A lease purchase is a full-payout equipment leasing arrangement with a lease term equal to the asset’s estimated economic life and a bargain purchase option for the lessee to exercise at the end of the lease term, by making all the payments due plus the option price – typically one dollar for US leases.

The lessee has the option of paying the final payment, including the option price, in order to receive title to the asset.  If the final payment is not made and the purchase option is not exercised, the asset is returned to the lessor – the lessee does not guarantee the final payment (a residual value guarantee).

Due to the length of the lease term and the bargain-purchase option and because the lessee bears the risk of ownership, a lease purchase is generally considered a finance lease for accounting purposes but a nontax lease for tax purposes.  As a nontax lease, a lease purchase is treated as a loan and the sale of the asset on deferred terms.

Costs and Benefits of Equipment Financing Alternatives
Purchasing Lease-Purchasing Leasing
Purchase Price Installment Payments Lease Payments
Residual Value Residual Value N/A
Maintenance Costs Maintenance Costs Maintenance Costs
No Service Contract No Service Contract Service Contract
IT Staff Costs* IT Staff Costs* IT Staff Costs*
Agency Staff Costs† Agency Staff Costs† Agency Staff Costs†
Disposal Costs Disposal Costs Disposal Costs
* IT staff time includes time spent on installation, maintenance, moves/adds/ changes, de-installation, and disposal. Costs will vary depending on who is responsible for maintenance in leasing contracts and on estimates of problem-solving efforts for older installed platforms.
† Agency staff time includes non-IT staff time spent on processing purchase orders, tracking leased equipment, dealing with surplus equipment, etc.
Source: Department of Information Resources, State of Texas

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