California Commercial Code Section 1203

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(a) Whether a transaction in the form of a lease creates a
lease or security interest is determined by the facts of each case.
   (b) A transaction in the form of a lease creates a security
interest if the consideration that the lessee is to pay the lessor
for the right to possession and use of the goods is an obligation for
the term of the lease and is not subject to termination by the
lessee, and:
   (1) the original term of the lease is equal to or greater than the
remaining economic life of the goods;
   (2) the lessee is bound to renew the lease for the remaining
economic life of the goods or is bound to become the owner of the
goods;
   (3) the lessee has an option to renew the lease for the remaining
economic life of the goods for no additional consideration or for
nominal additional consideration upon compliance with the lease
agreement; or
   (4) the lessee has an option to become the owner of the goods for
no additional consideration or for nominal additional consideration
upon compliance with the lease agreement.
   (c) A transaction in the form of a lease does not create a
security interest merely because:
   (1) the present value of the consideration the lessee is obligated
to pay the lessor for the right to possession and use of the goods
is substantially equal to or is greater than the fair market value of
the goods at the time the lease is entered into;
   (2) the lessee assumes risk of loss of the goods;
   (3) the lessee agrees to pay, with respect to the goods, taxes,
insurance, filing, recording, or registration fees, or service or
maintenance costs;
   (4) the lessee has an option to renew the lease or to become the
owner of the goods;
   (5) the lessee has an option to renew the lease for a fixed rent
that is equal to or greater than the reasonably predictable fair
market rent for the use of the goods for the term of the renewal at
the time the option is to be performed; or
   (6) the lessee has an option to become the owner of the goods for
a fixed price that is equal to or greater than the reasonably
predictable fair market value of the goods at the time the option is
to be performed.
   (7) in the case of a motor vehicle, as defined in Section 415 of
the Vehicle Code, or a trailer, as defined in Section 630 of that
code, that is not to be used primarily for personal, family, or
household purposes, that the amount of rental payments may be
increased or decreased by reference to the amount realized by the
lessor upon sale or disposition of the vehicle or trailer. Nothing in
this paragraph affects the application or administration of the
Sales and Use Tax Law (Part 1 (commencing with Section 6001) of
Division 2 of the Revenue and Taxation Code).
   (d) Additional consideration is nominal if it is less than the
lessee's reasonably predictable cost of performing under the lease
agreement if the option is not exercised. Additional consideration is
not nominal if:
   (1) when the option to renew the lease is granted to the lessee,
the rent is stated to be the fair market rent for the use of the
goods for the term of the renewal determined at the time the option
is to be performed; or
   (2) when the option to become the owner of the goods is granted to
the lessee, the price is stated to be the fair market value of the
goods determined at the time the option is to be performed.
   (e) The "remaining economic life of the goods" and "reasonably
predictable" fair market rent, fair market value, or cost of
performing under the lease agreement must be determined with
reference to the facts and circumstances at the time the transaction
is entered into.

Last modified: July 31, 2008