So is it by design we don’t do leases? or we just haven’t thought about doing them?
What a lease does compared to a loan or cash purchase is:
Allow the use of a piece of equipment with a small, manageable payment each month without debt.
Gives you better cash flow since no large outlay of funds is necessary.
Maintenance on the leased equipment is included. If the machine breaks or is unusable the company we lease it from comes out and makes repairs at no charge or replaces the equipment.
If the equipment is not used as expected or later is not used enough, the equipment can be returned.
Lastly, a lease with a buyout of $1 at the end of the term means The 'space can buy and own it after paying out all the lease payments for an additional payment of $1.
Food for thought… Food for thought…
EDIT: I should mention that this type of lease is used on items with any dollar amount. I personally have experience with this style of lease on $10k-$200k.
Lease agreements generally have language about the responsibility of the lessee to maintain the piece in proper condiftion. With the potential for tool abuse at the space, we could easily have a financial liability for the repair/replacement cost for large and expensive pieces of equipment we have leased.
As to #5, you own it after paying for the actual price of the equipmet PLUS considerable ‘interest’ to compensate the leaser for their financial risk. If the intent is to ultimately own the equipment, the purchasing is always the cheaper option.
Primarily with a for profit business, a lease has significant tax advantages, which is why they are common. We are not a for profit business and would have none of those tax advantages.
These are good points and are true in some or most lease agreements…
Almost all lease agreements will say something like if you abuse the equipment or try using it for something it is not designed for… you pay for repairs. This is no different when compared to ownership. But under normal wear and tear, repairs and even full replacements of the equipment if faulty or a lemon are included.
Item #5 Well as you know there is no ‘interest’ on a lease, but the price per month on a lease with free maintenance and buyout at the end will cost more in the end, BUT… Instead of shelling out hundreds or thousands of dollars today to buy one piece of equipment and then worrying about where to get money for other things over the next few months/years… you have a manageable monthly expense that frees up money to be used elsewhere over the course of years… and with no debt. Cheaper is not always the Best option.
As for taxes… You actually may have that backwards. In regards to straight tax deductions… If you lease equipment you can only deduct the amount of the lease payments as business expenses, so you are limited to the monthly amount x 12 each year. Whereas with a purchase you have options to deduct the full purchase amount in the year purchased or in some instances spread the tax burden over more than one year.
Now the one other benefit to ownership is that you can also deduct for depreciation, but that is not related to taxes on purchasing or leasing… it is in addition to.
Since we are a non-profit organization money is not overflowing or constantly streaming in, so outlaying a lump cash amount today vs making payments over a period of time might not be the cheaper solution in the end, but it will allow for obtaining more equipment today to hopefully provide more value to members and future new members during the term.
Let’s not forget about the possibility of a lease with NO buyout. The payments then become much cheaper per month because we will not own the equipment, but once the term is over in 3-5 years we then get a chance to start another lease with a more latest and greatest model or version This would be good for high tech equipment that gets deemed as old or antiquated quickly. A woodworking planer or automotive lift would not be a fit for this, but maybe a computerized laser CNC machine might.
All of this is just good discussion to explore avenues not previously thought of to achieve the space’s end goals successfully.
I’d like to chime in here and say:
In general, I’m NOT a fan of leasing because, as Walter points out, the middle man has to make money too and I’m paying that.
However, I do think, as Abel has pointed out, there are times and places for them.
I think it warrants consideration.
There is a very BIG difference. With a lease you may have to pay to replace the equipment (Our members can do a lot of damage), yet you still don’t actually own what you just paid for in its entirety (plus whatever you have paid in lease costs). While if you own it, you may have the option to perform a cheaper repair (Leases can dictate who and how such repairs/replacements occur).
I used ‘interest’ because that is essentially what it is. The costs for a lease are designed to pay the leaser for their financial ‘loan’ of the eqipment. Also, I believe polyprinter would be a perfect case to ask about just how much maintenace our tooling would require from such a leaser. I doubt anyone would do so without A LOT more charge then they do with a typical business lessee.
On the other hand for equipment we own (or take loans for), we can allow our members to maintain and perform repairs. Something we can’t do with a lease (most agreements with maintenance don’t allow it)
And this is another issue with lease clauses for faulty or lemons… The nature of our operation means we would have a hard time proving that we weren’t the cause of the fault, and hence the leaser isn’t responsible for the problem. (Those normal use clauses).
If you take a loan on the equipment (which is the other method to control actual cash flow), you can not take the full amount for the purchase price as a tax break–or so my accountant told me the last time the issue came up.
Also as a business, you use a lease (or loan) because you earn revenue with the equipment that covers the expense of the lease or loan over time. We don’t operate that way. Sometimes you will use a tax writeoff for the full amount to offset a large income for a particular year, but you do that by using the income to actually pay for the purchase. You don’t tend to take the loan and write the whole purchase cost off (at least if your wise), since you will be paying that loan off in future years and will not have any tax reductions for those payments.
