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Leasing is a flexible form of financing. The lessee pays the lessor an
agreed upon amount for a fixed period of time for the use of the asset. The amount of the lease
payment is directly related to the asset cost, the term of the lease and the lessee’s
credit.
$1.00 Purchase Option-
Also called a finance lease or conditional
sales agreement...from a tax stand point it is treated just like a loan. Payments are spread over a
fixed period of time and represent the full value of the asset. There is no residual or
baloon payment at lease termination except $1.00.
10% Option/PUT-
With a 10% option, at lease termination, the asset may be returned
or purchased for 10% of the original finance amount. A 10% "PUT"
lease requires 10% "Purchase Upon Termination". Consult your
accountant regarding tax deductibility.
Fair Market Value Lease- Otherwise
known as a "True Lease". Since the lessor is considered the legal owner of the
leased asset, this type of arrangement can be particularly attractive for companies
acquiring an asset that is vulnerable to technological obsolescence, such as computers and
software. Payments are lower than a full payout lease and qualify for full tax deductions.
At lease termination the asset may be returned, purchased for the determined fair market
value or re-leased.
Operating Lease- Usually for a shorter term, often used with high-tech or
other obsolescence prone equipment. The lessor typically takes a significant residual
position in the lease pricing, thereby bearing more of the risk of ownership. This allows
for a lower payment for the lessee and full tax advantages. Additionally, operating leases
allow for off-balance sheet financing because the asset is not recorded as an asset or
liability on the lessee's balance sheet. End of lease options are the same as Fair Market
Value Leases.
Seasonal/Skip Lease- Allow for periods where no payments are made. Seasonal businesses are the
ideal candidates for this type of arrangement.
Step Lease- Payments
can increase or decrease during the term of the lease. The amounts vary according to a
pre-determined schedule. Increasing payments (step up) can be beneficial for businesses
that are acquiring an income producing piece of equipment that earns little revenue at
first, but will eventually produce higher levels of revenue.
Municipal Lease- Offered to state and
local government agencies for tax-exempt lease financing. Since the income the lessor
derives is exempt from federal income taxes, lower payments are offered. Non-appropriation
clauses are written into all municipal leases.