When leasing equipment, what is, $1 Buyout Purchase Option?

The $1 buyout lease is a lease where the company (the borrower) makes payments on a piece of equipment, and at the end of that lease term, “buys” the equipment for $1. For a $1 buyout, the payments and term reflect – almost dollar for dollar – a finance loan of similar length (otherwise, buying it out for a single dollar wouldn’t make sense.)

In basic terms, a $1 buyout lease IS just like a loan, save for the technical classification of ownership. While lease payments are being made, the lessee (the borrower) doesn’t technically own the equipment – but if treated as a bargain purchase option lease – it does show up as an asset on the balance sheet. This may not make your accountant happy, so the better way to go is with a lease that doesn’t have a bargain purchase option (i.e. FMV) as each lease payment can be expensed 100% (as opposed to slow ownership depreciation), and the equipment won’t throw the balance sheet out of whack either.

But leaving the “accounting details while payments are being made” aside, the company is solid about wanting the equipment at the end of the lease. So the $1 buyout lease is structured so the bulk of the equipment’s cost is paid during the lease term, with that final $1 getting it over the hump to actual ownership.

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Category: Leasing

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