Lease Calculator

A lease is a contract between a lessor, who owns an asset, and a lessee, who wants to use it. The lessee gets the asset for an agreed term and pays for it in instalments. Ownership never changes hands. Housing, office space and cars are the familiar cases, but almost anything ownable can be leased: warehouse racking, conveyor belts, restaurant lighting, software licences, server hardware, aircraft, floor scrubbers.

How a lease payment is worked out

You are paying for the fall in value across the term, plus interest on the money the lessor has tied up. The payments and the leftover value have to add back up to what the asset was worth at the start.

Payment = (asset value - residual / (1 + i)^n) / ((1 - (1 + i)^-n) / i)

where:

• asset value is what the asset is worth at signing
• residual is what it is expected to be worth at the end
• i is the monthly interest rate, so an annual rate divided by 12
• n is the number of monthly payments

A $20,000 asset with an $8,000 residual over 36 months at 6% comes to $405.06 a month, or $14,582.28 in total. Of that, $12,000 is the drop in value and $2,582.28 is the finance charge. Switching the last field to $ runs the same equation backwards, so a payment you have been quoted returns the rate hiding inside it.

Rent and lease are not the same word

The two get swapped freely, and they mean different things. The lease is the contract. Rent is the payment made under it. Neither one builds equity: at the end of a lease you own nothing, whatever you have paid in.

Residual value

Residual value, also called salvage value, is what the asset is forecast to be worth when the lease ends. A $30,000 car leased for three years might carry a $16,000 residual. That $14,000 gap is what the lease payments cover, which is why residual value drives the monthly figure more than the sticker price does.

Longer terms usually mean lower residuals, since the asset has more time to wear out. Real estate runs the other way, because land and buildings often finish a lease worth more than when it started. Cars with a reputation for holding value get better lease deals for exactly this reason: a higher residual leaves less depreciation to pay for. The residual is set by the lessor at signing and does not move if the market moves, so a car that holds up better than forecast leaves you with a purchase option below what it would sell for.

Leasing a car

An auto lease puts you in a new car for a few years, usually inside the factory warranty, without paying for the whole vehicle. Over a full ownership cycle leasing costs more than buying, since you are always paying for the steepest part of the depreciation curve and never reach the years where a paid-off car costs almost nothing. What you get back is a lower monthly payment and a predictable repair bill.

Dealers quote lease interest as a money factor rather than a rate. Multiply it by 2,400 to convert:

Annual rate = money factor x 2,400

A money factor of 0.00250 is 6% a year. Anyone quoting "two fifty" means 0.00250, not 2.5%, and the difference is worth checking before signing. Car leases work the payment out slightly differently again:

Payment = (cap cost - residual) / n + (cap cost + residual) x money factor

The first half is depreciation spread evenly, the second is the rent charge on the average money outstanding. For the same $20,000 asset at 0.00250 over 36 months that is $333.33 plus $70.00, or $403.33 a month.

Mileage is the other lever. Most contracts allow 10,000 to 15,000 miles a year and bill 15 to 30 cents for every mile over. Going 5,000 miles past a 25-cent allowance is $1,250 due at handback. Wear-and-tear charges land at the same time, so the true cost of a lease is rarely the monthly payment on its own. Some contracts include a purchase option at the residual price, which is worth taking when the car is worth more than the number written three years earlier.

Renting and leasing a car are different transactions

Both involve paying to use somebody else's vehicle, and that is where it stops. Leases run for years and come from dealerships. Rentals run for days or weeks and come from rental agencies, covering a car in the workshop or a fortnight away. Rental pricing carries the agency's overhead and turnaround costs, which is why a month of renting costs several times a month of leasing.

Why businesses lease

Large companies hold leases running into billions on machinery, plant and property. Leasing lets a business use expensive equipment while paying a fraction of its price upfront, then walk away, renew, or buy at the end. For a young company short on capital, that is often the difference between having the equipment and not. Payments on an operating lease are deductible as a business expense, which trims the tax bill.

The other draw is obsolescence. Diagnostic scanners, commercial kitchen equipment and IT hardware all age fast, and a three-year lease hands the residual risk to the lessor instead of leaving you with a warehouse of stranded assets.

Finance and operating leases

US accounting splits business leases in two. A finance lease, called a capital lease before the rules changed, is treated as a purchase: the asset sits on the balance sheet and is depreciated. An operating lease is treated as a rental, and the payment is an operating expense.

Under ASC 842, a lease is a finance lease if it meets any one of five tests: ownership transfers at the end, a purchase option is reasonably certain to be taken, the term covers a major part of the asset's remaining life, the present value of the payments amounts to substantially all of its fair value, or the asset is so specialised that nobody else could use it. The older ASC 840 rules drew those last two as bright lines at 75% and 90%.

ASC 842 also changed where operating leases appear. They used to sit off the balance sheet entirely, which made lease-heavy retailers and airlines look far less indebted than they were. Since the standard took effect, for public companies in fiscal years beginning after 15 December 2018 and private companies after 15 December 2021, an operating lease puts a right-of-use asset and a matching liability on the balance sheet. Leases of twelve months or less are exempt. The income statement treatment still differs, so the split between the two categories continues to matter.

Leasing residential property

Twelve-month terms dominate residential letting. Three, six, eighteen and twenty-four months all exist, and any length both parties agree to is valid. Shorter terms usually carry a higher monthly rent, since the landlord faces the vacancy and turnover cost sooner.

A lease-to-own arrangement pairs a normal lease with an option to buy the property later at a price agreed now. Part of each payment may go towards the eventual purchase. These deals reward the buyer when prices rise and cost them the option fee when they do not.

Commercial property leases

A business leasing offices, land or a factory signs longer and stricter terms than a household does. The monthly figure may fold in insurance, property tax and maintenance, and what is included is the whole question. The categories below describe what the tenant pays for beyond base rent.

Gross lease

A gross lease, also called a full service lease, is all-inclusive. The tenant pays one flat figure and the landlord covers property tax, insurance and maintenance inside and out. Budgeting is simple, and you pay for that simplicity: landlords price in a cushion against operating costs coming in high. Common in office buildings, industrial units and retail centres.

Net leases

In a net lease the tenant picks up some of the running costs on top of base rent, and the base rent is lower to reflect it. Three versions exist.

A single net lease, written as N, has the tenant pay base rent plus a share of the property tax, usually in proportion to the floor space they occupy. The landlord handles everything else. It is the rarest of the three.

A double net lease, NN, adds insurance premiums to the tenant's side. The landlord keeps structural repairs and common area maintenance. In shopping centres and office parks, tax and insurance are divided between tenants by the space each one leases.

A triple net lease, NNN, hands the tenant property tax, insurance and common area maintenance, which are the three nets in the name. It is the most common net lease in US commercial and retail property, and tenants generally cover utilities and operating expenses too. NNN terms favour the landlord, whose exposure is reduced once the variable costs sit with somebody else. A bondable NNN lease goes further: it cannot be terminated early and the rent cannot be adjusted for any reason, including storm damage to the structure or a jump in the tax bill. An absolute lease, sometimes called a bond lease, puts every building expense on the tenant.

Modified leases

Gross leases suit tenants and net leases suit landlords, so modified gross and modified net leases meet somewhere between. A modified net lease often splits common area maintenance between the two sides while the tenant takes tax and insurance. A modified gross lease works like a full service lease with a few services carved out, and turns up in multi-tenant office and medical buildings.

The two labels are used loosely and mean different things to different people. Both describe a lease that is not quite full service, and the split is negotiable, as is most of a commercial lease. The contract is the only reliable answer to who pays for what, so read the clauses rather than the category name.