and enjoy the lease pricing you thought you negotiated.
What is Interim Rent?
Interi
What is Interim Rent?
Interi
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
rent, also known as stub rent, is the rent that a lessor charges a lessee from the time the lessee accepts the leased equipment until the official lease start date. Most leases start on the first day of the month following equipment acceptance. In
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
lease with monthly payments, interim rent is calculated as follows: multiply the number of days in the interim period by the monthly payment amount and divide the product by 30. In the extreme case, interim rent can add almost a full periodic payme
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
nt to the lease. In these cases it lifts the effective lease rate dramatically.
The impact of interim rent in the extreme case can be seen in the following example: assume you accept a 36-month lease for equipment that cost $100,000. Also assume th
The impact of interim rent in the extreme case can be seen in the following example: assume you accept a 36-month lease for equipment that cost $100,000. Also assume th
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
t the monthly payment is $3,113 per month, paid on the first of each month. Assume that the lease allows you to acquire ownership of the equipment for $1 at lease end. Therefore, your effective lease rate is 8%.
Now assume that the interim lease pe
Now assume that the interim lease pe
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
iod is 29 days. For simplicity sake, we will round the period to a full month and add it to the lease. The new effective rate for 37 payments of $3,113 is 9.7%. The new rate is more than 20% higher than the rate originally quoted by the lessor. This
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
higher rate represents a trap door in your lease that produces more cost for you and a higher return for the lessor.
The Purpose of Interim Rent
Many lessors justify interim rent as compensation for obligating themselves to pay equipment vendors
The Purpose of Interim Rent
Many lessors justify interim rent as compensation for obligating themselves to pay equipment vendors
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
n behalf of lessees in connection with lease transactions. As further justification, these lessors point out that lessees have use of the equipment during the interim period.
Problems with Interim Rent
There are two flaws in the reasoning offered
Problems with Interim Rent
There are two flaws in the reasoning offered
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
y these lessors. First, interim rent is exorbitant since it is based upon the periodic lease payment instead of the lessee’s borrowing rate. Since each lease payment has a return-of-capital component, the periodic payment is not an appropriate stand
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
rd to use for interim rent calculations. A calculation based on the lessee’s borrowing rate is probably a fairer measure.
The second flaw in this reasoning is that lessors often have not paid for the equipment during the interim period. They may no
The second flaw in this reasoning is that lessors often have not paid for the equipment during the interim period. They may no
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
t have incurred any additional cost during this period. The net result is that lessees incur significant increases in their effective lease rates while lessors are able to sneak extra yield through a trap door in the lease. Interim rent can turn a c
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
mpetitive lease into a relatively high rate transaction.
Solutions
Savvy lessees look for ways to limit or eliminate interim rent. They try to ensure that they receive the lease deal for which they bargained. Here are five strategies to blunt the
Solutions
Savvy lessees look for ways to limit or eliminate interim rent. They try to ensure that they receive the lease deal for which they bargained. Here are five strategies to blunt the
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
mpact of interim rent:
1. Eliminate interim rent. Try to negotiate a lease that excludes interim rent. One way to eliminate interim rent is to have the interim period count as a partial payment period. Another partial payment period can be added at
1. Eliminate interim rent. Try to negotiate a lease that excludes interim rent. One way to eliminate interim rent is to have the interim period count as a partial payment period. Another partial payment period can be added at
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
the end of the lease, such that the two periods constitute one full payment period.
2. Pay interest instead of interim rent. Instead of paying interim rent based upon the periodic payment, base the interim payment upon the implicit transaction rat
2. Pay interest instead of interim rent. Instead of paying interim rent based upon the periodic payment, base the interim payment upon the implicit transaction rat
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
or your borrowing rate. This method will eliminate the return-of-capital component that plagues most interim rent calculations.
3. Limit or fix the amount of interim rent. If you cannot eliminate interim rent, you can try to negotiate a limit on i
3. Limit or fix the amount of interim rent. If you cannot eliminate interim rent, you can try to negotiate a limit on i
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
. You can offer the lessor a fixed interim period, regardless of the equipment acceptance date.
4. Manage equipment deliveries. Another strategy is to coordinate with the equipment vendor to schedule equipment delivery and acceptance towards the en
4. Manage equipment deliveries. Another strategy is to coordinate with the equipment vendor to schedule equipment delivery and acceptance towards the en
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
d of the month. End-of-the-month acceptances would ensure a reduction in interim rent since the interim periods would be short.
5. Sale-leaseback at month end. As a last strategy, if allowed by the lessor, you could schedule a sale-leaseback of new
5. Sale-leaseback at month end. As a last strategy, if allowed by the lessor, you could schedule a sale-leaseback of new
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
y acquired equipment at month end. This strategy would also guarantee a short interim period.
It is important to understand the impact of interim rent on your lease. Rather than assume that you will receive the lease rate quoted, review the lease c
It is important to understand the impact of interim rent on your lease. Rather than assume that you will receive the lease rate quoted, review the lease c
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
refully. If your lease includes interim rent, plan to negotiate this feature. Use one of the strategies above to reduce this potentially costly aspect of your lease. Even if you cannot eliminate the interim-rent trap door, you may be able to seal it
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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