COLLEGE STATION A movement toward increasing agricultural producer’s flexibility is spilling over into the farm equipment leasing business. Depending on the operation, producers may choose to lease farm equipment as an alternative to buying.
“It may not always be the advantage to lease, but it can be the right thing to do for some people,” said Joe Outlaw, an economist with the Texas Agricultural Extension Service.
When equipment is purchased, the buyer owns 100 percent of the property and can dispose of it at any time. When leasing equipment, the lessee is paying only for the time that it is used.
Outlaw said there are primarily two ways to set up a lease.
“The first is a straight lease, like if one were to lease an apartment and pay a flat fee. Generally, each year at the end of the lease the equipment goes back.
“The second type of lease is a lease-purchase where the person is establishing ownership. There are a variety of ways that this can be set up, but one of the main ways is where a contract is set up at a certain interest rate for a number of years, and at the end of the contract, the lessee has the option of buying it.”
A common practice in buying a piece of equipment, such as a tractor, is to negotiate a lower purchase price. A lease is negotiable as well. Some options of leasing include:
Closed-end leases. A lessee can return the equipment at the end of the lease with no obligation. Most closed-end leases allow the lessee to purchase the equipment for the residual value, which is the estimated worth of the equipment at the end of the lease period. It is usually stated as a percentage of the purchase price.
To use any excess value above the residual value on a new lease. If a piece of equipment has an actual market value of $60,000 at the end of the lease, and the residual value is $50,000, most dealers will allow $10,000 excess to be applied to a new lease of new equipment.
Most leases require additional payment at the end of the lease if the equipment has been used for more hours than stated in the lease. Producers should have an idea of how much the piece of equipment is going to be used before signing an agreement.
“They are about to make it where leasing equipment is about as practical (as buying),” Outlaw said. “(With a lease) you are always driving new equipment and decreasing your maintenance costs. For some people who don’t like making a payment, buying it and keeping it makes a lot of sense. On the other hand, you can lease a brand new model for a couple of years, then turn around and lease another new piece of equipment.”
Dr. Danny Klinefelter, an economist with the Texas Agricultural Extension Service, said there are some cases where landowners will buy the equipment and lease it to the tenant.
“The reason is because the landlord frequently will be in a higher tax bracket,” Klinefelter said. “Some are retirees that have money tied up in certificates of deposits or bonds. They are getting 4 percent on their money. If a tenant goes out, he will be borrowing 10 percent money. But what if the landlord buys the equipment, leases it to the tenant and builds in a finance charge of 7 percent? The tenant is getting the money at 7 percent instead of 10 percent. Both the landlord and the tenant are better off.”
There are tax implications to consider. A basic lease is considered an operating lease where the asset that is leased is considered rental property. Lease payments are treated as operating expenses for tax purposes. An example would be leasing a no-till drill for two months during planting.
A capital lease, where the lessee builds ownership of the equipment while leasing, is treated similarly to the purchase of an asset financed with a loan from a commercial lender. Equipment dealers may offer attractive incentives to lease or buy new equipment during certain times of the year.
“They have the ability to give no interest deals just like cars or no payments for the end of a period (of time),” Outlaw said. “You have all of these types of enticements depending on the specific type of equipment and if it’s been sitting around. It’s just one of those things where you have to step back and put a pencil to it and see which one is going to work.”