What Is A Lease?

- Lease Types Explained

By James Monahan

A lease, by legal definition, is considered to be a contract that allows the use or occupation of
property for a specific period of time, with a specified amount of rent. There are different
lease types, all with variable conditions and subject to the laws governing each state.

Different types of lease:

Finance lease:

Also called a financial sale, it allows for the benefits of flexibility as payments are spread out
to a period of several years, often the equivalent of the actual cost of the equipment or
property.

A common misconception is that payments made for a finance lease equals to ownership, but
this is not always true. Nevertheless, the lessee does have the option to purchase the property
after the lease expires, for a significantly much lower percentage of the actual cost.

This kind of lease, however, is not suitable for individuals who wish to acquire rapid tax
benefits.

True lease:

Also referred to as a tax lease, this is the better choice when one wants to have rapid tax
benefits.

It is also advantageous to professional institutions, as the lessor still remains the owner of the
equipment, thereby trimming down costly investments when it comes to computers and other
office-related gadgets that are prone to becoming technologically obsolete.

You will get the advantage of lower monthly payments as compared to that of a financial
lease, and in some instances, these could actually be tax-deductible. When the contract
expires, the lessee is given the option of purchasing the property for a very minimal amount.

Operating lease:

Also referred to as a tax lease, this is the better choice when one wants to have rapid tax
benefits.

This is considered, in general, as a short-term lease, usually three years or less. It is often
associated with high-tech equipment, or property that is prone to becoming technologically
obsolete.

In this type of lease, the lessor takes more of a risk in ownership, therefore allowing for much
lower monthly payments for the lessee. The lessee also has the advantage of the lease being
considered as neither an asset nor a liability when it comes to taxes.
The lessee also has the option of buying the property at fair market value after the contract
expires, similar to a tax lease.

Skip lease:

Yet another flexible lease type, wherein lessee and lessor agree to a payment schedule where
some months, a set period of time, have no payment and penalty.

This kind of lease is typical for business institutions and organizations whose operations rely
on a seasonal schedule. This is most common in school systems, and the agricultural and
recreational industries.

Sixty or ninety-day deferred lease

This type of lease allows businesses that rely on income-producing equipments that take
several months to generate revenue. A sixty or ninety-day deferred lease can be similarly
structured to a finance and true lease. Lessees are required to make an advance payment, to
be followed by the next ones after a sixty or ninety-day period.

Pre-paid purchase lease:

This is an option often taken by new businesses which have no credit history. Lessees are
required to make a one-time advanced payment of ten to twenty percent of the property's total
amount, thus reducing the monthly payments significantly. When the contract expires, the
lessee is given the option of purchasing the property for a very minimal amount.

Sub-lease:

Often termed as "sub-let," this is a lease from one lessee to another.