Types of Leases
There are several typical kinds of lease agreements. The most popular arrangement is a fair market value (FMV) lease, also called an operating lease. For accounting purposes, the costs associated with an operating expense count as an operating expense (which can be written off 100% in the year it is paid) instead of a capital expense, which has to be depreciated over time.
An FMV lease is the most popular lease choice for companies looking to spend the least cash for their office equipment over the course of the average lease. If you have a FMV lease and, at the end of the term decide to buy the equipment, the agreement states that it would be at the “fair market value” for that equipment at that time, though the lease does not specifically say what that fair market value will be on that date. However, most businesses taking FMV leases don’t intend to buy the equipment at the end of the lease’s term.
In contrast, some types of buyers (such as state governments, for example) who may want to keep their equipment when the lease ends are better off with “capital leases” or “dollar-purchase option” (DPO) leases (where they have the option to buy the equipment for a dollar at the end of the lease), or with a ten percent purchase option, which sets the value of the equipment at the lease’s start, with a separate document provided that says the lessee can buy the equipment for 10% of the original value at the end of the lease (and defining the price). DPO leases work well for businesses that may intend to keep their equipment (such as expensive high-end production-level devices, which do not become outdated as quickly as workgroup MFPs) for an extended time without having to pay a high price up front.
This kind of lease typically carries a higher monthly price, but businesses can depreciate the equipment, treat part of the payments as interest for tax purposes and have the option to buy the product at the pre-set (very low) price at the end of the lease.
Before signing anything, make sure your lease agreement covers as many contingencies as you can think of.
End-of-Lease Terms and Conditions
Even though they seem far away, your end-of-lease terms and conditions require the most attention. Under the automatic renewal clause (also called the “evergreen clause”), a business must notify the leasing company within a set timeframe whether it will purchase the device or return it. This means that if you forget to tell the leasing company you want to return your equipment by a set deadline, you may have to keep it for an extra year.
Another provision is “interim rent,” which means that if a business is scheduled to make payments starting on the first of the month but the product is on the premises prior to this day, you’ll have to pay a prorated figure to cover the usage.
Something else many businesses are not aware of is that they will probably have to ship the piece of equipment back to a specified location at their own expense when their lease is up. This isn’t always the case, but more often than not it will be in the contract. Also determine if there is a restocking fee or a charge for invoicing.
Finally, consider the length of your lease (three years is typical for workgroup copiers and MFPs; high volume printers and copiers may be leased for up to five years or longer) and the kind of payments that would work best for your needs. A good leasing company should also be able to set up flexible payments so that, for example, if your business is seasonal, you can pay less during off times and more during busy times. Some leasing companies might also offer a deferred program so you don’t have to make a payment for the first 30, 60 or 90 days of the contract, or “step plans” that give you a lower monthly rate to start with higher payments after a year or two.
Lease arrangements vary widely and almost everything can be negotiable, even among dealers of the same brand of equipment. Before signing any agreement it’s a good idea to shop around with several different suppliers to get a feel for what kinds of deals are typical (and which are exceptionally good).