Definitions

Capital Lease - a lease under which the user or lessee owns the equipment at the end of the lease term, or has the option to purchase the equipment at a bargain rate, such as 10% of the purchase price or $1. This type of lease is capitalized for accounting purposes.

Operating Lease - a lease under which the title of the equipment remains with the lessor or its assignee. After the initial lease term, the lessee typically has three options; return the equipment, renew the lease at fair market value, or purchase equipment under the lease at fair market value. This type of lease is treated as an expense for accounting purposes.