Capital Lease / Finance Lease

Capital Lease / Finance Lease

A Capital Lease is a contract in which one party (the “Lessor”) gives another party (the “Lessee”) the exclusive right to use and possess its property or equipment (the “Leased Property” or “Leased Equipment”) for a specified period. Capital Leases typically have a $1 purchase option at the end of the lease.

A lease that meets any of the following criteria will be deemed to be a Capital Lease:

  1. The life of the lease is 75% or greater of the assets useful life;
  2. The lease contains a purchase agreement for less than market value;
  3. The lessee gains ownership at the end of the lease period; or,
  4. The present value of lease payments is greater than 90% of the asset’s market value.

A Capital Lease would be considered a loan for accounting purposes, whereas an Operating Lease would be treated as a True Lease or rental for accounting purposes. The choice of lease-type/classification will have an important impact on a firm’s financial statements.

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