Finally, yes, you have a manageable monthly expense with no debt, but you also don’t own the capitol item in question. So you will be paying (and potentially paying more each month whenever you renew the lease) for as long as you use the equipment.
We aren’t a business. We will tend to use our equipment long past where a business will move on to the latest and greatest. The HAAS is a perfect example. It is a piece of equipment we were able to acquire because a business didn’t find it useful (nor were other businesses really interested). yet with its antiquated controller and all of its quirks we still find it useful decades after it was initially purchased or leased by the original user.
Dallas Makerspace is a business (not-for-profit). What you are pointing out is that we don’t replace depreciated equipment. Not all for-profit businesses do, though tax advantages make it more likely that they would. For example, many businesses will continue operations using antiquated computer systems that are so old that it’s difficult to find replacement parts. I know of a certain major hamburger franchise in which some of the franchise stores are running on computers that are not Y2K compliant.
Any business that wants to stay in business would replace vital equipment LONG before we do. We really don’t have any problem with down time. In a businees where down time means lost revenue it is a problem. And all equipment has a curve where it starts breaking down more then it is worth, hence why it gets replaced.
The HAAS is a perfect example. The recent Jump Server replacement is another. Computers age much faster then typical industrial tooling. Which is why we ended up replacing a server rather then repairing the old one.
BTW, the IT infrastructure is one of the few areas where it might benefit us to lease rather then own. But the ship has already sailed on that one for the foreseeable future.
BTW, if the hamburger business is the one I think your referring to, it isn’t a question of not wanting to replace hardware. It is a question of not also wanting to replace the custom software (which is a HUGE expense).
I used to work for a company that provided service to the franchise in question. I’d tell you who they are, but that would break a GOLDEN rule ARCHING across our industry. Suffice to say, the non-Y2K compliant systems are at the very bottom of the chain of equipment supplied by the franchise. Corporate stores all have updated equipment; franchised stores often won’t even replace a data cable until it literally crumbles to dust in their hands. The managers won’t put any money into infrastructure if they can avoid it, even if that takes the store down for a week. I’ve seen it many times, as I provided telephone tech support to these stores.
Except for a few major items that provide immediate big advantages to DMS, I’d put the CNC router in that category, I think pay-as-we-go is some of the discipline we need in following the discussions on our expenditures. Leases and loans are on-going obligations that reduce funds available for discretionary spending. I agree with many of the points Walter brought up about middle man profit (lessor) maintenance obligations or damage that limit in house repair/maintenance.
As for taxes, I doubt there are any advantages one way or the other for us. Many companies also use leases because it makes the balance sheet look better by being able to expense off the cost of a lease immediately vs longer depreciation times if held as a capital asset. That difference effectively reduces the cost because of the tax reduction advantage - we don’t believe we benefit from (some of you CPA’s could correct me if mistaken).
Like Walter & JAST, I believe if we want a major highly desired asset now, like the CNC Router, we can finance it cheaper than the built-in interest rate plus lessor profit. We are buy, use (too often abuse) and hold types that keep an asset until it is declared dead and then Makers swam it like carrion beetles for other projects.
I appreciate the idea being brought up, but incurring ongoing payments, at least with the current debates on finances, is not a desirable solution, IMO.
I have done numerous leases over the years, and never done a single one that I was happy with in the long run. If loans are available and you are sure that it is the right piece of equipment, that is going to be the cheaper way to go by far.
Part of it is in my bias set. I almost always buy used, won’t buy technology that is brand new, and will run things for 3x their estimated life span. I made the mistake one time of being talked into the latest and greatest copier that would do everything but answer the phone. It didn’t do much of what the sales guy said, was over priced, and we were STUCK with it. I have also done several large pieces of woodworking equipment. The leases were OK, it’s just that the cost was 1.5X what a bank loan would have been. And extra insurance costs.
I know people that don’t drive a lot and like new cars that love leasing. The difference is that I have not had a car payment for the last 8 years, and they have a monthly payment every single month for the rest of their life. (Plus the insurance cost on a newer vehicle).
So are you “the guy” who buys a used HVAC machine from eBay? I’m teasing here if you didn’t get the sarcasm. We had a customer who bought a 30 year old machine off eBay. The coils were beat to hell, it was an old recip & the controls for it were in about the same condition. That same customer bought a generator as well to run the machine. Now back to our regular scheduled programming.
The basic rule is that if you can’t work on it yourself, or if parts are not available for it, don’t buy. Among other things, I have a Delta shaper that was made in 1942. It is just about identical to the current model, parts are easily available, and I paid $75 for what would have been a $2,000 machine new. (And since I understand the theory of HVAC, but not the application, I would never buy something like that)
