A lease purchase is a full-payout equipment leasing [donotmark]arrangement [/donotmark]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 [donotmark]option price[/donotmark] – typically one dollar for US leases.

The lessee has the [donotmark]option [/donotmark]of paying the final payment, including the[donotmark] option price[/donotmark], in order to receive title to the asset.  If the final payment is not made and the purchase [donotmark]option [/donotmark]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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