Introduction Asset Acquisition Process Types of Acquisition How to Decide Between Lease or Purchase Next Steps and Recommendations Questions & Answers

Transcription

1 NIGP Webinar Presentation By Andreas Addison, Civic Innovator Richmond, VA Introduction Asset Acquisition Process Types of Acquisition How to Decide Between Lease or Purchase Next Steps and Recommendations Questions & Answers 1

2 Andreas D. Addison Civic Innovator, City of Richmond 5 years as a Public Servant University of Richmond, MBA Many lease contracts throughout the city Management of contracts was by department Inconsistent Responsibility for payment(s) Finance and department What can be leased? Purchased? Bonded? Support for centralized structure and decision making for the organization 2

3 Master Lease Agreement (MLA) Simplify and outline terms Strengthen buying power Standardize contracts throughout administration Third party contracted for all leases How to institute MLA into operation? When to lease or purchase? What to lease or purchase? Who makes lease or purchase decision? How are asset acquisition decisions made? Strengthen buying power Standardize contract terms and exposure Prepare for analysis between buying options 3

4 GASB Rules Change Leasable assets now count towards debt capacity Current and new leases must be analyzed Department asset = City Debt Burden Impact on Credit Rating = Both Good & Bad Shift in approach Asset acquisition options are more equal Needs: Master Lease in action Asset Inventory Expected life cycle Predictable annual cash flow & expenses Terms and Requirements Expected Maintenance Costs Annual Life of asset Acceptable time out of service Installation and removal costs 4

5 To make the best decision: Purchase Cost per unit Resale Price at end of term Discount Rate Present Value: Purchase, Resale, & Return Down Payment Period Payment: Number, Amount and Frequency Return fund amount Length of time for use is important Replacement schedule Terms of contract(s) Installation Removal Annual staggering of asset acquisition Five year life expectancy of 100 assets 20 per year for proper replacement 5

6 When to lease, purchase, or bond? Life expectancy of asset Short term 1 5 years Leasing and Purchasing Mid term 5 10 years Purchasing Long term 10 years plus Cash, bond or other long term payment option Exceptions to all classifications! How to implement and standardize the process for asset acquisition? What are the policies and procedures for making a decision about which financial vehicle to use? 6

7 Research: there were reports and studies No standard process or policy existed Best practices abound, but little documentation for operation of decision Found North Dakota form, more needed Conclusion: Lease Purchase Decision project Lease vs. Purchase Cost/Benefit Analysis Agency: Division: Asset Description: Date: Prepared by: Inputs Purchase cost Resale price at termination of lease Periodic discount rate Initial deposit or down payment/trade-in Period payment Number of period payments Purchase - option price Initial deposit returned Payment in advance? (Y/N) Intermediate Calculations Adjustment for payment in advance Present value of purchase - option price $0 Present value of resale price $0 Present value of returned deposit $0 Valuable resource: North Dakota Lease vs. Purchase Cost/Benefit Analysis Limited analysis functionality Simple straight up calculation Required certain terms up front Rates Depreciation Rates End of Life Value Cost Analyses 1. Present Value Costs if Held for Life of Asset Purchase costs $0 Lease costs $0 Saving (cost) of leasing asset $0 2. Present Value Costs if Held for Term of Lease Purchase costs $0 Lease costs $0 Saving (cost) of leasing asset $0 7

8 Case by case basis for lease or purchase Comparative costs and other factors Should not depend on fund availability Impact of decision can have lasting effects Budgetary Credit Rating Operations Many questions arose: Legal, Procurement, Finance, Leadership What is a leasable asset? When do you purchase? When do you pay with cash? When do you lease? Procurement needs answers to proceed 8

9 Leasing: Pro & Con Lease Purchase: Pro & Con Purchasing: Pro & Con Spreads out cash flow, includes depreciation Performance based contracting Maintenance costs reduced or minimized Maintenance, life cycle, installation, removal Enforced asset replacement External maintenance Contractual performance enforced 9

10 More expensive: many costs included Less control over asset Limited customization Contractually obligated to vendor Cannot extend useful life beyond contract Insurance standard requirements Same benefits as leasing Flexibility of spreading out payment(s) Improved cash flow Acquisition of asset at end of lease Buy out option Reduced staff costs for maintaining 10

11 Asset management has to be strict Insurance coverage requirements More expensive: costs included Less control over asset Limited customization Contractually obligated to vendor Buy out payment has to be budgeted for Cannot extend useful life beyond contract Customization of assets as needed Control of asset management Flexibility in rough times lengthen life cycle Reduce dependency on outside support 11

12 Cash flow more money outgoing Escalating maintenance cost risk Replacement on your dime Asset management is important Expected time and use period of asset Frequency of use during expected life Financial & operating advantages Total contractual amount to be paid per asset Net purchase price 12

13 Transportation, installation, removal costs Maintenance and service costs Fund availability & Cost of Capital Obsolescence of equipment options Ex. Technological advancement Availability of cash, bond funds, and lease terms Plans for use of equipment after useful life Trade in or salvage value at end of term/use Maintenance resource availability 13

14 Many factor are necessary to make decision A lot of data and information Not all immediately available, vary Asset management is key Purchasing: best option if Use expected to be longer than 3 years Limited use of equipment expected Uncertain future funding availability 14

15 Lease Purchase: best option if Monetary value of equipment is high Useful life is longer than 3 years Cost of capital benefits Spreading out payments is beneficial Leasing: best option if Replacement at end of life needed Technological advancement is high Agency changes and shifts Downsizing or reorganization Business need for quick adoption of new assets Spreading out funds over longer period of time 15

16 Computers Laptops, desktops, software IT Infrastructure Servers and other equipment Vehicles Trucks, sedans, vans, etc. Select heavy equipment Office equipment Inventory of 400 desktops and 800 laptops Desktop = $700 each Laptop = $1000 each Desire standardization and modernization Expected life cycle is 4 years Lease contract for Year 1: 100 desktops 200 laptops 16

17 Desktops: 100 x $700 = $70,000 Laptops: 200 x $1000 = $200,000 Total Purchase: $270,000 per year Annual Lease Price: $70,000 +/ Leasing is best option if: Asset replacement supports effective operations Staff support for systems, not hardware Cash flow is unreliable Purchase is best if: $270,000 is available each year Maintenance staff is available for assets 17

18 How can procurement professionals facilitate government agencies acquiring of assets to assure the best option? Lease purchase decisions are complicated, how to support the best option without overburdening purchasing staff? How to inject these points of data, information and decisions into the process? Explanation of leasing, cash payment, bond Impact of different asset acquisition options Describe factors needed for decision Lease vs. Purchase Matrix 18

19 Q&A To submit a question, type your question in the Q&A table found at the right hand corner of the screen, then click on Ask. Thank you for your questions 19