True lease

True lease
See also

True lease is a kind of long-term lease, in which exclusive rights to use and own a property or equipment is granted by the lessor to the lessee for a (monthly) fee for the time specified in the contract. True lease is similar to the rental from the point of view of the landlord.

True lease includes a rental contract for a definite period (less than a year), which is automatically renewable and also an indefinite term lease[1].

Use[edit]

True lease is used when the landlord is struggling with the risk of having the estate still after the end of the contract[2].

Characteristics[edit]

If there is a situation of non-compliance with the rental agreement, it cannot be supposed that the trustee will fail to fulfill his obligations. The borrower compensates the lessor for financial loss and ensures certainty of future leasing results. The party who is not the debtor may not have secured protection against the bankruptcy estate, so the cancellation of the lease that has not yet expired is a breach of the contract[3].

True lease[4]:

  • Tax/Accounting realization event – No
  • Tax/Accounting depreciation allowance – Lessor
  • Tax/Accounting payments – Income to Lessor and deduction to Lessee
  • Rights of Creditors of lessee – cannot get goods, may be able to attach rights to lessee’s holding interests
  • Lessor has to file a financing statement to protect its dealings - No

In determining whether an agreement is a true lease follow these tips[5]:

  • nature of the business
  • intention of the parties
  • benefits and disadvantages of ownership
  • option to purchase
  • transfer of ownership
  • security interest
  • effect of the transaction

Benefits of true lease[edit]

Payments of true loans are typically lower than they are for a standard loan, and flexible payments are available, as well. For example, monthly adjustments may be made if entity can afford to pay a little more or a little less each month. The entire cost of the equipment can be financed, which means very little cash is needed up front. Leasing of needed equipment frees up funds for other business expenses, which causes no need of buying an equipment[6].

Footnotes[edit]

  1. (Shilling D. (2016), p. 23)
  2. (Shilling D. (2012), p. 20)
  3. (Shilling D. (2012), p. 20)
  4. (Sepinuck S. L. (2008) p. 84)
  5. (Herbst A. F. (2003), p. 131)
  6. (Duncan R. F. (2013), p. 27)

References[edit]

Author: Monika Sojka