The business of: Equipment leasing and rental
As the economy continues its slow crawl out of the recession, school districts that had put off capital purchases are now replacing outdated equipment and buying new technology.
However, administrators are still considering large-scale acquisitions with caution, says Michael Lockwood, president of TEQlease Education Finance, a company that helps schools and other industries finance equipment leases.
A particular concern for district leaders is technology. Desktops, laptops and tablets change so rapidly that staying current can be challenging and somewhat cost-prohibitive, especially if the technology is widely used throughout schools, says Mike Rangos, vice president of contracts for E&I Cooperative Services, a member-owned, nonprofit co-op that helps educators connect with suppliers.
Districts are increasingly relying on e-readers, mobile devices and other emerging technologies to, in part, level the playing field for students. District leaders seeking to acquire more of this technology must decide whether purchasing or leasing is more cost-effective.
Many districts are barred from making multi-year financing arrangements, so for them, up-front purchasing is the only option. The benefits of this method are immediate ownership, no long-term contracts, no interest payments or fees, and no penalty if future budgets are cut and lease payments can’t be met. But the downside is that a district’s budget for that year may not match its needs, forcing them to reduce the amount of items they can purchase.
Fortunately, the cost of computers has dropped significantly and more schools are buying rather than leasing, says Rangos. More districts also are buying, rather than leasing, mobile devices.
Copiers appear to be an exception to the trend, says Rangos. Depending on the type of copier, costs can run from $2,500 to $10,000, with digital copiers costing $50,000 or higher. Additionally, the technology changes every three to five years, so copiers can become outdated quickly. Leasing may prove the better route—although schools need to factor in click/per-copy and maintenance fees before deciding, Rangos says.
When budgets are tight, there is a third option: renting copiers via a month-to-month agreement. It allows schools to acquire needed equipment without being bound to a lease or incurring penalties if the district can’t make payments. But the downside is that rented machines tend to be used or older.
Power up purchasing
Another cost-saving strategy is to buy through group purchasing agreements or consortiums. Green Local Schools in Ohio participates in a consortium comprising regional school districts. Kimberly Brueck, director of learning and teaching for Green Local Schools, says funding is a “constant consideration” in the district of 4,300 students and 600 employees.
The district’s technology includes desktops, laptops, tablets, iPads and copiers, says Brueck, who oversees curriculum, technology, professional development and assessment at Green Local Schools. Computers and tablets are typically purchased at a bulk discount through the consortium.
For an annual fee, the consortium also provides the district with hosted services such as wireless, IP telephony, voicemail, internet, firewalls, email, archiving and data backup. But previously, the district hosted its own services, and also purchased and maintained its own servers, software and maintenance contracts, says Brueck.
“By collaborating with other school districts throughout the consortium, we can take advantage of volume pricing and hosted services to access high-quality, supported and sustainable solutions at very affordable prices,” says Brueck. “This has also enabled the top district leaders to focus human resources on professional development services and student education, rather than on purely highly technical matters.”
Leasing pros and cons
Leasing’s clear advantage is spreading payments out over time. Depending upon the item, provider and terms, leases can run anywhere from three years to 10, or longer. Additionally, leasing can be a faster way to finance capital expenditures. Bonds, for instance, must go to the public for a vote, and grants must be applied for and won. Lease agreements have also become increasingly flexible and often offer competitive interest rates, depending on the district’s credit and other factors.
But strict multi-year contracts, funding uncertainties and penalties for breaking contracts can scare districts away from leases. Still, options exist that address concerns about getting locked into long-term funding via commercial leasing or other financing, says Bob Arnowitt, vice president of government financing for First Capital Equipment Leasing.
Arnowitt says the two common forms of leasing are:
- Commercial-type leasing: A business makes monthly payments, and returns or purchases the equipment at the end of the lease period.
- Tax-exempt municipal lease-to-own financing: Ownership passes to the school upon delivery. The interest rates are based on the “very low” municipal rates for which districts are eligible. Most importantly for administrators, municipal lease contracts contain “non-appropriation of funds” language.
The tax-exempt financing means that if funds aren’t available for any legal reason, the lease can be terminated after that budget year and the equipment returned.
“No one expects that to happen, of course, but the fact that the district has the legal prerogative to terminate the lease is why many treat the obligation as an expense rather than debt,” says Arnowitt. Unlike an expense, a debt must be repaid regardless of changed financial circumstances.
Although interest rates change daily and depend on factors such as credit worthiness and lease terms, Arnowitt says that municipal interest rates will always be much lower than commercial rates. They also compare favorably to bonds, which create debt.
So what kind of lease should you use? Leases requiring the return of equipment—at the district’s expense—are unattractive for some administrators, due to the long-term costs involved and lack of ownership. Additionally, such leases force districts to wipe hard drives, which further increases the actual cost.
Most district leaders can’t sign firm-term, multi-year commercial leases, especially because the interest rates are usually much higher than the tax-exempt municipal lease-to-own product, Arnowitt says.
These are some of the reasons administrators prefer to choose the lease-to-own option via the tax-exempt municipal lease, says Arnowitt.
Weighing the options
Administrators should explore the various ways of financing purchases. Districts’ options include:
- Leasing from a provider who offers either a standard commercial lease or a municipal lease-to-own product.
- Leasing directly from a product manufacturer or supplier that also may be able to provide technical support, if this is needed.
- Securing (non-lease) financing offered through a bank, credit union or other financial entity.
District leaders searching for the best acquisition tool should consider several points, such as their budgetary restraints and whether the costs can be spread out over several budget periods. “Should the school need to acquire more technology than its first-year budget allows, leasing is a tool to address the problem,” says Lockwood, of TEQlease Education Finance.
Two other questions to weigh include how often technology needs to be refreshed and the district’s attitude toward older, potentially-outdated products, he says. “If a school needs to refresh often, for example, within a two- or three-year cycle, leasing is the preferred option,” Lockwood says.
Still, for some districts, low interest rates aren’t as attractive as paying in cash, says Arnowitt. “But I’m getting more calls about leasing,” he says, “and about the tax-exempt product.”
Pamela Mills-Senn is a freelance writer based in California.