The Financing Upgrade Dilemma

Equipment upgrades, when a lessee or borrower adds to or modifies existing leased or financed equipment, can provide an opportunity for additional profit for the lessor but it can turn out to be costly for the lessee. Here's what you should consider: If the upgrade is not readily removable or has no standalone value, then generally, the existing lessor, or lender, is the only one willing or able to finance it. In these situations, the equipment lessee, or borrower, has two choices: to purchase the upgrade with its own funds, in which case, in a lease situation, the upgrade may belong to the lessor at the end of the lease, or agree to whatever lease or financing rate the lessor or lender offers.

In many lease situations, the upgrade is deemed, under the terms of the lease, to become the property of the lessor because, for example, it becomes an integral part of the leased equipment and cannot be removed without damage to the existing equipment. This being the case, opting to pay for a higher financing cost may more advisable than purchasing an upgrade, which automatically becomes the lessor’s property.

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