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Leasing

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What is leasing
The process by which the firm can obtain the use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments. lessee is the receiver of the services of the asset under the lease contract. lessor is the owner of the asset.

The

The

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Types of leases
There are two major types of leasing:

Operating lease or Capital lease

Financial

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Operating Lease
It is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an assets services.

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Operating Lease
Features
Cancelable

at the option of the lessee, who may be required to pay a penalty for cancellation. assets have a useful life longer than the term of the lease. assets may become less efficient or technologically obsolete if leased for a longer period. (computer systems)

Leased These

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Operating Lease
Features
If

an operating lease is held to maturity, the lessee returns the asset to the lessor. the asset still has a positive market value at the end of the lease. the total payments made by the lessee to the lessor are less than the initial cost of the leased asset.

Normally,

Generally,

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Financial or Capital Lease

Features
It

is a longer term lease than an operating lease. leases are non-cancelable and obligate the lessee to make payments for the use of the asset over a predefined period of time. leases are commonly used for leasing land, building and large pieces of

These

Financial

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Financial or Capital Lease

Features
The The

non-cancelable feature makes this type of leasing similar to long term debt. lease rentals become a fixed, taxdeductible expenditure that must be paid at predefined dates. to make these payments can result in bankruptcy for the lessee.

Failure

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Financial or Capital Lease

Features
the

total payments over the lease period are greater than the lessors initial cost of the leased asset. type of lease transfers ownership of the property to the lessee at the end of the lease. lease term is equal to 75 % or more of the estimated economic life of the property( with the exception of those assets leased towards the end of their

This

The

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Leasing Arrangements
Lessor The

use three primary methods for obtaining assets to be leased. method depends largely on the desires of the prospective lessee.

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Leasing Arrangements
Direct Lease
It

occurs when a lessor owns or acquires the assets that are leased to a given lessee. lessee did not previously owned the assets that it is leasing.

The

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Leasing Arrangements
Sale-leaseback arrangement
Lessors

acquire leased assets by purchasing assets already owned by the lessee and leasing them back. technique is normally initiated by the firm that needs funds for operations. selling an existing asset to a lessor and then leasing it back, the lessee receives cash immediately, while

This

By

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Leasing Arrangements
Leveraged Lease
It

includes one or more third-party lenders. lessor acts as an equity participant and supplies only about 20% of the cost of the asset. balance is supplied by a lender. lessor uses the lease rentals to service the loan.

The

The The