FMV vs $1 Buyout

Fair Market Value Lease (FMV) $1 Purchase Option Lease
  • Lease term shorter than asset’s expected useful life
  • Customer uses asset for a portion of its useful life in exchange for rental payments
  • Ownership retained by Lessor for tax purposes
  • Lease term spans 75% or more of asset’s expected useful life
  • Customer uses asset for most of its useful life
  • Customer owns asset at end of lease, provided all lease terms have been fulfilled
  • Lower monthly payments (even lower than a traditional loan)
  • Simplest accounting
  • Hedge against technology changes
  • Upgrade flexibility
  • Improves financial statements by protecting liquidity ratios and reducing debt leverage
  • Preserves capital budgets and avoids internal approval processes
  • Ownership at end of lease term
  • Fixed, predictable cost
At End of Lease Term Customer may:

  • Purchase asset for its Fair Market Value
  • Return asset
  • Replace asset with new asset under a new lease
  • Extend/renew the lease term
Customer may:

  • Purchase the equipment for $1
Tax Implications
  • Customer can deduct lease payments as a business or operating expense
  • Customer can claim depreciation and interest expense deduction (similar to a purchased asset)
Potential Customer
  • Looking for lowest possible lease payments
  • Acquiring equipment which quickly becomes obsolete
  • Concerned more about obsolescence than ownership
  • Wants maximum tax advantages
  • Acquiring asset which will not become obsolete quickly
  • Wants to own the equipment