A Presentation ON: Leasing

A
PRESENTATION
ON
LEASING
INTRODUCTION
• A lease is a contact between the owner of an asset (the
lessor) and the party desiring to use that asset (the lessee).
• A lease is a contract conferring a right on one person
(called a tenant or lessee) to possess property belonging to
another person (called a landlord or lessor) to the exclusion
of the owner landlord.
• It is a rental agreement between landlord and tenant.
• The relationship between the tenant and the landlord is
called a tenancy, and the right to possession by the tenant
is sometimes called a leasehold interest.
• A lease can be for a fixed period of time (called the term of
the lease) but may be terminated sooner.
• The consideration for the lease is called rent or the rental.
PARTICIPANTS
• There are a number of players in the leasing
industry, these are
• Lessor
It includes:
 Specialized leasing companies:(specialize in
business of leasing assets, the volume of business
transacted by them is huge)
 One-off lessor are those companies which come to
the leasing business for the purpose of availing the
advantage of huge depreciation and tax benefits.
 Manufacturer-lessors are those who are in the
field of manufacturing capital assets that are
available for leasing
Contd…….
• Banks-sponsored leasing companies are those
which operate as subsidiaries of the bank, and
have been established for the purpose of
undertaking the leasing business.
• Financial Institutions, in india institution like
ICICI provide leasing service.
LESSES (includes wide range of companies , from
blue chip companies to small units, which avail
the financial services from the lessor companies.
LEASE BROKERS (the intermediaries between the
lessors and lessees who help find a suitable lessor
for a prospective lessee and vice versa.
Contd…..
• LEASE FINANCERS: are the banking institutions
which provides financial assistance to lessors for
the purpose of acquiring the assets that are to be
leased.
Formalities of Leasing
• The formal requirements for a lease are determined
by the law and custom of the jurisdiction in which
real property is located. In the case of personal
property, it is determined by the law and custom of
the jurisdiction in which the rental agreement is
made
• A tenancy for years greater than 1 year must be in
writing in order to satisfy the Statute of Frauds.
LEASING PROCESS
The leasing process includes:
 Lease Selection
 Order & Delivery
 Lease Contract
 Lease period
TERMS OF LEASE
• The term of the lease may be fixed, periodic or of indefinite duration.
• If it is for a specified period of time, the term ends automatically when the
period expires, and no notice needs to be given, in the absence of legal
requirements.
• The term's duration may be conditional, in which case it lasts until a specified
event occurs, such as the death of a specified individual.
• A periodic tenancy is one which is renewed automatically, usually on a
monthly or weekly basis.
• A tenancy at will lasts only as long as the parties wish it to, and may be
terminated by either party without penalty.
• It is common for a lease to be extended on a "holding over" basis, which
normally converts the tenancy to a periodic tenancy on a month by month
basis.
• It is also possible for a tenant, either expressly or impliedly, to give up the
tenancy to the landlord. This process is known as a surrender of the lease
TYPES OF LEASE
• Financial Lease: also called a capital lease, is a
contract involving payment over an obligatory period,
of specified sums sufficient in total to amortize the
outlay, besides giving some profit to lessor.
• According to International Accounting Standard “a
financial lease is a lease that transfers substantially
all the risks and rewards incident to ownership of an
asset.
• It is non-cancelable in nature.
• The lessee is responsible for maintenance of the
assets leased.
• The lease generally provides for the renewal of the
lease on expiry of the lease contract .
Variants of financial lease
• Full Payout Lease, in this the lessor recovers the
full value of the leased asset, with in the period of
the lease, by way of lease rentals and the residual
value.
• True Lease: in this type of lease, the typical tax

