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FMV Lease: Definition & Examples

FMV Lease: Definition & Examples

Are you considering acquiring new equipment for your business but struggling to decide whether to buy or lease?

If so, you're not alone. Many business owners and operators face this same decision each year. The good news is that equipment leasing has become an increasingly popular option in recent years, and for good reason.

Leasing allows companies to obtain the necessary equipment without the significant upfront costs associated with buying. Instead, you make monthly lease payments over a set period. Monthly payments can be especially helpful for businesses requiring expensive equipment or just starting out with limited capital.

But what type of lease should you choose? There are different types of equipment lease options to choose from. That’s where the fair market value (FMV) lease comes in. FMV leases can be an excellent choice for businesses looking for flexibility, lower monthly payments, and the ability to upgrade equipment at the end of the lease term.

In this blog post, we’ll explore the ins and outs of FMV leases, including how they work, how fair market value is determined, and the pros and cons of this type of lease. Whether you’re new to leasing or just want to learn more, read on to discover if an FMV lease is the right choice for your company.

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What Is a Fair Market Value (FMV) Lease?

A fair market value (FMV) lease allows businesses to use equipment for a fixed period in exchange for regular lease payments. 

At the end of the lease term, the company can purchase the equipment for its fair market value, which is determined at the time of the lease agreement.

FMV leases may also be called operating leases, true leases, or FMV purchase options.

These terms are often used interchangeably within the leasing industry, but they all generally refer to the same type of equipment lease that allows a lessee to use the equipment for a set time and includes the right, but not the obligation, to buy the leased asset at the end of the lease.

During the lease period, the business makes regular payments, which are calculated based on several factors, including the cost of the equipment, the length of the term, and the estimated fair market value of the equipment at the end of the lease.

While leasing companies operate differently, a general way to calculate a monthly lease payment is to take the total cost of the equipment and divide it by the length of the lease term and then multiplied by a lease rate factor.

The lease rate factor is a percentage rate that the lessor determines based on several factors, including the lessee’s creditworthiness and credit score, the type of equipment being leased, and the length of the lease term. Macroeconomics can also significantly determine the lease rate factor.

The estimated fair market value of the equipment at the end of the lease term also plays a role in determining the monthly lease payment. 

Generally speaking, the higher the estimated fair market value, the lower the monthly payments will be, as the lessor is assuming less risk that the equipment will be worth less than the estimated value at the end of the lease term.

Monthly payments for an FMV lease tend to be lower than the payments for a lease with a standard purchase option or for financing the purchase of the equipment outright. This is because, under an FMV lease, the business never actually owns the equipment but is renting it for the duration of the lease term.

This means that the business is not responsible for the residual value of the equipment at the end of the lease term and can return the equipment to the lessor without any further obligation.

In contrast to an FMV purchase option, a standard purchase option provides the lessee with the option to purchase the equipment for a predetermined price that is set at the beginning of the lease term. This predetermined price may be equal to the original purchase price of the equipment, or it may be a discounted price that is negotiated as part of the lease agreement.

An appraiser or other third-party expert typically determines the fair market value of the equipment at the time of the lease agreement. The appraiser considers factors such as the age and condition of the equipment, as well as current market trends, to arrive at a fair market value for the equipment.

FMV leases are a popular choice for businesses that require expensive equipment but want to avoid committing to the long-term costs and risks of ownership. 

With an FMV lease, companies can enjoy lower monthly payments and greater flexibility while still having the option to purchase the equipment at the end of the lease term if desired.

How Is Fair Market Value Determined?

When entering an FMV lease agreement, a lessee can purchase the equipment at the end of the lease term for its fair market value.

But how is the fair market value determined, and what factors can impact it? We mention some of the factors above, but let’s explore how fair market value is determined a little more closely.

Fair market value is the price a willing buyer and a willing seller would agree on if the equipment were sold on an open and unrestricted market.

In other words, it’s the price that a knowledgeable buyer would pay, and a knowledgeable seller would accept in an arm’s-length transaction.

This value is typically determined by an independent appraiser who specializes in valuing the type of equipment being leased.

Several factors can impact the fair market value of equipment, including:

  1. Age: The age of the equipment can significantly impact its value. Older equipment may have more wear and tear, be less efficient, and not have the latest features, all of which can decrease its value.
  2. Condition: The condition of the equipment is also an essential factor in determining its fair market value. Equipment that has been well-maintained and kept in reasonable condition will typically have a higher value than equipment that has not been properly maintained.
  3. Market demand: The level of need for the type of equipment being leased can also impact its fair market value. If there is high demand for the equipment, its value may be higher than if there is low demand.
  4. Market supply: Similarly, the supply of the equipment can also impact its value. If there is a surplus of the equipment on the market, its value may be lower than if the supply is limited.
  5. Technological advancements: The fair market value of a piece of equipment can fluctuate, mainly if the equipment is subject to rapid technological advances. It’s helpful to know the current fair market value of the equipment. Lessees should consider this when thinking about purchasing the equipment at the end of the lease term.

Whether you’re considering construction, agricultural, medical, research, or technology equipment, factors like age, condition, current demand and supply, technological advancements, and expected lifespan can all play a part in an asset’s fair market value. This can also make the value of an asset fluctuate over time.

