Lease Financing (2)

8/9/2019 Lease Financing (2)

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UP-FRONTED LEASES- More rentals are charged in the

initial years and less in the later years of the contract.

BACK-ENDED LEASES-Less rentals are charged in the

initial years and more in the later years of the

contract.


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PRIMARY LEASE- Provides for the recovery of the cost

of the asset and profit through lease rentals during a

period of about four or five years.

SECONDARY LEASE- It may follow primary lease on

nominal lease rentals.


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TYPES OF LEASES

LEASES

OPERATING FINANCIAL

LEVERAGED LEASE

SALE AND LEASEAC

CROSS-BORDERLEASE


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OPERATING LEASES

Short term, cancellable lease agreements

Convenience and instant services are hallmarks

It may run 3 to 5 years

Lessor is generally responsible for maintenance and

insurance.

The shorter the lease period , the higher will be the

lease rentals It may not fully amortize the cost of the asset.

E.g. tourist renting a car, office equipment.


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FINANCIAL LEASE

Long term, non-cancellable lease contracts.

It amortize the cost of the asset over the term of the

lease.

Also called Capital or Full-payout leases.

Most financial leases are direct leases.

The lessor buys the asset identified by the lessee.

Maintenance and insurance are normally theresponsibility of the lessee.

E.g.; ships, aircraft etc.


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FINANCIAL LEASE LEVERAGED

LEASE

Lessor, lessee and financier.

Lessor provides equity equal to about 25 per cent of

the assets cost.

Remaining amount is provided by the financier as a

loan.

For financing Expensive assets.


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FINANCIAL LEASE - SALE-AND-

LEASE BACK

Special financial lease arrangement.

A user may sell an (existing) asset owned by him to the

lessor and lease it back from him.

This provides liquidity as well as possible tax gains to

the lessee.


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FINANCIAL LEASE CROSS BORDER

LEASE

Also called international lease.

Lesser and lessee situated in two countries

More complex than the domestic lease.

When the lease transaction takes place between

three parties vendor, lessor and lessee in three

different countries , it is called foreign to foreign

lease


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TERMS USED ININ LEASING

INDUSTRY

Closed ended Asset gets transferred to the lessor at

the end.

Open ended Lessee has the option of purchasing

the asset at the end of the contract.

Direct lease Provides purchase option to the lessee.

Master lease Provides for a period longer than the

assets life and the lessor is responsible for providingequipment in good working condition during the lease

period .


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TERMS (Cntd.)

Percentage lease Fixed rent plus some percent of

the previous years gross revenue.

Wet and dry lease When the lease involves financing

as well as servicing and fuel

Net net net lease The lessee is obliged to take care

of maintenance, taxes and insurance of the

equipment.

Update lease Lessor agrees to replace obsolete

asset with new one at specified rent.


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ADVANTAGES OF LEASING

Convenience and flexibility

Shifting of risk obsolescence

Maintenance and specialized services


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THANK YOU

ABDUL SUBEER K K

Documents

Lease Financing (2)