Used dental equipment is bought and sold on a daily basis across Canada. In many instances it is common for the purchaser to assume all or some of the existing leases of the previous owner of the equipment. Equipment leases are an excellent source of financing, yet it can be confusing when one dentist assumes the leases of another. Therefore, there are several reasons to exercise caution when considering assuming the lease of dental equipment.
Leasing companies may charge a penalty to terminate a lease prior to the intended expiry date. These penalties are reasonable because the leasing company had a contract stating that a certain amount of interest was to be paid to them over a specified time period. If the lease is terminated prior to its expiry date, that interest is lost. This is the same as a mortgage company charging three months interest to break a mortgage.
When a dentist joins a practice as a partner (associate buy-in), it is impractical for the owner to cancel leases then have the purchaser borrow the funds from another source (sometimes the same source) the same day. The result is that the owner cancels one equipment lease and then enters into another. This can be costly, time consuming and an inefficient use of legal and accounting resources.
Existing equipment leases can be considered “in-place” financing and are a form of credit that may be required by a purchaser to afford a transaction.
There are several methods of calculating an equipment lease assumption amount. Typically, this amount is applied as a credit on closing towards the purchase price. In other words, if you agree to pay $150,000 for a dental practice and the equipment lease assumption amount is $50,000, you only need to deliver $100,000 on the closing date. Here are some methods of determining the assumption amount:
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In order to calculate the amounts described above, the following information is required:
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Once you have this information, it is possible to calculate the equipment lease assumption amount using the methods described above. Unfortunately, there may be other variables as well. In some instances, GST and PST can be factored into a lease assumption and sometimes not, depending on the purchaser’s or vendor’s tax liability on the sale of the leased assets. For example, equipment is PST taxable if sold to a purchaser, whether leased or not. Leaseholds are not usually GST taxable. Other exemptions exist on certain transactions of which your accountant may or may not be aware, so please copy this article for future reference or contact the author for further information.
This is necessary technical information because this issue arises in at least half of the transactions I have seen. It can become a serious problem when there are two dentists, two lawyers, two accountants and a leasing company involved in the calculations. A great deal of time and effort can be wasted on this one issue alone, frustrating all parties to an otherwise simple transaction.
If you have used a professional appraiser or broker, he or she should understand this information completely. This is another reason why you may consider retaining those services. My suggested formula, which I believe is fair to all parties when assuming leases, is this:
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This article is not to be relied upon as professional legal or accounting advice. Please consult with your advisors before signing leases at any time. You may wish to copy this article and file it with your equipment lease information. I also recommend sending a copy to your accountant if you have any leases that are likely to be shared with another dentist now or in the future.
Ontario Dentist – May 2000