FMV vs. $1 Buyout Lease for Switchgear

Two lease structures dominate equipment financing for electrical gear: the fair market value lease and the dollar buyout lease. Both get the equipment to the site and spread the payments. They differ substantially on what happens at the end of the term, how the payments are calculated, and how each one interacts with your taxes and balance sheet. Choosing the wrong one does not ruin a project, but it does cost money or create complications that a five-minute comparison up front could have avoided.

This page focuses specifically on how each structure applies to switchgear, transformers, motor control centers, and similar high-value power distribution assets where the end-of-term decision is real and consequential.

How Each Structure Works

Fair Market Value (FMV) Lease: The lessor funds the equipment at the full purchase price. Your monthly payment covers the depreciation on the asset over the lease term plus the lessor's return, but not the full cost. At the end of the term, you have three options: buy the equipment at its fair market value at that time (what a willing buyer would pay a willing seller in the open market), renew the lease at a new rate, or return the gear. The residual value, what is not paid off through your lease payments, is what the lessor is counting on recovering either from you at buyout or from reselling the asset. Because the lessor retains residual risk, monthly payments are lower.

Dollar Buyout Lease: Your payments fully amortize the cost of the equipment (or close to it) over the term. At the end, you pay one dollar for title. You are always going to own this equipment. It is a loan wearing lease clothes. Payments are higher than an FMV lease for the same term because there is no residual for the lessor to absorb.

Payment Comparison

On a $400,000 switchgear assembly, 60-month term, rough market-rate comparison:

• FMV lease: approximately $6,800 to $7,800 per month. At month 60, buyout might be $40k to $80k depending on what the market says the gear is worth.
• Dollar buyout lease: approximately $8,000 to $9,000 per month. At month 60, pay $1 and own it.
• Equipment loan: approximately $7,500 to $8,500 per month. At payoff, own it.

The FMV lease wins on monthly payment during the term. The total cost depends on whether you buy at the end and at what price. If you plan to keep the gear for 15 years, the FMV lease may end up costing more than a dollar buyout or loan once you factor in the end-of-term buyout. If you plan to return or re-lease the gear, the FMV lease wins on total outlay.

For durable electrical infrastructure like a metal-clad switchgear lineup or a unit substation that will be in service for decades, the dollar buyout or loan structure almost always makes more sense on a lifecycle cost basis.

When To Use FMV And When To Use Dollar Buyout

FMV lease fits best when:

• You are not certain you will need the gear after the lease term. A contractor installing temporary distribution gear for a specific project that ends in three to four years is a good FMV candidate.
• Keeping the asset off the balance sheet has genuine value to your financial ratios or bonding capacity.
• You want the lowest possible monthly payment and are willing to make the buyout decision later.
• The gear is technology-sensitive and you expect to upgrade at the end of the term.

Dollar buyout fits best when:

• You know you will own the gear long-term. Permanent power distribution for a manufacturing facility or data center does not get returned.
• You want to use bonus depreciation or accelerated depreciation, which requires ownership.
• You prefer simplicity. No end-of-term negotiation, no market value uncertainty, just a one-dollar final payment and title.

Residual Values On Electrical Gear

Residual value is the lessor's estimate of what the gear will be worth at lease end. It is the number that drives FMV lease payment calculations. For switchgear, residuals are generally favorable relative to many other equipment categories.

Equipment from Eaton, Siemens, and Square D has broad secondary market demand. A 5-year-old switchgear assembly from one of these manufacturers in good condition can still command 40 to 60 percent of original cost in the resale market. That healthy residual is what allows lessors to offer meaningful payment reductions on FMV leases relative to dollar buyout structures.

For niche or custom assemblies with thinner secondary markets, residuals are lower, which means the FMV payment discount versus a dollar buyout is smaller. In those cases, the lease structure decision matters less because both structures converge on similar monthly numbers.

Related Financing Paths

Motor Control CentersReview Financing Path

Metal-clad SwitchgearReview Financing Path

Unit SubstationReview Financing Path

Manufacturing FacilityReview Financing Path

Data CenterReview Financing Path

Bonus DepreciationReview Financing Path