Procedure for Requesting Approval for an External Third Party Lease

University financial policy #2311 - Procurement of Equipment requires a formal review of all external third party equipment leases over $100,000 by the Office of the Vice President for Finance/Treasurer and final review and execution of the supplier lease contract by Purchasing Services. Requests to lease equipment (with total lease payments >$5,000) are subject to the University's competitive bidding guidelines. Faculty and staff are empowered to solicit bids/quotations from qualified suppliers; however, Purchasing Services staff members are available to assist in the solicitation of competitive bids.

The following are the definition and terms for University equipment leases:

1. Rentals - Rentals are formal legal binding contracts with an external supplier that commit the University to pay stipulated term payments for the use of an asset (either equipment or real estate) for a specific period of time. For the purpose of these Equipment Lease Guidelines, a rental is considered to be the commitment to pay for the use of the asset for a period of one (1) year or less, or with total contracted payments over the full term of the rental period less than $5,000. Purchasing Services is responsible for reviewing and approving all supplier rental agreements and related purchase orders prior to their final approval in BEN Buys. Rental amounts are encumbered when a purchase order is created and expensed is incurred.
2. Leases - Leases are formal legal binding contacts with an external supplier that commit the lessee to pay stipulated term payments for the use an asset (either equipment or real estate) for a specific period of time. For the purpose of these Equipment Leasing Guidelines, a lease is considered to be the commitment to pay for the use of the asset for longer than one (1) year, with total contracted monthly payments over the full term of the lease of $5,000 or greater.

Capital leases are considered long-term financial obligations of the University. Therefore all capital leases and lease renewals are considered a use of the University's debt capacity.

3. Capital Lease - A capital lease is an equipment lease that is capitalized if the total anticipated payments over the term of the lease, excluding any transportation costs, are greater than or equal to $100,000, on a per contract basis, and at least one of the following criteria is met:
   1. By the end of the lease term, ownership of the leased property is transferred to Penn.
   2. The lease contains a bargain purchase option that Penn reasonably expects to exercise.
   3. The lease term is substantially (75% or more) equal to the estimated useful life of the leased equipment.
   4. At the inception of the lease, the value of the minimum lease payments is 90% or more of the fair value of the leased equipment.

   Capital leases are reported as an asset and a liability on Penn's financial statements and interest and depreciation are expensed. Capital leases are generally not cost effective for the University and are not recommended in most cases. Please see Internal Equipment Financing Program for information on internal financing.

4. Operating Lease - An operating lease does not meet the definition of a capital lease in 2 above. Operating lease payments are expensed as incurred.
5. Approvals and Thresholds - Equipment leases with total anticipated contracted cash payments over the term of the lease of $100,000 and above must be approved by the Vice President for Finance/Treasurer. Equipment leases with total contracted cash payments over the term of the lease under $100,000 can be approved by managers with requisite expenditure authority in relationship to total contracted cash payments.
6. Board of Trustees Approval - Equipment leases with total anticipated contracted cash payments of $1,000,000 and above require approval by the Board of Trustees.
7. Lease Terms - Procurement is responsible for negotiating equipment lease related business terms. Equipment leases must be signed and executed by the Chief Procurement Officer, the Director of Purchasing or their designee.
8. Reporting Requirements - Notification by the leasing department must be sent to the Comptroller's Office of all capital leases along with required property information for addition into the University's fixed asset system. The leasing department is responsible for tagging the equipment and maintaining the property records in the fixed asset system after acquisition.

   Purchasing Services must provide to the Comptroller's Office a schedule of future lease payments related to operating equipment leases in accordance with the University's annual closing schedule.

9. Receiving Equipment - The department must inspect, verify and document the condition of leased equipment when received in according with Financial Policy #2309 - Receipt & Inspection of Purchased Goods.
10. Insurance - Penn's high deductible insurance coverage makes it unlikely that the University's insurance carrier would pay for any loss or damage. Therefore, lessor's insurance for equipment should cover all aspects of damage and injury. For more information, contact the Director of Risk Management.
11. Change of Terms - Departments must observe the start and stop dates of the lease. Using the equipment outside the terms of the agreement has significant contractual implications and may subject Penn to additional rental charges, early termination charges, and other liabilities. The lessor's insurance may be valid only during the stated period. Departments interested in terminating a lease prior to its expiration date are to contact Purchasing Services to review their termination requirement and determine if early termination is feasible under the terms of the lease contract.
12. Equipment Purchase at the End of the Agreement - To purchase leased equipment at the end of the lease, the ordering department must exercise the purchase option in accordance with the lease contract and issue a new BEN Buys purchase order for the purchase price of the leased equipment.

Related Links

• Penn's Office of Research Services
• Federal Acquisition Regulations (FAR)
• Office of Management & Budget (OMB)