The FMV in FMV Lease stands for “Fair Market Value”. It’s also sometimes known as a “true lease” in business circles, probably because this structure was likely the original thought behind leasing.
An FMV lease is where a company leases a piece of equipment for a specified period of time, and at the end of the term, has several options, one of which is to purchase the item at “Fair Market Value” (the other options are usually “return the equipment” or “re-lease the equipment”).
So why would a company want an FMV lease? There are several reasons:
1) A company is leasing equipment that rapidly depreciates in value. Vehicles often fall under this, as does technological equipment. Also, if a company fears the “new and improved model” is right around the corner, and their leased equipment will be obsolete soon, a FMV lease makes sense if they need the equipment now.
2) Of course, like many other leases, the payments on the FMV lease are tax deductible, and the equipment is not on the company’s balance sheet.
3) Because the lessor is guaranteed “fair market value” for the item at the lease end (either if the lessee decides to buy it, or they return the equipment and the lessor sells it secondhand), the lease payments are lower than other leases (like 10% Put or $1 Buyout).
Your lease payments are generally determined by what the lessor feels the value will be at the end of the term (which may or may not be 100% accurate). So in essence, you are paying for the value / life of the equipment that you actually use, and that’s it.
And there you have it – the FMV lease in a nutshell. Next up in our lease series is the TRAC lease. Stay tuned.