True Lease
Definition
A True Lease is a contractual arrangement where the lessor retains ownership rights and the associated risks and rewards while leasing the asset to the lessee for a specified period. The lessee gets the right to use the asset but does not hold the asset’s ownership or its residual value.
Examples
- Vehicle Leasing: A car dealership (lessor) leases a car to a customer (lessee) for two years. The dealership retains ownership and the residual value of the car at the end of the lease term.
- Equipment Rental: An equipment rental company leases construction machinery to a contractor for a project duration, where the rental company retains ownership and the machines’ residual value.
Frequently Asked Questions (FAQs)
Q1: What happens at the end of a True Lease? A: At the end of a True Lease, the asset returns to the lessor unless a new lease agreement is made or the lessee decides to purchase the asset, if an option exists.
Q2: What are the advantages of a True Lease for the lessee? A: A True Lease allows the lessee to use the asset without committing to the full cost of ownership, and often includes lower monthly payments and maintenance responsibilities covered by the lessor.
Q3: Can the lessee claim depreciation benefits for a True Lease? A: No, since the lessee does not own the asset; the lessor is responsible for claiming depreciation expenses on their taxes.
Q4: How is a True Lease different from a Financial Lease? A: In a Financial Lease (or Capital Lease), the lessee assumes the risks and rewards of ownership, often with an option to purchase the asset at the end of the lease term. In contrast, the lessor retains these risks and rewards in a True Lease.
Q5: What types of businesses commonly use True Leases? A: Businesses requiring temporary or flexible use of high-value assets, such as vehicle fleets, office equipment, and industrial machinery, often utilize True Leases.
Related Terms
- Financial Lease: A type of lease where the lessee assumes both the risks and the benefits of ownership of the leased asset, and it is often considered a financial obligation.
- Synthetic Lease: A leasing arrangement that combines certain tax and accounting benefits of both True Leases and Financial Leases, with the lessee obtaining the operating lease treatment for accounting purposes, while gaining tax benefits of ownership.
Online References
Suggested Books for Further Studies
- “Equipment Leasing: Leveraged Leasing” by Peter K. Nevitt and Frank J. Fabozzi
- “The Handbook of Lease Financing” by Cleveland E. Cutler
- “Lease Accounting: A Practitioner’s Guide” by William H. Wiersema
Fundamentals of True Lease: Leasing Basics Quiz
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