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Fair Market Value Leases

A Fair Market Value lease allows the lessee to utilize the equipment for a designated number of months with end of lease options to continue to lease the equipment, return the equipment and upgrade to new equipment or purchase the equipment at the then determined fair market value price of the equipment. An FMV lease is also known as an operating lease.

This type of lease is quite common for those business that want to use an asset for a short period of time, and replace it at the end of the lease period. The lessor has ownership of the assets and bears the risk of obsolesce.

Capital Leases

A Capital Lease allows the lessee to utilize the equipment for a designated number of months but requires the lessee to book assets and liabilities associated with the lease if the lease agreement meets specific requirements. A capital lease is considered a purchase of an asset unlike a Fair Market Value lease.

With a Capital Lease, there is no uncertainty about the value of the equipment at the conclusion of the lease as the buyout terms are generally a part of the initial agreement. A Capital Lease is noncancelable, and is for the long term; a business intends to use the equipment for the long term or plans on purchasing the equipment at the end of the lease period.

True Lease

A True Lease is a multi-year lease in which the lessor gives the lessee exclusive rights to use and possession of the equipment for a monthly fee for a designated number of months. Ownership rights of the equipment remain with the lessor.

A significant benefit of the FMV lease is that the monthly payments are typically less than a bank loan. Payments under this type of lease are treated by the IRS as rental payments and therefore are 100% tax deductible operating expenses.

Step Lease

A step lease provides for an increase or decrease in the lease amount after a specified period of time. A step-up payment structure means the lessee typically makes smaller payments at the beginning of the lease with payments increasing over the life of the lease. This type of lease is useful when the equipment being leased becomes more productive over a period of time.

Deferred Payment Lease

A Deferred Payment Lease is a multi-year lease in which the lessor defers lease payments for a pre-determined term (typically 3-12 months). Upon expiration of the deferred period, the lessee will then pay higher-than-market rent for the balance of the lease term.

Deferred Payment leases accommodate the capital budgeting and/or the cash flow requirements of a business by deferring the initial lease payments. This lease is sometimes referred to as the “cash-flow friendly” equipment lease.

Sale Leaseback Leases

A Sale Leaseback Lease is an asset that a business sells to a company and then leases the asset back from the purchaser. In a Sale Leaseback lease, the seller of the asset becomes the lessee and the purchaser becomes the lessor. A Sale Leaseback lease enables a company to sell an asset to raise capital, a still have use of an asset; this way a company can have both the cash and the asset it needs to operate its business.

The benefits of Sales/Leaseback financing is that a business can continue to use equipment, so productivity never slows down an revenue should remain constant. The extra capital generated through the sale can be used for any purpose. Additionally, there is a balance sheet benefit because assets are converted into contingent liabilities which may lower taxes.

First Amendment Leases

A First Amendment Lease provides a lessee a purchase option at one or more defined points during a lease term with a requirement that the lessee renew or continue the lease if the purchase option is not exercised. The option price is usually a fixed price intended to approximate fair market value or is defined as fair market value determined by lessee appraisal and subject to a floor to insure that the lessor’s residual position will be covered if the purchase option is exercised.

If the purchase option is not exercised, then the lease is automatically renewed for a fixed term at a fixed rental to approximate fair rental value. The lessee is not permitted the option of returning the equipment on the option exercise date.

The First Amendment lease is beneficial for businesses with large CapEx budgets. With such large expenses, it can be difficult to plan for unforeseen changes in technology, accounting changes to the balance sheet and customer demand. When leasing equipment, some major expenses include, lease payments, delivery costs and pickup costs. When purchasing equipment, businesses much consider the costs of maintenance, insurance and resale value. A First Amendment lease can combine the best of both worlds, enabling businesses to consider their needs in real time.