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Fair market value lease FMV lease
Also called FMV lease, true lease, operating lease.
An equipment lease where at the end of the base term you buy at fair market value, return the equipment, or renew — with a lower payment because the lessor is banking on the residual.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The lessor keeps title, finances the full cost, recovers part of it through rent and expects the rest from the equipment's value at the end. That expectation is what makes the payment lower than a dollar-buyout lease or a loan on the same machine, and it is the only reason the payment is lower.
The consequences of it being a rental
You are renting. Rent is generally deductible as paid, and there is no Section 179 election because you have not purchased anything. A capital or finance lease is the opposite on every one of those points, whatever the document is titled. Ask your accountant which one you are signing before you rely on a tax outcome.
Fair market value is a defined term, not a market fact
The definition in the schedule controls, and the variants are far apart. Value "in place and in use" of a working, installed production machine is a much larger number than orderly liquidation value or value removed from your site. Some contracts let the lessor appraise, some name an independent appraiser, some cap the purchase price at a percentage of original cost. A cap is worth asking for at signing — it costs the lessor something, it is sometimes given, and it is never volunteered.
Return is an obligation with a specification
A maintenance standard, hour or mileage caps, removal of your modifications, original manuals, tooling and accessories, packing to a stated specification, freight to a location the lessor names, and an inspection with charges for anything short of the standard. Budget for it; businesses treat return as free and it is not.
Where this one catches people
The lower payment is not a discount. It is a deferred decision, and both exits can cost more than the saving.
Buy, and the price comes from a valuation method the lessor largely controls, on a machine you cannot run the business without — which is not a strong negotiating position. Return, and you pay freight, refurbishment to the return standard, and the cost of lost production while a replacement is installed and commissioned.
Watch the renewal clause as closely as the purchase option. Many FMV leases renew automatically for a further term at the same rent unless you give notice by a stated date, and paying full rent past the base term on an asset the lessor has largely recovered is the most expensive money in equipment finance. Diary the notice date the day you sign, and diary the date the window opens as well as the date it closes.
Worked through
Illustrative. A 120,000 machine on a 60-month lease at an implicit 9 percent a year.
Under a one-dollar buyout the lessor must recover the whole 120,000 plus yield through rent. Payment: about 2,491 a month.
Under an FMV lease with a 20 percent residual booked — 24,000 — the lessor recovers 120,000 less the present value of that residual. Discounted at 9 percent over 60 months, 24,000 is worth about 15,329 today, so about 104,671 comes through rent. Payment: about 2,173 a month.
The saving is 318 a month, about 19,100 over the term. At month 60 you own nothing.
Buy at the booked 24,000 and you are about 4,900 worse off than the dollar-buyout route. Buy at an appraised 32,000, because the used market held up and the valuation is in place and in use, and you are about 12,900 worse off. Return it and you keep the 19,100, own nothing, and pay freight and refurbishment out of it.
The FMV structure wins where you genuinely intend to hand the machine back and replace it — and loses, quietly, everywhere else.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Fair market value lease — common questions
What does fair market value lease mean?
An equipment lease where at the end of the base term you buy at fair market value, return the equipment, or renew — with a lower payment because the lessor is banking on the residual.
Where does fair market value lease catch people out?
The lower payment is not a discount. It is a deferred decision, and both exits can cost more than the saving.
Is fair market value lease the same as an interest rate?
Fair market value lease is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does fair market value lease apply to?
Equipment Financing.
Is there a worked example of fair market value lease?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside fair market value lease?
Auto-renewal, Buyout, Capital lease, Early termination fee, End-of-term option.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.