A Capital Lease is one which transfers substantially all of the risks and benefits of ownership of the leased property to the lessee, and may be your best choice if long-term equipment ownership is your goal. According to the Canadian Institute of Chartered Accountants handbook, a lease will be treated as a Capital Lease (i.e. be categorized on your balance sheet as a long-term liability, interest expense on your income statement) if it meets any of the following criteria:
- Title passes automatically to the lessee at the end of the lease term;
- The lease contains a bargain purchase option (i.e. less than Fair Market Value, anywhere from $1 to 10% of the original equipment cost);
- The lease term is greater than 75% of the estimated economic life of the leased property;
- The present value of the minimum lease payments is greater than 90% of the leased property’s Fair Market Value at the inception of the lease.
An Operating Lease is any lease that is not a Capital Lease, and does not transfer substantially all of the benefits and risks related to the ownership of property to the lessee. As such, Operating Leases are generally used for short term equipment lease, and can work to the lessee’s benefit for tax purposes as the payments may be deducted as an operating expense. An operating lease is considered to be an “off-balance sheet” liability, allowing the lessee to acquire equipment for just a fraction of the useful life of the asset, although it typically contains a provision to purchase the equipment at the end of the lease for Fair Market Value. Additional services, such as maintenance and insurance may be provided by the lessor.
A Stretch Lease offers the lowest monthly payments and tax benefits available, and is probably for you if you want to take advantage of lower payments and may want a purchase option in the middle of the lease term. Stretch Leases offer the lessee an option, at the end of the primary lease term, to either extend the term of purchase the asset. Should the lessee choose to extend the term, no later purchase option will be available, as the present value of the extended lease payments is usually equal in value to the option price. For example, if you are approved for a lease over 24 months, this approved value can be taken and spread, or stretched, over 27 months, which has a direct impact on lowering your monthly payments.
Skip Payment Lease
A Skip Payment Lease allows the lessee to avoid payments during slow periods of the year, and contains a payment stream requiring the lessee to make payments on a payment plan tailored to fit a unique cash flow cycle. Matching the timing of revenues to expenses is an important financial strategy for business with fluctuating cash flow streams. For example, a lease with the first payment due in 90 days, would be considered a "three-month skip".
Step Payment Lease
A Step Payment Lease allows the lessee to tailor lease payment streams to match irregular revenue streams inherent to their business. A step-up lease begins with lower than normal amortized monthly lease payments that increase, or ‘step up’, over the lease term, structured over virtually any interval, with 6- and 12-month steps being most common. Step-down leases follow the same theory, only monthly payments are periodically reduced over the lease term.
A Master Lease is an agreement whereby the lessee is not only able to lease currently needed assets, but also to acquire in the future other assets under the same basic terms and conditions without negotiating a new contract. This type of arrangement puts the lessee in control of future equipment purchases, making Master Leases a powerful tool for businesses planning to expand their capital infrastructure.
Sale and Leaseback
Need capital? Let your assets work for you.
Sale and leaseback allows companies to free up capital tied up in their movable and immovable assets. You can use the money to strengthen your balance sheet, repay debts or invest in further development in your core business.
A Sale Leaseback agreement is an arrangement whereby an asset owned by the Lessee is sold for cash to the Lessor, and is in turn rented back to the Lessee. The purpose of a Leaseback is to free up the Lessee’s capital while allowing them to retain possession and use of the asset. This also allows for tax benefits not otherwise available to the Lessee, such as a deduction of rental payments, rather than depreciation on the owned asset. This also benefits the Lessor, in that assets are typically acquired at a purchase price lower than market value, and come with a long-term lease at a premium rate, which provides periodic income.