Operating Lease – Fair Market Value Buyout (FMV)
The Operating Equipment Lease is beneficial to business owners who finance equipment, which becomes obsolete relatively quickly. Computers, copiers, medical equipment, and electronic equipment fall into this category. This equipment lease is designed for customers who expect the value of their equipment to decrease quickly and plan want to upgrade it at the end of term for a new piece of equipment. Some professions like medical and computer technology, typically requires working with the latest most advanced systems; an operating lease helps manage that requirement by allowing the business to keep exchanging the system for a new one every 2-3 years.
At the end of an Operating Lease which is also known as an FMV equipment lease, there are three options: extend the term to pay it off for full ownership, return the equipment and potentially replace it with newer equipment, or buy it at fair market value which is usually 10% – 20% of the original sales price. The decision on what to do will depend on the business strategy, market and increased revenue the equipment would generate. This equipment lease allows you to have the lowest monthly payments of any business finance and you can usually write off 100% of your payments as an operating expense since the structure is considered a “rental”. As a rental, it will not appear on your financial statements as debt improving your operating ratios. Consult your accountant regarding how the taxation applies to your business. Recently, many owners have opted for an operating lease simply because the payments are the lowest and they plan to keep the machine for a longer term and pay off the FMV (balloon) payment with future revenues.
Solar financing is sometimes structured this way to keep the monthly payments as low as possible so a cash flow benefit is realized. Also, since solar projects currently earn a 30% federal tax credit, the payment offered by the lender is discounted to reflect the tax credit and depreciation. See our Power Purchase Agreement (PPA) product for solar projects which has some similar components to an FMV lease.