SECTION 320: Lease, Lease-Purchase and Installment Purchase Agreements

Last Updated: June 2008

I.    Execution of Agreements

II.   Evaluation Criteria

III.  Accounting

IV. Amending Existing Agreements

NOTE:  For real estate leases, refer to Section 323 of the Manual of Business Procedures.

I.  Execution of Agreements

A.  By directive of the Michigan State University Board of Trustees, only the President, the Secretary to the Board, the Vice President for Finance and Operations and Treasurer, the Assistant Vice President for Finance and the Purchasing Department have the authority to bind the university’s financial resources through the execution of lease, lease-purchase and installment purchase agreements. Individual university departments have not been granted that authority.

B.  University departments considering a lease, lease-purchase or installment purchase agreement must submit a requisition and a proposed agreement to the Purchasing Department for review and approval; municipal leases must be submitted to the Controller’s Office for review and approval.

C.  The Purchasing Department is responsible to determine the appropriateness of leases, lease-purchases and /or installment purchase agreements. Purchasing obtains legal review of lease documents through the General Counsel’s office. Purchasing negotiates any suggested changes to the terms and conditions of the lease documents with the lessor and subsequently receives final approval from the General Counsel’s office. The Purchasing Department may also conduct its own lease/buy analysis or it may suggest a lease-purchase through University Stores http://universitystores.msu.edu/html/lease/ to avoid East Lansing personal property tax and/or an unfavorable lease rate.

II.  Evaluation Criteria

A.  Leases, lease-purchases and installment purchase agreements meeting the following criteria will be considered an equipment purchase, and the purchase order will be coded with a 091 expenditure classification. When the final payment is made and title passes to the university, the object code will be changed to 090 providing the residual value is greater than $5,000.

B.  General criteria to determine when a proposed agreement will be considered an equipment purchase:

1. The lease period is equal to or greater than 75% of the leased equipment estimated economic life.  In cases where the lease contains a purchase option, a shorter lease period may be considered as criteria.
2. Title is transferred to the university.
3. The terms of the agreement indicate that it is likely to terminate with title transfer to the university.

III.  Accounting

A.  Year-end balances will not be carried forward to cover object code 091 encumbrances.

B.  Equipment purchases are coded with object code 090 equipment.  Encumbrances coded 090 will be carried forward to the extent of funds available.

C.  Payments under agreements which are exclusively rental in nature (no option to purchase available) are coded with object code 052 rental.

IV.  Amending Existing Agreements

A.  If a department opts to either amend a rental/lease agreement to incorporate a purchase option, or to consummate a rental/lease agreement with a purchase, a requisition must be submitted to Purchasing authorizing the proposed change.

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