John Phipps: Remarkable Mix of Conditions Have Now Created Rare Opportunity to Lease Equipment

From Ken Berry in Boston, Kentucky:

“What advantages/disadvantages are there to leasing farm equipment?”  

 This question would prompt considerable details from our financial expert, Paul Neiffer, but I’m just going to limit my answer to generalities. Leasing is a reasonable alternative to purchasing in some situations. There are many pertinent factors to making this decision: interest rates, used equipment prices, the tax and financial situation of the buyer/lessor and strategic goals.

For example, if you want to test a new type of machine but aren’t in love with it yet, a three-year walkaway lease – where after the term of the lease you are not obligated to extend or buy, and just turn the machine back in – might work well. If you don’t want any additional debt on your balance sheet, leases accomplish that, but at the cost of no possibility of equity growth.

Until Section 179 and bonus depreciation were enacted, depreciation limits came into play more since lease payments are simply expenses for Schedule F. Usually, the financial trade-offs are approximately balanced making it a tough decision. In the last few years, however, a remarkable mix of conditions have created a rare opportunity.

For example, if you leased a machine two years ago, it probably came with a buyout figure that would allow you to purchase the machine for a fixed amount at the end of the lease. In my experience, this number was always relatively unattractive, and the machine was just returned. Low interest rates and red-hot used machinery prices have changed this.

The value of the machine after the lease is likely higher – even much higher – that anyone imagined when the lease was written. It could be higher than the original retail price. Even if you don’t want the machine, you can purchase it at the lease completion for the agreed buyout sum and turn around and sell the machine on the used market. There are some machinery bargains and whopping gains being pocketed right now from such leases. While I knew this was mathematically possible, I never imagined I would see it happen. The same thing is happening in the car market, by the way.

One answer to the lease versus buy question then is to lease – but do it two years ago. Sellers have noticed this so going forward, initial retail, payments and buyout numbers will be higher so this door is likely already slammed shut.