Construction Equipment Leasing Key Terms

Construction equipment leases can fit the goals and financial situations of businesses

Leasing construction equipment can be very advantageous to businesses. Benefits include not having to make a large financial investment at one time, not owning equipment that has outdated technology and particularly with equipment, not having the maintenance headaches if your lease agreement contains those conditions.

There is a variety of leases available to businesses. Examples include tax, operating, capital, skip and step-up leases. Some lease agreements particularly the step-up lease, offers low monthly payments in the early stages of the lease before increasing as a business’ cash flow improves.

Tax lease

A tax lease, also known as a true lease, is a lease agreement where a business pays to utilize equipment for a specified time. At the end of the lease, the business may return the equipment, renew or extend their lease or purchase the equipment for its fair market value price. Tax deductions for monies paid on lease payments may be available to business owners.

Operating lease

Operating leases are beneficial to businesses that need equipment for a short amount of time. Operating leases offer businesses affordable payments and, depending on the lease agreement, the ability to trade up to a different piece of equipment that best suits their needs. Like other leases, at the end of the agreement the business may return the equipment, renew the lease agreement or purchase the equipment for its fair market value price.

Capital leases

Capital leases allow businesses to assume legal ownership of the equipment at the end of the lease period. This leasing method is beneficial to those businesses wishing to purchase equipment without having to make a huge initial investment. Capital leases have one of four specifications in the agreement such as the legal transfer of ownership at the end of the lease, the option for the business to purchase the equipment at a discounted price, the length of the lease is at least 75% of the equipments projected life and lease payments are at least 90% of the equipment's fair market value.

Skip lease

Skip leases, sometimes referred to as seasonal payment leases, allow businesses with fluctuating income to skip some monthly payments without penalty as identified in the lease agreement.

Step-up lease

Step-up leases, also known as graduated lease payments, have monthly payments that start out low and increase over time as the cash flow of the business improves.

Terminal rental adjustment clause

Terminal rental adjustment clauses (TRAC) allow businesses to purchase equipment at the end of a lease agreement for the price established when the lease took effect. At the end of the lease, the business can do one of four things: purchase the equipment at the pre-established price, trade or replace the equipment, extend the lease or return equipment and establish a rental adjustment agreement.

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