Evergreen Behavior and In Process End-of-Term Operations - Product Advisory

December 2019

Introduction

The purpose of this Product Advisory is to explain the LeaseAccelerator evergreen processes which occur based on the schedule’s Mid-Term/EOT Options (both specified and automatic) and the product category’s (asset type) configured Default EOT treatment. In addition, this advisory will explain specific mid-term/end of term behavior for lease schedules and the associated assets when the status displays as is ‘in process’ on reports for end of term events.

This advisory provides guidance for operations after the 19R3 and 19R4.1 Releases. 

Restructured Mid-Term/End-of-Term Evergreen Actions

• Evergreen behavior

  • automatic exercise of Mid-Term/EOT Options (not just evergreening)

  • impact to operations

  • payments

  • accounting

• Deal status changes during the EOT process

• Effective lease end date changes during the EOT process

• How the User Interface (UI) presents information to the user and how it changes

• How reports present information to the user and how it changes

• Questions related to evergreening centered around the timing of evergreen and the length of the accounting output

• How Default EOT Treatment effects lease status and end date

• The Glossary at the end of this document may be helpful while reading through the information

Mid-Term/End-of-Term Event Processing and In Process Statuses

• Postdated EOT Events, e.g. Renewal (in process), Buyout (in process), Impairment (in process) or Return (in process)

• Declaration of Intentions

Standard Lease Timelines

This timeline represents a standard lease term where an EOT Event has not been recorded at the Original End Date and has gone into an evergreen period due to the Default EOT Treatment being set to “Evergreen (month-to-month)”.

This timeline represents a standard lease term where an EOT Event has not been recorded at the Original End Date and has terminated due to the Default EOT Treatment being set to “Terminate without Fee”.

In Process Lease Timelines

This timeline represents a standard lease term where an EOT Event has been declared in advance of the Original End Date. In this visualization the lease will show an “In Process Status” on reports until the Effective Date of Declaration has been reached. If the Declaration lapses, then the lease will go into evergreen due to the Default EOT Treatment being set to “Evergreen (month-to-month)”.

This timeline represents a standard lease term where an EOT Event has been declared in advance of the Original End Date. In this visualization the lease will show an “In Process Status” on reports until the Effective Date of Declaration has been reached. If the Declaration lapses, then the lease will terminate due to the Default EOT Treatment being set to “Terminate without Fee”.

Post 19R3 and 19R4.1 Evergreen Behavior

The logic for evergreening was changed in the 19R3 and 19R4.1 releases and now assumes a lease is in evergreen through the payment period that includes the last day of the current fiscal month.

• To better align with evergreen activity the function of evergreen was updated to show payments through the last day of the expected payment period rather than through the first day of the next payment period.

• The date math now correctly accounts for leases with start dates on the 28^th, 29^th or 30^th.

• LeaseAccelerator records payments to capture the appropriate evergreen period based on the payment cycle while also considering the fiscal periods.

• Automatic changes to a deal status are posted in a manner that ensures your monthly closing processes have sufficient time to identify and capture any deal events that had not been reported prior to the deal undergoing an automatic end-of-term event.

• Subsequent extension of the payment schedule, for deals placed into evergreen, is done on a just-in-time basis to avoid overstating obligations arising from evergreen.

• This manifests as a change in how many evergreen payments are displayed into the future and the timing of when evergreen payments appear.

• Typically, evergreen payments appear “painted” green in the UI in the Payment Schedule.

What does this do to the Status?

The status of a particular lease still respects the minimum days notice set across all EOT Options and will change on the Deal Summary > Summary tile, at the appointed time.

• In the absence of a specified number of days evergreening will take place on the first day after all advance notice deadlines have been missed, but not less than 27 days before end of term.

• If all EOT options require 90 days advance notice, the deal will be evergreened 89 days before end of term. 

“Evergreening” can mean Evergreen (month-to-month) or Terminate without Fee. If all EOT options do not require advance notice, so Min Days Notice is 0, the deal will be evergreened 27 days before end of term.

Automatic EOT options have no minimum days notice by definition, (not even 0), and are exercised 27 days before end of term. Subsequent evergreen payments will be posted as required to cover the current fiscal month, as each payment period is entered while also taking into account the minimum days notice. Meaning the minimum days notice will guide when the next payment appears, not just if the payment due date has occurred.  Please note that Automatic EOT options are not the same as reasonably certain options; reasonable certainty is an accounting judgment, whereas automatic options are defined as such contractually.

What does this do to the Effective Lease End Date?

For leases paid In Advance, the effective lease end date will show the lease schedule ending the month after the last payment showing in the Payment Schedule, minus one day.

For leases paid In Arrears the effective lease end date will show the lease schedule ending the date of the last payment showing in the Payment Schedule, minus one day.

What will this look like in the UI?

In the deal information section at the top of the Summary tile, in Deal Summary, the Status will appear as Evergreen based on timing explained above in the Status section.

In the deal information section at the top of the Summary tile in Deal Summary, the Effective Lease End Date field will display based on timing explained above in the Effective Lease End Date section.

The Payment Schedule will not reflect a green colored evergreen payment unless the payment period overlaps the current fiscal month or the due date of the payment has already occurred, and the minimum days notice has been met. 

Here are some example deals and what the system will produce with the combination on inputs:

*** Payment will be 'painted' Evergreen is only EOT Option present.blue instead of green, since this is an implicit renewal.

Quarterly, Semi-Annual, and Annual paid leases follow the same guidelines as above

• Status is driven by the notification days

• Payment Dates are driven by frequency of lease payments will not appear until the payment is due

What will this look like in reporting?