FMV Lease Benefits

We’ve covered several benefits an FMV lease can offer businesses looking to acquire new or refurbished equipment. Let’s summarize below:

Lower Monthly Payments

FMV leases typically have lower monthly payments than other leases, equipment financing, or outright purchases. Lower payments and reduced upfront costs allow businesses to manage their cash flow better and invest in other business areas.

Flexible Terms

FMV leases can typically be tailored to meet the business’s specific needs, with options for short-term or long-term leases.

Flexible terms can benefit companies with fluctuating equipment needs, allowing them to adjust their equipment as needed without the financial commitment of purchasing.

Ability to Upgrade Equipment

FMV leases allow businesses to upgrade their equipment at the end of the lease term, keeping them competitive and up-to-date with the latest technology.

The option to upgrade is often critical in industries where technology is constantly evolving and becoming outdated quickly, such as the life sciences and biotechnology.

Tax Advantages

Lease payments are typically tax-deductible as an operating expense, meaning businesses may be able to deduct the total cost of their lease payments from their taxable income, reducing their overall tax liability.

However, the tax benefits of an FMV lease can depend on the specific terms of the lease agreement and the tax laws where the company is located. It’s always a good idea to consult with a tax professional to fully understand the tax implications of any financial decision, including leasing equipment.

FMV Lease vs. Capital Lease

A fair market value (FMV) lease and a capital lease—now called a finance lease—are both types of equipment leases, but there are some key differences between the two.

Similarities

  • FMV and finance leases are equipment financing used to acquire equipment without purchasing it outright.
  • In both cases, the lessee makes regular payments to the lessor over a set lease period
  • Both leases may offer the lessee tax advantages, depending on the specific circumstances.

Differences:

  • FMV leases typically have lower monthly payments than finance leases because the lessee "rents" the equipment and is only responsible for its use during the lease term. In contrast, finance leases have higher monthly payments because the lessee is essentially financing the equipment purchase and is responsible for its full cost.
  • FMV leases typically have shorter lease terms than finance leases, often ranging from one or two to five years. In contrast, finance leases are usually longer term, ranging from five to ten years.
  • FMV leases often offer greater flexibility to the lessee, as the lessee can return the equipment at the end of the lease term or purchase it for its fair market value. Finance leases usually require the lessee to buy the equipment at the end of the lease term for a predetermined price, which may be less flexible.
  • FMV leases are often used for equipment subject to rapid technological advancements or equipment expected to have a shorter useful life. (Think most lab equipment used for research and development.) In contrast, finance leases are often used for equipment with a longer useful life, such as commercial vehicles or industrial machinery.

FMV vs. $1 Buyout Lease

Both types of leases can be helpful, but there are some key differences to consider. An FMV lease, as we’ve discussed, allows businesses to lease equipment for a fixed period and return it at the end of the lease term.

The monthly payments are typically lower than a $1 buyout lease because the business only pays for the equipment’s use, not its total value.

On the other hand, a $1 buyout lease allows businesses to lease equipment and purchase it at the end of the lease term for $1. This type of lease may have higher monthly payments than an FMV lease because the business is essentially financing the full value of the equipment.

However, it offers the benefit of ownership at the end of the lease term, which can be particularly appealing for businesses that plan to keep the equipment for much longer.

If you compare and contrast an FMV lease vs. a $1 buyout lease, keep your specific needs and preferences in mind. Some factors to consider include the following:

  • Cash flow: If conserving cash flow is a priority for your business, an FMV lease can be the better option since it typically has lower monthly payments.
  • Equipment needs: If your business has fluctuating equipment needs and you anticipate needing to upgrade or replace equipment frequently, an FMV lease may be a better fit since it allows for more flexibility in returning and upgrading equipment.
  • Long-term ownership: If your business plans to keep the equipment for a long time (think 8-10 years or more) and wants the benefit of ownership, a $1 buyout lease might be a better fit.

Consider your options and work with a leasing professional like Excedr to determine the best type of lease for your business. Each company is unique, and what works for one may not work for another.

By understanding the differences between FMV and $1 buyout leases, you can make an informed decision and choose the option that makes the most sense for your business.

Is a Fair Market Value Lease Right for You?

In summary, a Fair Market Value (FMV) lease is an equipment lease where the lessee makes payments based on the estimated residual value of the equipment at the end of the lease term.

The lessor owns the equipment throughout the lease term, and the lessee can purchase the equipment at the end of the term for its fair market value or return it to the lessor.

The benefits of an FMV lease include lower fixed monthly payments, flexible lease terms, access to the latest equipment, and potential tax benefits.

Leasing equipment can be a smart choice for businesses that want to conserve their cash flow, have more flexibility, and access to the latest equipment. In many cases, leasing can be a smarter decision than purchasing equipment outright.

Before deciding on a lease, it’s essential to consider factors such as the type of equipment needed, the expected usage, and the business's financial situation.

Looking for high-quality equipment to level up your business? Consulting with a leasing specialist can help you make an informed decision and choose the best option for your needs.

As an equipment leasing company specializing in lab equipment, Excedr is always here to help! Our leasing services cater to all sizes & needs. And while Excedr doesn’t technically offer FMV leases, our operating leases are very similar and include a purchase option at the end of the lease term. Learn more about our leasing program.