What Is A Capital Lease?

A Capital Lease is some what similar to a loan agreement and is sometimes referred to as a Lease Purchase Agreement. From the Lessor’s viewpoint a capital lease is a sale of equipment and the lessee construes it as a purchase. The lessee takes possession of some equipment, makes periodic lease payments and at the end of the lease, the equipment can be purchased for an amount significantly lower than it’s fair market value. Since the equipment is construed as a purchase by the lessee, it must be reflected on their balance sheet as a fixed asset with a corresponding liability. Leases that are in effect purchases are called Capital Leases since the acquired asset must be capitalized.

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