Commercial Lease Terms
Operating Leases "by GAAP definition" are as close to a rental as you can get without actually being a short-term rental. An operating Lease has no appearance of equity build up during the lease-term. Should the Lessee wish to take ownership of the equipment, title may be secured by payment of Fair Market Value at the end of the original lease term. And, the Lessee typically incurs no new balance sheet debt.
Fair Market Value
Fair Market Value is generally defined by a third party appraisal of the equipment's then present market value.
A Capital Lease includes a minimal down payment with a payment structure for a set lease term. Upon satisfactory completion of the payment terms the Lessee can generally purchase title to the equipment from the Lessor for a nominal sum (generally a $1.00 purchase option) with ownership transferring to the Lessee. With a Capital Lease the depreciation expense goes to the Lessee as the title is expected to pass with the end of term purchase option. A Capital Lease is generally the chosen methodology for equipment acquisition when the equipment value or “life” is beyond the initial Capital Lease Term.
True LeaseA True Lease falls somewhere between the Operating Lease and the Capital Lease. The True Lease allows a defined purchase option at the end of the lease term that the Lessee can, but does not need to exercise. This serves to lower the Lessee's periodic payment. The True Lease Purchase Option is always higher than the $1.00 Capital Lease Purchase Option. It can be defined in either dollars or a percentage of the original equipment cost. At lease inception Lessor and Lessee can agree on this “end of term” value or residual. A True Lease can either be on or off balance sheet, which is left to the discretion of the Lessee and their auditor.