I’ve mentioned bits and parts of this before in this blog, but it’s good to revisit these things from time to time for newer readers.
For this post, I’ll list each type of equipment lease and a very basic description, and in future posts, we’ll talk about each one individually.
Note – there are more lease types than I am going to mention – we’re just going to talk about the most popular ones in an equipment leasing sense.
The first thing I will mention are the two basic lease classifications.
- Capital Lease – This is a lease where the company (technically the lessee, but I hate using those terms here as people always get confused) gets the benefits (and drawbacks) of ownership. They are usually used for equipment where the company will likely (or must) buy it at lease end.
- Operating Lease – This is a lease where the company is shielded from the drawbacks (and benefits) of ownership. These leases are better for equipment such as technology, which may have a short shelf life, or equipment the company doesn’t want to retain past the term of the lease, etc.
Then within these two classifications, we have a bunch of lease types that I’ll go over. Here they are in a nutshell.
$1 Buyout Leases are capital leases, and are great when a company wants the tax advantages of my old favorite, Section 179, but is also pretty sure they want to own the equipment when the lease term is over. Thus, they lease it, and at the end of the lease, they then buy it for $1.
10% Option Lease – This is similar to a $1 buyout because the company can buy the equipment for a predetermined cost, which is 10% of the original price, and still provides a lower monthly payment like an FMV lease.
FMV Leases are operating leases. This is where the company/lessee is not 100% sure if they want the equipment. They lease it for a certain period of time, and at the end of the lease, they can either 1) Buy the equipment at fair market value; 2) Give the equipment back; or 3) re-lease the equipment.
10% Put Option Lease – This capital lease is similar to a 10% option lease, save that there’s no “option” at the end – the company buys it for 10% of the original value.
TRAC Leases – This is a lease where the future purchase price is known, and the payment is based on that. It’s used for vehicles only. It can be either a capital or an operating lease, depending on how it’s written.
For the next post, we’ll discuss the ins and outs of Capital vs. Operating Leases, and in the future, we’ll devote a post to each lease.