May 2007

By Michelle L. Barnett

Operating leases are becoming increasingly important to many corporate lessees for a variety of reasons. The primary reason a corporate lessee prefers operating leases to capital leases is for balance sheet management reasons. Operating leases, or “true leases” — as opposed to capital leases — reduce the lessee’s outstanding debt recorded on the balance sheet, which results in a better debt-to-equity ratio. The other motivations behind the corporate lessee’s preference for operating lease treatment vary. For example, many corporate credit facilities have covenants preventing corporations from creating debt, which usually includes capital leases. Also, many companies want to preserve current lines of credit and cash for other ventures, such as the acquisition of a new business line.

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