Capital Purchases and Leasing

What Is a Capital Purchase?

Any and all  property purchased or acquired are deemed assets of the University. A capital purchase is any item that has a purchase value that exceeds $5,000 or more and has a useful life of more than one (1) year. In order to be considered a capital purchase, the asset must also be an individual, stand-alone, movable or tangible item. Examples include: 

  • Furniture 
  • Equipment 
  • Vehicles 
  • Library books 
  • Artwork 

When Is a Lease Purchase Capitalized? 

A lease-purchase involves an item paid for on an installment payment basis, where the  University assumes outright ownership when the terms of the lease purchase agreement are completed. Lease purchases are materialized  when the lease purchase agreement has been signed and after the first payment is made. 

When Is a Software Purchase Capitalized? 

Software purchases become a capitalized item when the purchase price exceeds $100,000. The capitalization threshold for software over $100,000 includes: license fees (single or multiple), annual fees (one or multiple years), testing fees, setup fees and delivery cost.  

What Costs Are Included in Purchase Cost?

The threshold cost of more than $5,000 must include any associated charges and fees. If the amount is below the threshold, it is not considered capital. Examples of associated charges and fees include: 

  • Original contract or invoice price 
  • Freight charges and import duties 
  • Handling and storage charges 
  • In-transit insurance charges 
  • Taxes and fees imposed on the acquisition (where applicable)
  • Installation charges 
  • Charges for testing and preparation for use 
  • Costs of reconditioning used items when purchased 
  • Parts and labor associated with the construction of equipment
  • Other related acquisition cost 

What is Capital Leasing?  

Leases are legally binding, non-cancelable contracts that financially obligate the University. The Lessor (e.g. bank) owns the equipment throughout the contracted lease period and maintains a security interest or lien on the equipment. Departments have a fiduciary responsibility to safeguard the leased equipment in their care.  If the equipment is stolen and/or damaged, appropriate University personnel must be notified because the University is responsible for the prompt replacement of the equipment. A Lease may not be canceled for any reason prior to the end of the term without incurring severe financial repercussion. 

Leasing goods is subject to the same policies and procedures that would apply to the acquisition of any piece of capital equipment, such as computers, scientific equipment, or business-related equipment. 

Leasing is a financing mechanism, not a funding source. The acquiring department must identify the funding source before entering a lease. In order to be considered for leasing, the item must have a value of at least $50,000. A  primary reason to lease rather than buy an item is because the needed item is so expensive that its direct purchase is not possible or not permitted due to limited funding sources (in the case of sponsored project leasing) or other financing mechanisms are unavailable or more expensive than leasing. 

The lease or buy decision and the identification of the type of lease that would be most appropriate must take into consideration the following criteria: 

  • Technical and operational useful life of the item(s). 
  • Likelihood of continued use beyond the lease term. 
  • Budgeting issues. 
  • Financing terms (term, cost of borrowing). 
  • Type of lease (Operating vs. Capital) and its Financial Statement impact 

Types of Leases:

1. Operating or Fair Market Value Leases: 

An Operating/Fair Market Value Lease is essentially a long term rental of equipment and/or payment for the use of equipment over a specified term. At the end of the lease term, the equipment must be either returned to the lessor or purchased for the current fair market value (FMV). 

2.  Finance or Capital Leases: 

In a Finance/Capital Lease, the payments are structured like a regular loan (with interest) under which the school or department owns the leased item at the end of the lease term for a nominal cost (generally a value of $1.00). 

What Capital/Goods are covered by the Leasing Policy?

The types of capital equipment that are covered by this policy are typically (but are not limited to) the following: 

  • IT hardware 
  • Vehicles 
  • Furniture 
  • Equipment (i.e., facilities, medical, laboratory) 

General Guidelines 

Schools and departments can request leasing of capital equipment and installed software only. Software may only be leased under a Finance/Capital Lease. Extended warranties and service contracts are not included in leases. Leases require a  Purchase Order (PO) and must have available funds budgeted and guaranteed for the full term of the lease. Leases require receipt and acceptance. All equipment leased on the same schedule must be located at the same address and must be delivered and installed at the same time. This is necessary to avoid lengthy delays in finalizing the lease, increased financing charges such as interim rents, and delays in payments to the equipment vendors. 

Lease terms are based on equipment cost and useful operational life. A lease term may not exceed the useful operational life of the equipment. 

A.  Lease Documentation and Signing Authority 

Leases require extensive documentation and review in addition to approved requisitions and POs in order to implement. The following documents are typical of leasing documentation: Lease Proposal (Lease Financing Quote or Offer), Master Lease Agreement (MLA), Lease Schedule, Delivery & Acceptance Form and Third Party Assignment. 

B.  Leasing Process 

Procurement Services is responsible for managing the capital leasing process at the University. 

With the exception of copiers, printers, scanners and postage meter leases, all other leases are processed, executed, managed and paid centrally through Procurement Services. Payments are administered centrally to ensure timely payments, avoidance of late fee finance charges and the mitigation of the risk of default by the University. Payments are scheduled once a Purchase Order has been established, lease documents have been properly executed, equipment has been inspected, received and satisfactorily installed, (when applicable). Payments are subject to the execution of a Payment Authorization Schedule providing authorization to Procurement Services by the department to schedule payments to the lessor. This document must be signed by the respective authorized officers at the school or department. 

Lease documents received by departments must be forwarded to Procurement for review and execution. The University only enters into lease agreements with lessors approved by Procurement. Approved lessors are those with whom a Master Lease Agreement (MLA) has been negotiated and executed by the  Procurement Services. 

Responsibilities 

A. Department/School – It is the responsibility of the appropriate staff in a department or school to: 

  • Consult with Procurement Services to obtain information necessary to evaluate and compare leasing and buying options 
  • Conduct bids for the purchase price of goods 
  • Justify equipment acquisition method if the decision is not the most economical one for the University 
  • Request and receive all necessary approvals (prior, internal and budgetary) 
  • Adhere to the University’s purchasing policy 
  • Ensure that an authorized Lease Agreement and Purchase Order is obtained prior to delivery of the equipment 
  • Notify Procurement once the equipment has been delivered, installed and is working properly. It is the department’s responsibility to work with the vendor to ensure that the equipment is delivered and installed in good order. 

Note: If the source of funding for equipment is to be from sponsored project funds and the proposal budget indicates that the equipment is to be leased rather than purchased, the department and the Principal Investigator must document the leasing requirement and guarantee availability of funding for the term of the lease. 

B.  Procurement Department – It is the responsibility of the Procurement Department to:

  • Work with the department/school to clarify equipment cost, terms, conditions and any other requirements; 
  • Upon request from a school or department, provide financial guidance as to whether the goods should be leased or purchased; 
  • Work with departments to resolve any requests for leases that deviate from the guidelines contained in this policy statement; 
  • Solicit lease bids from approved financing institutions to obtain the most favorable rates and terms based on the requirements of the underlying acquisition; 
  • Provide the best lease financing option to department/school