Equipment Lease Structures

Equipment Lease Structures & End of Term Options:

- Types of equipment lease structures:

Capital Lease (Finance Lease):
Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (1) the lessor transfers ownership to the lessee at the end of the lease term; (2) the lease contains an option to purchase the asset at a bargain price; (3) the lease term is equal to 75 percent or more of the estimated economic life of the property or (4) the present value of minimum lease rental payment is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor.

Operating Lease (True Lease):
A lease which is treated as a True Lease, as opposed to a loan for accounting purposes. As defined within FASB 13, an operating lease meet all of the following criteria: (1) lease term is less than 75% of estimated economic life of the equipment, (2) Present value of lease payments is less than 90% of the equipments fair market value, (3) lease cannot contain a bargain purchase option, (4) ownership is retained by the lessor during and after the lease term. The operating lease is accounted for by the lessee without showing the asset or liability on his balance sheet. The lease payments are accounted for by the lessee as an operating expense.

Master Lease:
A continuing lease arrangement under which additional equipment may be leased by executing a new lease schedule instead of negotiating a new lease contract. It is, in effect, a line of credit the lessee can draw upon to finance additional equipment. Terms of the original lease contract apply to all subsequent additions.

Municipal Lease:
A lease designed to meet the special needs of state and local governments. The lease contains a non-appropriation clause which states that the only condition under which the entity may be released from its payment obligation, the lease, is when the legislature of funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. Thus, the IRS doesn’t charge the lessor income taxes on this type of lease.

Sale Leaseback:
A transaction that involves the sale of equipment to the leasing company and a subsequent lease of the same equipment back to the original owner - who continues to use the equipment.

TRAC Lease:
A tax oriented lease of titled motor vehicles or trailers that contains the fixed purchase amount (Terminal Rental Adjustment Clause) and otherwise complies with True Lease requirements set forth by IRS rules. TRAC Leases are used for financing transactions containing only titled equipment and with residuals from 10-20%.

- End of Term Buyout or Purchase Options:

Fair Market Value (FMV) Purchase Option:
At the end of the lease term, you typically have 3 options:
1. Purchase the equipment for its then Fair Market Value,
2. Extend the lease for a pre-determined length of time, or
3. Return the equipment at the end of term.

10% Purchase Option:
At the end of the lease term, you typically have 3 options:
1. Purchase the equipment for 10% of its original purchase price,
2. Extend the lease for a pre-determined length of time, or
3. Return the equipment at the end of term.

*You will typically be required to send written notice of which option you intend to exercise prior to the end of term. Make sure you review your lease documents to completely understand the dates for the written notice requirement.

10% PUT (Purchase Upon Termination):
At the end of the lease term, you are obligated to purchase the leased equipment for 10% of its original purchase price.

$1 Buyout (Full Payout/Capital Lease):
The lessee (you the customer) repays the lease obligation with a fixed monthly payment and takes ownership of the equipment at the end of the lease term with a nominal or dollar buyout ($101 buyout in certain States). Title is transferred to lessee at the end of term.

Call Today @ 877-389-2468

Application - Equipment Lease Structures

Home Page