Lease Structures

Lease to Own

These leases fall in this category:

These leases combine the fixed equal monthly payments with a preset purchase price determined at the inception of the lease. This purchase price is usually set at $1.00.

Lease with option to buy

These types of leases offer lower monthly payments then the Lease to Own arrangement and offers additional flexibility to the lessee.

A Fair Market Value Lease has a purchase price that is set by the fair market value of the equipment at the end of the lease. The purchase price may also be set at the inception of the lease, which is usually 10%-20% of the purchase price. You may also to choose to continue the lease, usually for 12-24 months, which would give you ownership at the end of that period. Typically you will not have the choice of turning in the equipment once the extension of the lease has been initiated.

An Operating Lease offers these options but will usually allow the equipment to be returned to the leasing company with out further obligation from the lessee. This option is useful to companies that continually update or replace their equipment. Out of all the finance alternatives available,  an Operating Lease results in the lowest payment and offers the business an excellent tactic for circumventing capital budget restraints. In the early years of an Operating Lease, since the lease is treated as an off-balance sheet purchase, it can result in higher reported earnings.

Sale Leaseback

This applies to equipment that is purchased within the last 90 days. If you are looking to recapture the capital already laid out for the equipment, some lease companies will offer to purchase the equipment from you and lease it back to you over a period of 12 – 60 months.

If the equipment is older than 90 days, then the lease company will require an independent appraisal of the equipment before funding. They may also fund an amount that is based on liquidated (auction) value. A Sale Leaseback will usually be written as a lease to own.

Terminal Rental Adjustment Clause (TRAK) Lease

This lease is designed for vehicles, tractors, and over-the-road trucks and trailers. The tax code provisions allow pre-determined end-of-lease valuations. However, the lessee does bear some risk if the vehicle or equipment does not bring in the predicted resale value at the end of the lease. This type of lease may include Fair-Market-Value treatment in the contract or continued rental options at the end of the original lease terms.

Seasonally Adjusted Lease

Many businesses have “slow” seasons due to the type of business they operate. A seasonally-adjusted type of lease allows for higher payments when business is at its peak with lower or, in some cases, no payment, when business is down.

Examples of these types of companies may be:

Equipment Finance Agreement

This is essentially a loan using the equipment as collateral. However, there are no other blanket liens or compensating balances are needed as with a normal bank loan. The payment is also a fixed payment and does not change with the fluctuating Prime Rate as with most regular bank loans.