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Equipment Lease Definitions

Summary: Learn about the various types of equipment leases, and trade-ins.

Lease

A lease is a contract between the University and a Supplier that contains the essential terms and conditions for the use (not purchase) of property in exchange for scheduled payments of a specific amount over a specified term. Title of the equipment remains with the Supplier. Equipment is returned to the Supplier at the end of the term of the contract.

Typically, a lease is more expensive than purchasing or lease-purchasing equipment. Only choose a lease if the equipment is needed for a limited period of time and you do not ever want to own the equipment.

Operating Lease

For the University an operating lease must be valued for an amount less than $100,000 and coded with the Account Code 006135 (non-computer) or 006155 (computer). An operating lease is also known as an installment purchase because the payment for the equipment is financed over an agreed upon term - usually from 36-60 months.

Characteristics and Requirements of an Operating Lease

• Purchasing will order an operating lease of equipment with a B purchase order number.
• One purchase order is used for the entire life of the operating lease agreement.
• Equipment acquired under an operating lease is not inventoried and tagged. The equipment is only tagged if and when the lease is bought out at the end of the contract term.
• The purchase order text must include the financing terms.
• The supplier must provide an amortization schedule.
• The PO must refer to Terms & Conditions (BUS43, Exhibit C, Appendix F.)
• Sales tax is typically added to each payment.

Capital Lease

A capital lease is valued at $100,000 or more. More difficult criteria must be evaluated in consultation with Plant Accounting to accurately determine this classification and the use of Account Code 006130 (non-computer equipment) and 006150 (computer equipment). Equipment acquired under a capital lease is inventoried and tagged at the inception of the contract.

A capital lease must have one of the following characteristics:

• lease term is less than 75% of estimated economic life of the equipment
• present value of lease payments is less than 90% of the equipment's fair market value
• lease cannot contain a bargain purchase option (i.e. less than the fair market value)
• ownership is retained by the lessor during and after the lease term unless a buyout option is exercised.

Lease with No Purchase Option

A lease with no purchase option does not include an option to purchase the equipment for a specified amount upon termination of the lease. Title remains with the lessor. No principle or interest components apply to payments.

Lease with Purchase Option

A lease with purchase option includes an option to purchase the equipment for a specified amount upon termination of the lease. If this option is exercised, title then transfers to the University. Payments include principle and interest components. This is not the same type of contract as a Lease-Purchase (installment purchase).

Lease-Purchases of Equipment (Installment Purchases)

A lease-purchase (also called an installment purchase) is a contract executed by the University and another party containing all terms and conditions for acquisition of property by means of scheduled installment payments of specified amounts of money during the life of the contract. Conditional title to the equipment vests in UC upon receipt of the equipment. The equipment is inventoried at inception of the contract.

A lease-purchase or installment purchase differs from a lease. With a lease-purchase, the intent is to purchase equipment, and UC is committed over the term of the contract. Even if the contract states that it is cancellable in the event of loss of funding, it is considered non-cancellable. The assumption is that UC has in good faith set sufficient funds aside in order to enter into the contract. Third-parties may provide the financing.

Characteristics and Requirements of a Lease-Purchase of Equipment

• A lease-purchase is also known as an installment purchase because the payment for the equipment is financed over an agreed upon term - usually from 36-60 months.
• Purchasing will order the lease-purchase of equipment with a B purchase order number.
• One purchase order is used for the entire life of the lease-purchase agreement.
• Under a lease-purchase agreement, the equipment is tagged as University property upon delivery of the equipment, not at the end of the contract term.
• The purchase order text must include the financing terms.
• The supplier or 3rd party financer must provide an amortization schedule.
• A Standard Lease Purchase Agreement must be completed: http://www.ucop.edu/purchserv/leasedoc.html
• Equipment supplier colects sales tax and includes expense in lease purchase payments.

Trade-ins

A trade-in is the simultaneous exchange of equipment to which UC holds title, for equipment to which UC will hold title. It provides a financial advantage toward the acquisition of the new equipment. Acquisition of the new equipment may be a direct purchase or financed via a Lease Purchase.

Trade-In on Lease: The simultaneous exchange of equipment to which UC holds title, for equipment to which UC will not hold title. This exchange results in a cost advantage toward financing the new leased equipment.

Trade-In on Lease-Purchase (Installment): The simultaneous exchange of equipment to which UC holds title, for equipment to which UC will hold title. This exchange results in a cost advantage toward new equipment being financed.

Retirement and Removal: The simultaneous exchange of equipment to which UC does not hold title, for equipment to which UC will not hold title. This transaction does not represent a true Trade-In because it does not involve UC equipment, nor does it result in a financial advantage for UC. It represents only removal of an old Leased machine in exchange for installation of a new Leased machine.

Resources

• How to Request an Equipment Lease
• Guidelines for Leases, Installment Purchase Contracts, & Associated Trade-Ins
• UCOP Leasing: Master Lessor List - includes Approved Lessor List

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Last revised: August 14, 2007 (am)