After determining that a lease is the best option for acquiring needed equipment, the requisitioner should obtain a copy of the proposed lease agreement from the vendor and complete the Financing Checklist Form. The requisitioner will then submit a requisition, along with the Financing Checklist and proposed lease agreement, to the campus Fiscal Agent for approval.

To expedite the order, the Fiscal Agent should submit the requisition, Financing Checklist, and lease agreement to Property Accounting for accounting review and approval. Property Accounting will add any further information needed and forward the packet to Purchasing. Before a purchase order is issued, Purchasing will obtain approval for the contract from the Legal Department.

• Capital Leases (Lease-purchase agreements)
• Operating Leases
• Installment Purchases
  

Capital Leases

CAPITAL leases (often called lease purchase agreements) transfer ownership or title to the lessee (MCCCD) upon completion of the term (at the END of the lease or agreement), and may include a bargain purchase option. Capital leases may be funded from Funds 2, 3, or 7. Use of Fund 3 for payment of capital leases is restricted to conditions of applicable grant agreements.

Example: Rental of a copy machine for more than one year with buyout at the end of the lease term for $1.00, or option buyout before the end of the lease term at a reduced price.

For a CAPITAL LEASE (lease purchase), determine:

1. If the lease meets one of the four criteria for capital leases:
   • Does lease transfer ownership to MCCCD?
   • Is there a bargain purchase option? If so, what is the amount? A bargain purchase option is a provision allowing the lessee to purchase the leased property for a price that is lower than the expected fair market value of the property at the date the option becomes exercisable. The difference between the purchase price and the expected fair market value must be large enough to make exercise of the option reasonably assured at the inception of the lease.
   • Is lease term equal to 75% or more of asset's estimated useful life?
   • Does the present value (PV) of the minimum lease payments equal or exceed 90% of fair market value of the leased property?
2. Principal or asset cost
3. Interest Rate
4. Installation costs
5. Taxes and insurance
6. Warranty/maintenance/usage costs
7. Fair market value (what MCCCD would pay if the leased property was purchased outright on the contract date.)
8. Lessee's incremental borrowing rate, or Lessor's implicit interest rate
9. Number of years/months of the lease
10. Periodic payment
11. Account coding (IMPORTANT: capital leases may NOT be charged to Fund 1)

FOR ASSISTANCE, please call Capital Asset Accounting

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Operating Leases

OPERATING leases allow the use of an asset for a specified period of time and DO NOT confer ownership or title to the lessee. Operating leases may be funded from Funds 1, 2, or 3.

Example: The rental of a copy machine for more than one year with the lease being renewed or the copy machine being returned to the lessor at the end of the rental period. However, if the total amount of rent (to be paid over the lease term) exceeds 90% of the list price of the copy machine, the lease must be classified as a capital lease NOT an operating lease.

For an OPERATING LEASE, determine:

1. That the lease does NOT meet any of the four criteria for capital leases. If a lease meets ANY ONE of the four criteria for capital leases, it may be classified as an operating lease only if the lease agreement:
• is for a period of up to 12 months
• is non-renewable
• is cancelable
• does NOT contain a bargain purchase option or otherwise show intent to own
2. From the vendor (and include on the requisition) the following:
• whether lease is cancelable or non-cancelable (if non-cancelable, determine if the District has legal recourse such as a fiscal funding clause)
• usage costs
• rental term
• periodic rental expenditures
3. Account coding (IMPORTANT: An operating lease may NOT be charged to Fund 7)

For either type of lease, show any trade-in value or allowance amount on the requisition. Subtract this amount from the total purchase price to arrive at the net asset value or lease amount. Also, list the description, tag number, or serial number of the equipment traded-in on the requisition.

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INSTALLMENT PURCHASE

An Installment Purchase agreement transfers title to the buyer at the beginning of the agreement. For accounting purposes, installment purchases are treated as CAPITAL leases.

Financing Checklist Form

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