bargain purchase option

Bargain-Purchase-Price Option

A lease in which the lessee has the option to buy the underlying asset at less than its fair market value at the end of the lease. For example, one may enter into an agreement to rent a house for five years with the option to purchase the house at the end of five years; the price is determined at the beginning of the lease, but must be substantially less than the market value of the house. If the lease is non-cancelable, the Financial Account Standards Board requires that it be considered a capital lease. See also: Rent-to-own.

bargain purchase option

A right granted to a lessee, typically under a personal property lease such as for office equipment,but it could be a real property lease.The right,called the option,gives the lessee the ability to buy the property, at the end of the lease term, for a price substantially less than fair market value.The inclusion of a bargain purchase option in a lease contract is an indication that the contract is really a disguised seller-financing arrangement.As a result,“rent”payments previously written off in their entirety may be disallowed by the IRS because some portion of the rent was really payment of principal on a loan.In addition,under Sarbanes-Oxley,public companies may have to post such arrangements as liabilities on the company's balance sheets,contrary to prior custom and practices.