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What is a True Lease?

In a true lease, the lessor gives the lessee rights to the property in question without having to transfer full ownership rights to him or her. These agreements also require the lessee to pay an agreed monthly fee for a specific period.

How Does a True Lease Work?

A true lease which is also known as tax lease or tax-oriented lease gives lessors the right to claim all tax benefits on the property, while the lessee claims lease payments as expenses. If at the end of the lease period, there is no new agreement between the lessor and the lessee, the later is expected to evacuate the property in the same manner or slightly close to how it was before the lease was awarded. A true lease differs from a financial lease as lessors don't make full payment of the property as seen in financial lease. The lessee generally gets to buy the property in full and rent it out to the lessee. A balloon payment an amount greater than what was initially spent usually occurs at the end of a contract. In this situation, the lessee is granted full rights to the property as long as he or she abides by the conditions binding the contract. 

Types of Lease 

True lease, unlike a finance lease, doesn't provide room for the transfer of exclusive rights from the lessor to the lessee. This concept is otherwise known as an operating lease. An operating lease lasts less than the value of the leased property. At the end of a lease cycle, the lessor can remove any extra economic value to the property; otherwise known as the residual value. Lessors generally set expectations for residual values of each property before the start of a leasing cycle. Assets like heavy machinery and equipment are clear examples of operating leases which can have additional vale at the end of a lease period.

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