Expert Don Coolbaugh of Advantage Funding continues a weekly series of questions and answers for chauffeured transportation operators on all matters related to financing and leasing fleet vehicles.
QUESTION: There are Fair Market Value (FMV) buyouts, 10% buyouts, and $1 buyouts at the end of a typical lease. What are the advantages of one compared to another? Who determines "fair market value?"
ANSWER: There are three methods of leasing mentioned, but actually there are only two that are distinctly different. For our purposes, we will discuss the FMV or fair market value against the S1 out leases.
The FMV lease, also known as an operating lease or True lease, is primarily designed for businesses that want the lowest monthly payment with the greatest flexibility at the end of the lease term. With an operating lease, the lessor (funding source) retains ownership of the asset for tax purposes, and the lessee (you) typically claims all lease payments as an operating expense or tax deduction. The greatest asset of the FMV is to lower the monthly payment to the least amount possible. At the end of the lease, you would hold no obligation to purchase the equipment, although you would have the availability to do so from the leasing company at the equipment FMV as determined by the leasing company.
A $1 out lease, also referred to as a Capital lease or finance lease, is primarily designed for businesses that are fairly certain they want to own the equipment after the lease term ends. With a finance lease, you (the lessee) can claim ownership of the asset for tax purposes (although the funding source is the actual owner), so you can claim depreciation and interest expense deductions. Most commercial leases are done under a $1 buy out lease due to the mileage restrictions with other types of leases such as those mentioned above. With a $1 out lease, you own the equipment at the end of the term.
The differences and /or advantages of one type over another would be specific to each particular customer and in each specific application. You could see the same company use an operating lease in one situation and then a capital lease in another. Particular use, long term ownership needs, and mileage requirements would certainly sway one's decision.
Source: Don Coolbaugh, vice president of sales, Advantage Funding Inc.
E-mail finance and leasing questions to: Martin@LCTmag.com