See, even Fletch gets a bit confused when all of these lease types are jumbled together. I say this because my last lease post was about the 10% purchase option lease, and at the end of it, I said “next we’ll talk about FMV leases”. But I forgot all about the 10% PUT Lease, which, truthfully, is the next logical step after the 10% purchase option lease.
So, after that long-winded intro, let’s quickly talk about the 10% PUT Lease (and next time, we’ll do FMV leases – I promise).
As I stated in my last leasing post, the 10% purchase option was a lease where the buyer has the option to outright buy the item at the end of the lease for 10% of the original purchase price (with the other 90% obviously being paid for with the lease payments.) Basically, this lowers the monthly payment (by deferring a pre-determined 10% to the end of the term), keeps the item off the company’s books, and also gives the company an “out” if they feel the item isn’t worth buying outright (due to unforeseen obsolescence, etc). Yes, it’s only 10%, but say it’s a $100,000 item – deciding “nah, we don’t want it after all” at the end will save them that last $10,000 payment.
The 10% PUT lease is the same thought, except the 10% at the end is not an option (in fact, you may have been asking yourself “what does PUT actually stand for?” It stands for “Purchase Upon Termination”).
The lessee (the buyer) agrees up front to a lease term of X years, which pays 90% of the item’s value, and 10% at the end of the term to own the item. This lowers the payment over a traditional $1 buyout lease, but also guarantees the lessor (the seller) a full sale (which could be a useful part of negotiations). The lessee is 100% sure they want the item, and, if everything breaks right, the remaining value of item will be worth more than that final 10% (by the way, that last thought is true on all leases where the residual value is pre-determined – it’s always good for the buyer if the item is worth more than the predicted value.)
So there you have it – the 10% PUT Lease. We’ll definitely do FMV (Fair Market Value) leases next.