Did you just glance over that last equipment lease you signed? Think you have a handle on your end of lease responsibilities? BUYER BEWARE! The devil IS in the details! Were you aware that there are at least three or four ways to determine the value of your equipment at the end of a lease? Believe me, very few of them are designed to be fair to you, the lessee. Below you'll find just some of the end of lease buyout tricks and traps to avoid that I've seen in the past.
Avoid Mutually Agreeable Price
Watch out for this one. Usually this one contains a provision that if the parties don't "mutually agree" to a purchase price, that something far more expensive will occur such as an automatic renewal of the lease for an additional year at the same lease payment. Congratulations! You just turned a 36 month lease into a 48 month lease and you'll have to go through the whole "mutually agreeable" process again in 12 months. Put that into your financial calculator and calculate your IRR.
Ask for a Cap to the Fair Market Value (FMV)
This is simple. You can get a good sense for the lessors intentions by simply asking for a cap on the FMV. The clause would read something like this: "Fair Market Value not to exceed X% of original cost."
Note: See your accountant on this one if you're trying to create an operating lease. Depending on the size of the cap, this could have negative effects on this desire.
Know the other types of FMV and what they mean
How about Fair Market Value (removed)? Think about that telecom system that's installed on several floors, running through the walls and your ceiling. This is the value of the equipment that INCLUDES the cost of removal from your site and moving it to another location. So now it's not just the value of the equipment is it? And if you didn't read and understand that one little parenthesized word "removed" you could have cost your company thousands more dollars.