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Is It a True Lease or a Loan?

By Ken Weinberg
May 01, 2004

Part One of a Two-Part Series

Anyone who has been in the leasing business for much time at all understands that a transaction that the parties describe as a “lease” can be either a “true lease” where the lessor owns the leased equipment or a “loan” which results in the lessee being the owner and the lessor having merely a security interest. The latter is commonly referred to as “disguised security interests” or “leases intended as security” or “financing leases.” Many people also have a general understanding of the distinction between the two, and most of those reading this article have heard one person or another proclaim the bright-line rule that a lease with a dollar purchase option is a loan and a lease with a fair market value purchase option is a true lease.

Unfortunately, the rule is not anywhere near that straightforward, and many people analyzing this issue are incorrect with respect to some of the fine-tuned details. Given that the distinction between a true lease and a loan is still one of the most often litigated issues in the leasing profession and that case law continues to develop in this area, even people who know this issue well can benefit from the overview and refresher offered in the remainder of this article.

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