Most business owners have heard of $1 buyout leases and FMV leases, but there is a third structure that sits between them and often gets overlooked. The 10 percent option lease lets you buy the equipment at the end of the term for 10 percent of its original cost. It offers lower payments than a $1 buyout with more certainty than an FMV lease.
This article explains exactly how the 10 percent option works, how the purchase price is calculated, how it compares to other lease structures, and what to watch for in the fine print. If you want a middle ground between low payments and a predictable end of term, this lease type deserves your attention.
What Is a 10 Percent Option Lease?
A 10 percent option equipment lease is a financing arrangement where the lessee can purchase the equipment at the end of the lease term for 10 percent of the original equipment cost. Unlike an FMV lease, where the end of term purchase price is unknown, the 10 percent price is fixed in the agreement from day one. You know exactly what you will pay to own the equipment before you sign.
On a 50,000 dollar machine, the end of term purchase price is 5,000 dollars. On a 200,000 dollar piece of equipment, it is 20,000 dollars. The percentage never changes, regardless of what the equipment is actually worth on the open market at term end. Your monthly payments are lower than a $1 buyout lease because you are not amortizing the full cost, but higher than an FMV lease because the residual is fixed at 10 percent rather than based on a market appraisal.
How the 10 Percent Option Is Calculated
The math is straightforward. When the lease is written, the lessor takes the original equipment cost, also called the capitalized cost, and sets the purchase option at 10 percent of that figure. Your monthly payments are then calculated to cover the other 90 percent plus financing charges and fees over the lease term.
For example, on 100,000 dollars of equipment with a 48 month term, the 10 percent option price is 10,000 dollars. Your payments amortize roughly 90,000 dollars plus interest over 48 months. Because the option price is fixed, there is no appraisal at term end and no negotiation over market value. This removes one of the main uncertainties of an FMV lease, along with the risk of an unexpectedly high FMV quote from the lessor.
Is the Purchase Option Mandatory?
This is the most important question to ask, because the answer varies by agreement. In most 10 percent option leases, the purchase is optional, just like the purchase option in an FMV lease. You can buy for 10 percent, renew the lease, or return the equipment. In some agreements, however, the structure functions more like a conditional sale where the purchase is expected or effectively required.
The distinction matters for tax treatment. If the purchase is truly optional, the lease may qualify as a true lease, with payments treated as operating expenses. If the purchase is effectively mandatory, it may be treated as a purchase, with depreciation and interest deductions instead. Also confirm what happens if you return the equipment: some agreements include deficiency provisions, meaning if the equipment is worth less than the option price when returned, you owe the difference. Ask the lessor to walk through the exact return scenario in plain language.
How It Compares to a $1 Buyout Lease
The $1 buyout lease remains the simplest path to ownership: higher monthly payments, then the equipment is yours for one dollar. The 10 percent option lease gives you lower monthly payments during the term, but you pay a lump sum of 10 percent at the end if you want to own the equipment. Over the full term including the purchase, the total cost is often similar, but the timing of the cash outflow differs.
Choose the 10 percent option over the $1 buyout when monthly cash flow matters more than total simplicity. On a 150,000 dollar machine, the monthly savings versus a $1 buyout might be several hundred dollars, which adds up over a 48 or 60 month term. Choose the $1 buyout when you want the cleanest possible ending and prefer to avoid a future lump sum. For a detailed look at the other structure, see our explanation of the dollar buyout equipment lease.
How It Compares to an FMV Lease
Compared to an FMV lease, the 10 percent option trades payment size for price certainty. FMV lease payments are lower because the residual is based on expected market depreciation, which is often higher than 10 percent. But the FMV purchase price at term end is unknown, and could be higher or lower than 10 percent of original cost depending on how the equipment holds its value.
The 10 percent option is the better choice when you expect to keep the equipment but want lower payments than a $1 buyout offers. It is also better when you dislike uncertainty: the fixed 10 percent price eliminates the appraisal process and any dispute over fair market value. FMV is the better choice when you are likely to return or upgrade the equipment, since the lower payments reward you for not buying at the end.
Tax and Accounting Considerations
The tax treatment depends on how the agreement is structured and classified. When the purchase option is genuinely optional and the lease otherwise qualifies as a true lease, payments are generally treated as operating expenses and deducted as paid. However, tax authorities look at the economics, not just the labels: a fixed purchase price of only 10 percent can attract scrutiny if the equipment is realistically worth much more at term end, because the lease may look like a disguised purchase.
Keep records showing that return was a realistic option and that the 10 percent price reflected a reasonable estimate of residual value at signing. Accounting rules add another layer, since many leases must be recognized on the balance sheet regardless of their tax classification. Discuss both the tax and accounting treatment with your CPA before signing.
Equipment Types That Fit the 10 Percent Option
The 10 percent option works best for equipment with moderate depreciation and a useful life that extends well beyond the lease term. Manufacturing equipment, commercial kitchen equipment, fitness equipment, and certain types of medical and dental equipment are common examples. These assets lose value steadily but remain productive for years, so buying at 10 percent of original cost at term end is often a genuine bargain.
It is less attractive for technology equipment that depreciates rapidly. If a server system is worth close to zero after four years, a 10 percent purchase option of several thousand dollars may exceed the actual market value, and you would be better off with an FMV lease where you can walk away. Match the structure to the depreciation curve of the specific asset class.
Fine Print to Review Before Signing
First, verify whether the purchase option is truly optional or effectively mandatory, and understand the return provisions if you choose not to buy. Second, confirm exactly what figure the 10 percent is calculated from: the equipment cost alone, or the cost plus installation, delivery, and soft costs rolled into the lease. Third, check the notice requirements for exercising the option, since some agreements require written notice 90 or 180 days before term end.
Fourth, review the maintenance and insurance obligations, which are typically your responsibility throughout the term. Fifth, ask about early termination costs if your business needs change. If any of these terms are unclear, ask the lessor to explain them in writing. A reputable lessor will answer plainly, and vague answers about the end of term mechanics are a warning sign.
Negotiating and Deciding
The 10 percent figure itself is sometimes negotiable, particularly for large transactions or strong credit profiles. Some lessors will agree to a lower option percentage or a capped dollar amount in exchange for a slightly higher monthly payment. Also negotiate the surrounding terms rather than fixating on the rate alone: a lower rate with harsh return conditions may be worse than a slightly higher rate with fair wear standards. Our tips for negotiating a lease buyout price cover the same skills you will use if you exercise the option.
The 10 percent option lease makes sense when you want lower payments than a $1 buyout, more price certainty than an FMV lease, and a realistic path to ownership. It suits established businesses with steady cash flow and equipment that holds moderate value. As with any financing decision, consider lease extension versus renewal options as part of your end of term planning too. Understand the calculation, confirm the option is truly optional, review the return provisions, and compare the total cost against the alternatives before you sign.
