Operating Lease or Finance Lease - What are the differences?

[minature_hero]

I've been asked to head up a project for a number of small schools to get their projection equipment updated. We'll probably go with an up to date multi-touch screen rather than replacing existing projection equipment and boards. To get similar equipment in each class the schools will need to enter into some sort of an operating lease to spread the cost out over a number of years.

 

As schools are not able to enter into finance leases how do I tell the difference between these two agreements? So far I've found:

 

 

 

1. The Net Present Value (NPV) of rentals is less than 90% of the original cost of the equipment (excluding interest and VAT) (Not sure what NPV really means in Tech English)
   
2. The lease term is shorter than the useful life of the leased equipment.
   
3. Ownership will not transfer to the lessee at the end of the lease term. (I believe this means that it is not prearranged - it is possible but the cost has to be negotiated at the end of the lease term)
   

 

 

Are there any other things I should be looking for that diffrentiate the two or are these the main points and does anyone have any info from the DfE regarding what they term operating/finance lease.

 

Thanks folks!

[Brimstone]

Have a read here...http://www.fla.org.uk/main-data-content/files/2014/redirect/765gjtY/submo_776yietRWTREYYGUGIHI_87/1FLALeasinginSchoolsDecember2011.pdf

[Fazza]

Make sure you have a warranty/service agreement on the equipment that is the same length as the lease you get. I've seen too many schools assume their equipment is covered for faults etc for the entire length of the lease when all they had was the 1 or 2 year manufacturers warranty instead of the 3 or 5 year length of lease.

[Cache]

You need to be careful you don't convert an operating lease into a financial lease at the end of it too, you can't "buy out" an operating lease to take title as it then becomes a financial lease.

 

There are ways around it, but it all gets a bit murky and you need to be exactly sure what you are doing and specific on the wording.

[truebluesteve]

No disrespect but lease's can be complicated products so have you considered asking someone with a legal or finance background to take a look at the documents? Your expertise is in IT so let someone else use theirs to help you with this! :-)

[Brimstone]

You need to be careful you don't convert an operating lease into a financial lease at the end of it too, you can't "buy out" an operating lease to take title as it then becomes a financial lease.

 

There are ways around it, but it all gets a bit murky and you need to be exactly sure what you are doing and specific on the wording.

 

Incorrect...an operating lease can have what is known as a "put" option, just as long as the school realise that to take title of the goods the price has to be at "market value" which makes taking title of them offputting for most as the residual value tend to remain high

[minature_hero]

Good points above - thanks for your responses.

 

Fazza - the devices would have a 7 year next business day warranty so as long as the lease is less than that I think I'm covered. - thanks for the tip though.

 

Cache/TrueBlueSteve - Good comments on the wording and getting someone else in to look at this. I've already had the LA Legal team look at one lease from my usual AV provider (they had a 3rd party offer the lease), it was turned down as a finance rather than operating lease. I think I need to go back to the LA Legal Team to to ask what the specific requirements are for the agreement. That's really why I was posting, to see if someone had a link to a respected resource that defines the lease types.

 

I've spoken with various AV suppliers, all seem to offer "operating" lease agreements as they are obviously keen to supply us. It's difficult to see their advice as impartial as they are selling the product along with a lease agreement. Often their information conflicts with each other on what "operating" means. The LA Procurement department has replied back that we should be looking at using a procurement framework but there seems to be as many of these again.

 

At the moment the link Brimstone posted from the Finance and Leasing Association seems to hit things on the head - leasing is complicated for schools and the more you look at it the more complicated it gets!

 

Keep the info coming if you have anymore please - or if you are a school that has experience of dealing with this please PM me so we can maybe chat about this offline if you have time.

[Cache]

Incorrect...an operating lease can have what is known as a "put" option, just as long as the school realise that to take title of the goods the price has to be at "market value" which makes taking title of them offputting for most as the residual value tend to remain high

 

That's different from what I've been told when dealing with the last few leases we had. Taking title of the equipment I was told would make it into a Finance Lease rather than an Operating lease, we could request title be passed to another organisation for a value and that would satisfy the requirement as the school itself would not take legal title.

 

The way in which we did it, with approval, was to negotiate continued indefinite use at the end of the lease term.

[minature_hero]

That's different from what I've been told when dealing with the last few leases we had. Taking title of the equipment I was told would make it into a Finance Lease rather than an Operating lease, we could request title be passed to another organisation for a value and that would satisfy the requirement as the school itself would not take legal title.

 

The way in which we did it, with approval, was to negotiate continued indefinite use at the end of the lease term.

 

We have a really old legacy lease agreement that I'm phasing out this year and it has a similar clause that allows us to get the PTA or some other group to purchase the title for us. The equipment is basicially now junk, or was a long time ago, but we've still been paying for it and I guess this is why there are so many hoops to jump through as the system was abused by some suppliers.

[Brimstone]

As an education establishment you can buy title from the lessor e.g. the finance company direct and not the supplier of the goods as they do not own the goods. Many lease companies allow the reseller a "put" option which allows the lessee e.g. the commercial company to then buy title of the equipment from the reseller.

This is not allowed with an operating lease as the goods have never been an asset on your books.