Accounting reports will not show a change in payments until the payment period overlaps the current fiscal month, or the next payment is actually due. These will follow the pattern explained above for the Payment Schedule in the UI. Notes:

• The Ledger Export will have a partial month Deferred Rent balance for evergreen deals with mid-month start dates.

• Evergreen status will exhibit off balance sheet treatment and payments are expensed as incurred

Non-accounting reports will reflect the Status shown on the Summary tile in Deal Summary

• Leases in Evergreen do not show an effective end date on reports

What is the best practice for a notice period for EOT Options?

If either integration with API or the Payables Export is being used, then the new suggested best practice is to not use ‘0’ for minimum days notice.

• Customers should determine how many days before a payment date they run payments and put that number in the minimum days notice field in the UI and/or PIW.

  • For example, if payments are due on the 1^st, and run on the 25^th of every month, or seven days before the due date, then at least ‘7’ should be entered not ‘0’.

    • This will ensure that ‘7’ days before the end of the period, the payment shows up as payable.

  • If ‘0’ is used, then the first evergreen payment will be visible in the UI 27 days before the original lease end date.

  • Subsequent evergreen payments will not appear until the day the payment is due.

What happens if a ‘Terminate without Fee’ Portfolio level Default EOT Treatment is setup?

If the portfolio level default treatment is ‘Terminate without Fee', and there are additional EOT Options (each of which requires 30 days notice)- if no notice is served on those options, LeaseAccelerator will terminate the deal without fee, with an as at date 27 days before end-of-term. LeaseAccelerator does not hardcode any assets with the default treatment of ‘Terminate without Fee’ and this setting is better suited for asset types that naturally cease to exist at the end of the lease term, such as warranties, software licenses, or financed services. This is commonly associated with Non-Lease items.

Mid-Term/End-of-Term Event Processing: ‘In Process’ Statuses Order of Operations for ‘In Process’ EOT Events

Many times, a user will see a status of Active in the UI for a particular deal, but a report generated for that same deal will show Renewal (in process), Buyout (in process), Impairment (in process) or Return (in process). This is not an error, but a design feature. There are a couple of scenarios where this is expected to occur.

1. If a postdated renewal, buyout, impairment or return has been recorded through the UI, then during the window between the as at date (when the event is first reflected in accounting based on ledger date) and the affecting payments date (the effective date of the event), the long deal status on reports will be one of the following: Renewal (in process), Buyout (in process), Impairment (in process) or Return (in process) and will remain as such until the affecting payments date is reached. Note: If a future ledger date is used when recording the event ‘in process’ will not appear until that date.

2. If a Declaration of Intentions (shown in the Deal History, Documents tile as a Declaration Manifest) has been submitted via mailback or UI, the reporting status will remain ‘in process’ until either recordation of the event is performed, or the deal goes into Evergreen. A note about Declaration of Intentions: This action resets the clock on evergreening; evergreening will not take place until end of term has been crossed but will be recorded with a backdated date of one day.

Please be sure to take advantage of the End-of-Term Training available on LeaseAccelerat-ED for the basics on EOT functionality.

Automatic End-of-Term Order of Precedence

Automatic end of term events follow an order of precedence whether they are at deal level (contractual), asset level (policy override), product category (policy) or portfolio level (standard configuration). 

The order of precedence as of the 19R4.1 Release is as follows:

1. Automatic EOT Options on the contract take precedence.

2. The policy for the asset type will be applied to each asset when the deal is first booked (or on asset re-import).

3. The applied policy setting may be superseded through the Asset Management screen at the asset level.

Changes to the asset type policy will not be applied to assets already booked.

Note: Reasonably Certain options are not automatic and have no impact on evergreening.

Glossary

Automatic EOT – At deal level: Any EOT Option setup which has been designated to automatically occur at the specified time by selecting the radio button in the UI in Mid-Term/End-of-Term Options for: “Option will be automatically exercised if no action taken by Lessee” or by leaving ‘Min Days Notice’ blank on a PIW, EOT Options tab. At portfolio level: The Default EOT Treatment selected in Settings, Asset Types that will be automatically exercised if no action taken by Lessee.

Declaration of Intentions (Declaration Manifest) – Created in a deal when an anticipated EOT event is submitted through mailback using an EOT Recordation Template to convey end of term intentions. Or, through the UI by enqueuing a To Do for ‘Record end-of-term intentions for assets approaching end of term’ and proceeding through the related workflow.

Default EOT Treatment – The portfolio level assignment of action to be taken automatically by the system if no action is taken by Lessee. Configured in Settings, Asset Types tile for each Product Category.

Evergreen (month-to-month) – System action that will automatically record the last non-zero payment in the payment stream using the current payment frequency.

Terminate without Fee – System action that will automatically record a termination of the configured assets with no associated cost.

Effective End Date – The expected end date of a lease reflected in the UI and reporting. This can be the original lease end date if no end of term events exist that would alter it, the new lease end date if a renewal exists, the actual date of a termination and the end of the evergreen current evergreen period.

Evergreening – The process in LeaseAccelerator that occurs with Nightly Maintenance where the system exercised any existing automatic EOT Options as a renewal for one payment period at a time.

Min Days Notice – The minimum number of days required by the Lessor to notify them of end of term intentions, the deciding factor in the timing of Notifications being sent to the lessee from LeaseAccelerator and the driver for LeaseAccelerator to change status.

RCHP (Reasonably Certain Holding Period) – The number of months that the assets contained in the lease are expected to be held.