Tuesday, November 13, 2012

Avoid Inherent Conflicts at End of Lease

As appraisers we are often brought in to help mitigate arguments that arise at the end of leases because a lot of leases don’t have their purchase options defined clearly.  The most common issue is not defining “Fair Market Value.”  When you don’t define specifically what “Fair Market Value” is, misunderstandings will always prevail.  The Leasing Company argues that the purchase option is “Fair Market Value In-Place” while the lessor argues that it is “Fair Market Value for Removal” and, as we all know, the cost of a machine installed is always significantly higher.

For an example, Loeb Appraisal recently was hired by a lessee to appraise a machine coming off lease that they wanted to purchase.  They hired us because our client felt the “Fair Market Value” as presented by the lessor was onerous due to the fact that a) The technology had changed significantly in the industry and b) Newer comparable equipment costs on average 25% less than when the original lease was put in place. 

During our research stage, we were able to show the trending in the used market and auction market for this type of asset, along with quotes on similar units if purchased “New.”  Even with this research showing the leasing company that the value assigned for the purchase option was not based on current market, the argument continued because of the value of the installation.  After many rounds of conference calls we were able to act as an expert, and unrelated party,  to eventually reach a happy medium for both parties.

It is our recommendation to avoid this situation by either clearly defining if Fair market Value is “in-place” or “for removal.”  Better yet, consider the rising trend of including a fixed dollar purchase amount in your lease terms.  From a lessor’s standpoint, it will better position your organization to avoid possible asset disposition issues if the purchase option is not exercised because your lessees will have a set purchase goal, and will be able to manage their cash flow accordingly.

For more information on how Loeb Appraisal can assist in your asset valuation projects, please visit www.loebappraisal.com.

Overall equipment values remain up across most industries!
Take a moment to review our 3rd Quarter Appraisal Trends Sheet.

 Appraisal Market in Review 3Q2012

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