What does "Finance leases" mean in real estate?

Finance leases (also called capital leases) are lease arrangements where the lessor legally owns a property or asset but the lessee obtains control and assumes substantially all the economic risks and rewards of ownership for the lease term. In real estate, a finance lease effectively acts like a purchase on the lessee’s books: the lessee records the property as an asset and recognizes a corresponding lease liability.

How to recognize a finance lease

Lease term covers most of the asset’s useful life (commonly ~75% or more).
The present value of lease payments equals or exceeds a major portion of the asset’s fair value (commonly ~90% or more).
There is a bargain purchase option allowing the lessee to buy the asset at the end of the term for a price below fair market value.
Ownership transfers to the lessee at the end of the lease.

Accounting and financial reporting

Because finance leases transfer ownership-like benefits, accounting standards require the lessee to capitalize the leased asset. Under modern standards the lessee recognizes a right-of-use asset and a corresponding lease liability. Lease costs are split into amortization (depreciation) of the asset and interest on the liability, which typically produces higher front-loaded expense recognition compared with an operating lease that recognizes lease expense evenly over time. Relevant frameworks include US GAAP (ASC 842) and IFRS, which define criteria and disclosure requirements for finance (capital) leases.

Common real-estate examples

Long-term office or retail leases where the tenant has exclusive control, can modify the space, the term covers most of the property’s economic life, and a favorable purchase option exists.
Specialized manufacturing sites or facilities leased for most of their useful life where the lessor has little alternative use for the property after lease termination.
Institutional arrangements—such as universities or corporations—leasing campus buildings or land under long-term contracts that effectively transfer ownership risks and rewards.

Why businesses use finance leases

Finance leases allow businesses to finance expensive real estate without an immediate cash purchase while reflecting economic ownership on the balance sheet.
They provide control over improvements and long-term use rights similar to ownership.
The accounting treatment affects leverage and profitability metrics (higher assets and liabilities; front-loaded expense recognition), which should be considered in capital planning.

Quick comparison

Scenario	Description
Long-term office lease with control	Lessee has exclusive use and control of floors with option to purchase after 10+ years — treated as a finance lease.
Manufacturing plant equipment	Lessee finances specialized equipment for most of its economic life and assumes residual risk — capitalized as a finance lease.
University campus buildings	Long-term lease meeting value and term criteria; institution recognizes the leased real estate asset and liability.

Bottom line

In real estate, a finance lease moves the economics of ownership to the lessee even though legal title may remain with the lessor. It requires capitalization on the balance sheet and distinct accounting treatment (amortization plus interest), and is governed by lease-classification rules under modern accounting standards. Properly identifying finance leases is important for financial reporting, tax planning and capital strategy.