Higher Ed: Lease Versus Buy
In the past year, there has seemed to be a growing number of companies who are looking to provide financial services to colleges and universities. They reach out to purchasing agents in the school and tell them all the benefits of leasing, and how they are making a big mistake if they are not leasing. In my experiences and through education, my view has always been that there is no “one good” answer when it comes to lease or buy. Which makes it even more frustrating when companies push it on you. They try to make you feel like it is the best option possible, and you simply don’t understand finances if you don’t agree with them. I am writing to remind you that there are two sides to this argument, and they both have pros and cons.
In the for-profit world, there are a host of reasons to think about lease versus buy. These can include tax write-offs depending on how you amortize the purchase, and can also include what they want to list as property owned on their financial reports. These issues do not play the same role in higher ed, particularly when it comes to technical purchases.
A salesperson wrote to me recently highlighting these benefits of leasing:
- Budgets — Budgets are increasingly challenging, but technology demands and costs continue to increase.
- Upfront Costs — Leasing removes the massive capital one-time costs of technology.
- Lifecycles — Leasing is perfect for establishing a long-term strategy for lifecycle replacements.
Let’s look at all of these concerns from both sides.
From the lifecycle perspective, leasing is in fact a highly desirable situation. Regardless of the terms of the lease, you have a built-in period of equipment replacement. If you are smart and organize the lease into say, six or seven separate annual leases, you put your entire campus on a manageable rotating improvement plan. This ensures equipment that is continually up to date and some of it may even stay under the manufacturer’s warranty during the lease period. From a technology manager’s perspective, that scenario is pretty hard to beat.
Yet, we live in a world where not all of our dreams come true. In higher ed, leasing versus buying is a discussion of operational expenses versus capital expenses. There is no doubt that most companies that want to sell equipment to a school would love for those purchases to be operationalized. They believe that doing so makes a clear path forward for a regular replacement of the equipment. Most manufacturers and integrators don’t offer the financing directly, but rather through a partner, so for them, it is the best of both worlds. They get their money up front (maybe even a kickback from the leasing company) and they feel they have you locked into future purchases. But this may not always be what is best for the school. Budgets are particularly tight in higher ed right now for a number of reasons. The money that schools received from COVID funds is no longer available. Inflation is at record highs, and in many institutions around the country, enrollments are on the decline. Despite these pressures, tuition increases can not match the current inflation rates.
Because the tuition of most schools can not exceed a 3% annual increase, which is also often the same amount that employee raises and benefits might increase, schools are at a point where they need to cut their budgets. This actually pushes against leasing equipment. Schools often talk about their platform costs, in corporate lingo that would be the fixed costs. The costs that you do not have control of year over year. Any organization wants to keep these costs as low as possible. Leases contractually tie you into a multi-year contract, therefore increasing your annual platform cost. If you have been in higher ed for at least 10 years, you are aware there are years during which budgets need to be cut or stay flat. Our financial offices like to have some flexibility in budgets when those times come and do not like having their hands tied. Technology hardware is an area where most of the time, we can get “one more year” out of the equipment. As responsible decision-makers of our schools, we may need to be prepared to support that equipment for another year, regardless of what our ideal situation would be. Additionally, schools may be able to keep their annual operating budgets low and use fundraising or grants for upgrading technology in spaces. Each of these scenarios argue against leasing equipment.
In regards to large upfront costs, I have never encountered any colleague who replaces all their campus technology in one fiscal year. Rather, many have already operationalized their upgrades and maintenance by setting an expected life of a classroom and use that to divide the total cost of upgrade and maintenance. That becomes their annual operating budget. It would only be in a very rare case where a school got very far behind in their technology updates that leasing would remove a “massive one-time cost”.
In the end, it is really a question of the strategy of your school. Where do you currently stand in regard to the stability and age of the equipment? What value does having new equipment bring to your school? What is your forecast for the coming years for your budgets? All of these things need to be considered when deciding what financial plan you decide to implement.