related benefits, such as investments tax credit ,
depreciation tax shield, etc are offered to the
lessor.
OPERATING LEASE
• It is any other type of lease where by the asset is
not fully amortized during the non-cancelable
period of lease, and where the lessor does not relay
on the lease rentals for profits.
• It is a short-term lease on a period-to-period basis.
• The period of lease being less than the useful life of
the asset.
• The lease is cancelable at short-notice by the
lessee.
• The lessee has the option of renewing the lease
after the expiry of the lease period.
• It is a high risk lease to the lessor, since it could be
cancelled at any time.
NET LEASE
• It is a type of lease where the lessor is not
concerned with the repairs and maintenance of the
leased asset.
 The only function of the lessor is to provide
financial services.
 Conveyance –type Lease: it is a very long tenure
lease applicable immovable properties.
 The intention of this lease to convey title in
property.
 Such lease are entered into for periods which may
be as long as 99 years or 999 years.
Leveraged lease
• When the part or whole of the financial
requirement involved in a lease are arranged with
the help of a financier, it takes the form of
leveraged lease.
• This type of lease is resorted to in cases where the
value of the leased asset is very high.
• In this type of lease, the lessor who is also a
financier, involves one more financier, who may
hold a charge over the leased asset, over and above
a part of the lease rentals.
Sale and leaseback
• Under this type of lease, the owner of an asset sells
it to the lessor, and gets the assets back under the
lease arrangement.
• The ownership of the asset changes hands from the
original owner to the lessor, who in term leases out
the asset, back to the original owner.
 Partially pay-out lease: in this type of lease
where by the lessor obtains full payment of lease in
several leases.
 This broadly falls under the category of operating
lease.
Consumer Leasing
• Leasing of consumer durables such as
television,refrigertors,etc is called consumer
leasing.
• According to the US controller of currency,
“consumer lease is a contract in the form of lease or
bailment for the use of personal property by a
natural person for a period of time exceeding four
months, and for total contractual obligation not
exceeding $25,000, primarily for personal, family,
or household purposes, whether or not the lessee
has the option to purchase or otherwise become the
owner of the property at the expiration of the lease,
except the such term shall not include any credit
sales”
Balloon Lease
• A type of lease, which has zero residual value at
the end of the lease period.
• A kind of lease where the lease rentals are low at
the inception, high during the mid year, and low
again during the end of the lease.
 Close-end Leasing:
leasing arrangement whereby the asset leased out
is reverted(returned) to the lessor.
• it is also called walk-away lease.
Open-end Leasing
• In this case the lessee does not know the actual
cost of the asset until it is sold at the end of the
lease.
• Under this agreement, if the asset’s residual value
fetches less price than agreed, the lessee pays the
difference to the lessor .
• Where the asset’s residual value fetches more than
the value agreed, the lessor pays the excess to the
lessee .
 Swap Leasing: under this the lessee is allowed to
exchange equipment leased out whenever the
original asset has to be sent to the lessor for some
repair or maintenance.
 Warp Leasing: when the lessee further sub-leases
the asset to the end user, retaining a fee and a share
of residual value is known as warp leasing.
 Import Leasing: The leasing of imported capital
goods . It is beneficial to the lessee because
arranging any other source of funding may take a
long time, during the prices of importable item, as
also the rates of exchange, may change.
Cross –border Leasing
• A type of lease where the lessor in one country
leases out assets to a lessee to another country.
• It originated in the 1970 in US.
• The main intention of this lease to take the benefit
of income tax and depreciation with a view to
reduce the financial cost to the lessees.
 International Leasing: leasing company operates
in different countries through branches.
 It is active in US, Japan and Hong Kong.
 Problem faced by international leasing companies
is that they have to face draconian(very harash)
provisions in foreign exchange laws prevailing in
the respective countries.
ADVANTAGES OF LEASE
1. Leases often require much less equity
investment than bank financing.
2. Since leases are contracts between two

willing parties, their terms can be
structured in any way to meet their
respective needs.
3. If properly structured, neither the

leased asset not the lease liability are
reported on the face of the balance
sheet.
Contd….
It also includes
Advantages to lessor:
 Stable Business: it provides a continuous and
stable manufacturing business for the lessor, the
business is supported by the lessee’s continued
patronage, since there is no necessity for capital
investment.
 Wider Distribution: it allows for capturing a wider
distribution network by the lessor.
 Sale of supplies
 Second-hand market
 Tax benefit
• Absorbing obsolescence risk
 Easy finance
Contd…..
Advantages to lessee
It includes:
 Efficient use of funds
 Cheaper source of finance
 Flexible source of finance
 Enhanced borrowing capacity
 Off-balance sheet financing
 Tax benefit
 Guards against obsolescence
 Avoidance of initial cash outlay
 Better liquidity
LIMITATIONS OF LEASE FINANCING
• Disguised Debt financing

• Costly option
• Loss of tax shield
• Double sales tax
• Loss of residual value
• Unfavorable gearing
• No ownership
• Risk of default
• No working capital
• Indiscriminate finance
• Long –term venture

A Presentation ON: Leasing

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A Presentation ON: Leasing

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A

• True Lease: in this type of lease, the typical tax

2. Since leases are contracts between two

3. If properly structured, neither the

• Disguised Debt financing

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