Leasing equipment to a federal government agency or entity offers leasing companies, finance companies, and manufacturers (together, “lessors”) a great opportunity for growth, but it comes with strict rules, regulations, and compliance requirements. The federal government is one of the largest and most stable leasing markets, offering billions in annual equipment leases. For lessors seeking long-term revenue, federal leasing presents a valuable growth opportunity. Success in federal leasing requires an understanding of how it works, the risks involved, and how contracts are structured.

How Federal Leasing Works

Government agencies lease a variety of equipment, from office furniture to complex machinery. Leasing is often preferable to purchasing because it allows agencies to acquire equipment without a large upfront investment. However, unlike commercial leases, which tend to be more flexible, federal leasing is subject to strict regulations.

There are two main ways to lease equipment to the federal government:

1. General Services Administration (“GSA”) Schedule Contracts – These awards offer pre-negotiated terms and pricing, streamlining the process for agencies to lease equipment.
2. Standalone Procurement Contracts – These opportunities allow for more flexibility, but typically involve a bidding process or sole-source justification.

Both methods require the lessor to have subject matter expertise, to strictly comply with federal rules, and to make a significant investment in processes. Many lessors address these challenges by establishing dedicated teams or working with experienced partners who specialize in federal leasing. GSA contracts are generally best for those wanting steady government business, while standalone contracts work better for one-time or specialized deals.

Key Differences Between Federal and Commercial Leasing

Leasing to the federal government may seem similar to leasing to any other customer, but there are important differences.

One major difference is the procurement process. In commercial leasing, lessors negotiate terms directly with their customers, but federal leases follow strict procurement rules. If a federal government lessee uses a GSA contract, the terms and pricing are set through pre-negotiated schedules, which typically include multiple competitors for the government to choose from. If an agency  uses a standalone solicitation, the lessee may require a formal bidding process or a justification and approval for a sole-source award.

Another key difference is payment reliability. The federal government is one of the most dependable customers, with payments backed by congressional funding. However, government leases come with unique termination risks (discussed below) that lessors need to consider when structuring contracts.

Federal leasing is also subject to more regulatory oversight than commercial leasing. It is subject to the Federal Acquisition Regulation (FAR) and other government-specific policies. In contrast, commercial leases are usually governed by standard contract law or the Uniform Commercial Code (UCC), which allow for more flexibility.

Leasing Structures in Federal Procurement

Federal agencies utilize various lease structures, based on their budgetary and operational needs. Among the most common are:

1. Lease to Ownership Plan (LTOP) – This structure allows agencies to make installment payments that eventually lead to ownership of the equipment.
2. Lease with Option to Purchase (LWOP) – This type of lease grants agencies the flexibility to purchase the equipment at the end of the lease term but does not require them to do so.
3. Traditional Operating and Capital Leases – Agencies may also enter into standard operating leases for temporary equipment needs, or capital leases when long-term usage is required.

Finance and leasing companies typically structure these agreements to comply with FAR guidelines and align with government budget cycles. In contrast, manufacturers and vendors primarily use leasing as a tool to facilitate product sales, sometimes  embedding financing within their equipment offerings. 

Leasing Through GSA Schedule Contracts

The GSA administers the Multiple Award Schedule (MAS) program, which allows federal agencies to lease equipment from GSA pre-approved vendors. GSA contracts simplify the leasing process by providing pre-negotiated terms and pricing, reducing the need for lengthy bidding procedures. However, businesses must meet strict qualifications to participate.

Obtaining a GSA contract can take six months to two years and requires lessors to submit detailed financial records, past performance evaluations, and compliance documentation. Lessors must also adhere to federal pricing regulations and follow laws such as the Trade Agreements Act, which requires that equipment be manufactured or substantially transformed in one of an established list of countries. Even after approval, lessors must maintain ongoing compliance and regularly update pricing and contract terms. Many businesses hire consultants or establish internal teams to manage their GSA contracts.

One major benefit of the GSA Schedule is that agencies can lease equipment simply by issuing a purchase order, streamlining the procurement process. Despite the challenges, many companies find GSA leasing to be a worthwhile investment, offering steady government business and a structured path to working with federal agencies.

Leasing Through Standalone Procurement Contracts

If an agency cannot find what it needs on the GSA Schedule, or requires a more customized solution, it may issue a standalone procurement contract. These contracts offer greater flexibility than GSA leases but also come with additional requirements and a longer approval process.

To lease equipment through a standalone procurement contract, agencies typically issue a Request for Proposals (RFP) (though the terminology varies by contract type). Vendors submit bids, and the agency evaluates them based on cost, technical capabilities, and other factors. This process can take longer than GSA leasing, which allows agencies to bypass bidding by issuing a purchase order once a GSA schedule is in place. However, standalone contracts provide greater flexibility in structuring customized terms.

Termination Risks in Federal Leasing

Federal leases come with several risks that are not typically found in commercial leasing, including termination for non-appropriation, termination due to the absence of a bona fide need, and termination for convenience. Lessors need to be aware of these risks when structuring lease agreements:

1. Termination for Non-Appropriation - Most federal leases depend on annual budget approvals from Congress. If funding is not approved, in any given year during the term of the lease, the agency can cancel the lease without penalty, even if it still needs the equipment.
2. Termination due to the Absence of a Bona Fide Need – The federal government can terminate the lease if the ordering agency no longer has a “bona fide need” for the equipment. The termination right hinges on the agency no longer needing the equipment, and the agency cannot terminate on this basis simply to lease a competitor’s product.
3. Termination for Convenience - The federal government can terminate a lease at any time if it decides termination is in the government’s best interest (i.e., if the government decides it does not want the equipment any longer or wants similar equipment from a competitor). Lessors may be compensated for certain costs incurred as a result of the termination, but those costs do not include expected profits from the remainder of the lease term.

Some federal leases include “termination ceiling charges,” which functionally penalize the agency for terminating the lease early. These charges help lessors recover some of their costs, but they are not utilized universally, are subject to negotiation, and are unlikely to reimburse the lessor fully for lost future profits.

Final Thoughts

Leasing to the federal government can be profitable, but it comes with unique challenges and costs. Whether leasing through GSA Schedule contracts or standalone procurement contracts, in deciding whether to move forward, lessors need to analyze the cost, compliance, contract structure, risk tolerance, and experience of their team. While the process comes with challenges, those who manage it well can tap into a stable, long-term revenue stream backed by the federal government. A strong federal leasing strategy can diversify a lessor’s portfolio and offer steady income, even during economic downturns, making it a worthwhile addition to their leasing business.