When leasing equipment for your restaurant, you may have come across the term fair market value.
Fair market value is a term used in many different types of equipment lease agreements. Many lessees assume that since their lease agreements allow them to purchase the equipment at fair market value then the value of the equipment is mutually agreed upon.
Fair market value has different definitions for every contract so you need to carefully evaluate how your lease is structured and how the various elements are defined. These are some of the elements that you should identify when leasing equipment for your restaurant so that you can understand exactly how fair market value is determined.
Leasing Equipment For Your Restaurant: Setting Fair Market Value
Resolution Methods
Even when your lease agreement allows you to come to some sort of mutual agreement as to what the fair market value is, your lessor will still have the upper hand because the lease will continue until you both come to an agreement.
As you continue setting up your fair market value for the kitchen equipment, your rental payments will continue to accrue. Your lessor will therefore be willing to continue with negotiations knowing that your rental payments are accumulating. This will make you less willing to continue with fair market value negotiations therefore giving your lessor an upper hand.
The good news is that there is a solution you can use to reach a mutual agreement without losing negotiating leverage. You can choose a third party appraiser to settle your dispute but make sure that you have clearly indicated in your contract how the appraiser will be chosen and if you will need more than one of them. You should also include how long the appraisal will last and who will cater for the costs.
Determine Who Will Decide Fair Market Value
Many lease agreement contracts already have a definition of what fair market value is but most of them allow lessors to determine the value. If you do not review and understand your lease, your lessor may retain the sole discretion in setting fair market value within the provisions set in the contract.
Take Into Account The Time Value Of Money
You can decide to agree upon the market value of the restaurant equipment at the end of the lease term but ensure that the time value of money is taken into consideration.
Condition Of The Equipment
When leasing equipment for your restaurant, it is important that in your lease agreement, there is a provision that covers how equipment will be evaluated for wear and tear and how the fair market value will be adjusted.
There is also the issue of de-installed vs. in use and in place. Fair market valuation is usually higher if the lease agreement specifies that valuation is for “uninterrupted and in continuous use” or “in use and in place”. This is because the value of de-installed equipment on the open market is much lower than that of equipment that is in use and in place.
The Market Place
Your lease agreement should clearly define the market segment, the buyer and the market place. The market place should not be one-sided in such a way that it favors the lessor’s interests; instead, it should be reasonable.
Conclusion
When you enter into a lease agreement, you take on a substantial risk if your agreement does not clearly define fair market value for your kitchen equipment at the end of the lease term.
In some cases, equipment leasing companies take the initiative to clearly define fair market value. As you can imagine, the definition may be clear but it may not be fair to you. Your lessor might come up with a less favorable fair market valuation method that can make it impractical for you to purchase the equipment. They may also take extra steps to ensure that returning the equipment is a much costlier option so the only choice you have is to extend the lease.
You therefore have to keep these two things in mind:
- You will continue to make rental payments as you continue to negotiate with your lessor over fair market value
- Your lessor would much rather have you continue leasing the equipment rather than purchase it because it would be more profitable
So rather than choose a clearly defined fair market value, choose one that is reasonable and neutral.
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