How to finance your dark fiber network: Lease vs. IRU
Before you decide to commence last mile construction for a dark fiber network, you need to find a financing solution that works for you. There are two main choices: dark fiber lease agreements and dark fiber indefeasible rights of use (IRUs). Both have their advantages and aspects worthy of consideration. You should decide which is best for you and your business. First, let’s walk through what these two options entail.
- Dark Fiber Indefeasible Right of Use (IRU): This is the most common financing option. The lessee signs a binding contract granting them rights to a fiber network for a set amount of time — usually 10 years at minimum. Generally, though, IRUs last about 20 or 30 years. They pay an upfront payment, with additional, smaller annual payments for maintenance. These costs are usually determined by route length rather than number of strands, and the maintenance charge is usually adjusted periodically to reflect inflation. In addition to general use, the purchaser is entitled to service credits if the network suffers an outage which causes the purchaser financial loss.
- Dark fiber lease: Dark fiber lease agreements are usually divided into monthly or annual payments, which allow the end user to have control over the fiber network for the length of the lease agreement.
The main differences between the two payment plans come down to flexibility and value. Dark fiber leasing is more flexible, but IRUs offer better long-term value. Leasing payments, if drawn out over a period of 10 or more years, end up being much more expensive than a dark fiber IRU. If, however, you can’t imagine yourself using the network for an extended period of time, or can’t afford the upfront payment associated with an IRU, then leasing might be a good option. For those who know their work will necessitate a high-speed, high-bandwidth network for years to come, a dark fiber IRU is probably the best financial decision.
With an IRU, though, the purchasing party absorbs the risk of traffic, routing, electronic delivery equipment and obsolescence. Lease agreements offer flexibility to end or modify an agreement, whereas IRUs are final for the life of the agreement.
Another factor to consider is whether your specific agreement is considered an “asset” or an “expense” under generally accepted accounting principles (GAAPs). Dark fiber lease contracts, according to GAAP, are accounted for as an expense. Thus, the lease of dark fiber is accounted for as a current liability, with the remaining contract accounted as a non-current liability. Alternatively, dark fiber IRUs are considered assets, which you would be able to have amortized over the life of the contract benefit period. You should consult with your accounting department to see what implications each option might have for your organization.
There are many factors to consider when choosing the financing option that’s best for you and your organization. At Arch Fiber Networks, we’re willing and capable to work with you to find a solution that fits your needs. Be sure to check out our Dark Fiber 101 guide or drop us a line if you have any questions.