Lease Financing

Financial Management

Presented By:

Dilip Khandekar M-4144

Arudhati Sawant M-4136

Harshal Pedamkar M-4133

Prachi Kanaskar M-4120

Kinjal Dabholkar M-4108

Harshal Pedamkar

M-4133

DEFINITIONo An agreement between two parties whereby one party

allows the other to use his/her property for a certain period of time in exchange for a periodic FEE.

o The property covered in a lease is usually -real estates, automobiles or machinery

o Leasing is the process by which a firm can obtain the use of certain fixed asset for which it must make a series of contractual, periodic, tax-deductible payments known as lease rentals

o A capital lease is long-term lease.

o An operating lease, on the other hand, is short-term

PARTICIPANTS

o LessorSpecialized Leasing

CompaniesOne-off lessorsManufacturer-lessorBank-sponsored leasing

companiesFinancial Institution

o Lesseeso Lease Brokerso Lease Financiers

EVOLUTIONo Leasing was prevalent during the ancient Sumerian and

Greek civilizations where leasing of land, agricultural implements, animals mines and ships took place

o The practice of leasing came into being sometime in the later half of the 19th century

o The public sector financial institutions –IDBI, IFCI, ICICI and the State Financial Corporation’s (SCFs) provided bulk of the term loans.

o The concept of financial leasing was pioneered in India during 1973. The First Company was set up by the Chidambaram group in 1973 in Madras

o The performance of First Leasing Company Limited and the Twentieth Century Leasing Company Limited motivated others to enter the leasing industry

LEASE AGREEMENT

Common elements in a Lease agreemento Details of parties involved and address.o Details of property-location, identificationo Declaration by the lessor that he is either the

owner of the property or is duly authorized by the owner to deal with it.

o Effective date of the commencement and duration of the time period.

o Terms and conditions.

o Lease rent and mode of payment.o Security deposits associated ,whether

interest free or not and circumstances of its refund.

o Facilities included with rent.o Grounds on which contract’s terminated.o Renewable clauses etc.

ESSENTIALS ELEMENTS

o Parties to the Contract

o Assets

o Ownership separated from User.

o Terms of the Lease

CLASSIFICATION OF LEASE

Lease

Sale and Leaseback &

Direct Lease

Single Investor Lease and

Leveraged Lease

Domestic Lease and International Lease

Finance Lease &Operating Lease

Prachi Kanaskar

M-4120

Features of Lease Financing

Financial leases allow the asset to be virtually exhausted by the same lessee.

Not Asset-based risks or Asset-based rewards.

Non-cancelable. Full-payout. Net lease. Not Asset-based risk but lessee-based

risk. Implicit rate of return.

Advantages Leasing offers a number of important

advantages: Protects against obsolescence Improves cash flow Preserves capital Treats payments as expenses rather than

debts Comes with tax advantages

Disadvantages Have an obligation to continue making payments.

Have no equity until lessee decide to purchase the equipment at the end of the lease term.

Although lessee is not the owner.

Kinjal Dabholkar

M-4108

TYPES OF LEASE FINANCING

o Finance Lease

o Operating Lease

o Capital Lease

o Direct lease

o First Amendment Lease

Finance Lease According to the International Accounting Standard (IAS - 17), the finance lease is

the one in which the lessor transfers to the lessee, substantially all the risks and rewards incidental to the ownership of the asset whether or not the title is eventually transferred

Key Features:

FL is suitable for ships, aircrafts, railway wagons, lands, buildings and heavy machines.

FL is long term, non cancellable lease agreements.

In FL the cost of an assets is fully amortized during primary lease period.

In FL, the lessee has an option to purchase the asset at the end of lease period.

FL is also called as Full Pay Out Lease.

Maintenance of asset is done by lessee

Operating Lease

‘’According to the IAS - 17, an operating lease is one which is not a finance lease. In an operating lease, the less or does not transfer all the risks and rewards incidental to the ownership of the asset and the cost of the assets is not fully amortized during the primary lease period.’’

Key Features:

OL is useful in case of computers, office equipments ,trucks , automobiles etc.

OL refers to short term lease agreement  or  the term of lease is always lesser than the economic life of an asset.

The primary lease period does not cover the cost of an asset.

Maintenance of asset is done by lessor

Capital Lease Capital lease classified and accounted for by a lessee as

a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria:

(a) the lessor transfers ownership to the lessee at the end of the lease term;

(b) the lease contains an option to purchase the asset at a bargain price;

(c) the lease term is equal to 75 percent or more of the estimated economic life of the property.

(d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor.

Direct lease A direct lease is a financing arrangement by which

the lessor buys the property and rents it directly to the lessee.

A direct lease can be used when two criteria are satisfied.

1. The first condition that must be met is that collection of minimum lease payments is assured.

2. The second factor is that there can exist no major uncertainties regarding the amount of unreimbursable costs that may be incurred.

First Amendment Lease A lease that provides the lessee with a purchase option

at one or more defined points during the lease term.

The customer must renew or continue the use of equipment under the lease if the purchase option is not exercised.

If the purchase option is not exercised, then the lease is automatically renewed for a fixed term typically 12 or 24 months.

Arundhati Sawant

M-4136

TYPES OF LEASE Net Lease

Open-end Lease

Sales-type Lease

Synthetic Lease

Contd…

Tax Lease

Trac Lease

True Lease

Sale And Lease Back

Contd…

Single Investor Lease

Domestic Lease

International Lease

Some other forms of leases

Net Net Net lease

Percentage lease

Close-ended and open-ended lease

Wet and Dry Lease

Dilip Khandekar

M-41

LEASING IN INDIA Leasing has grown by leaps and bounds in the

eighties but ; it is estimated that hardly 1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan.

The prospects of leasing in India are good due to growing investment needs and scarcity of funds with public financial institutions.

Leasing in the sphere of land and building has been in existence in India for a long time, while equipment leasing has become very common in the recent times.

IMPORTANCE 0F LEASE FINANCING

Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases.

Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance.

Reasons for Leasing

1. 100% financing

2. Taxes be reduced by leasing.

3. Flexible repayment structure - Skip payments, annual payments and deferred payments are all examples of lease structuring.

4. Convenience and Fast Decision making

Growth of Leasing Industry The growth of equipment leasing is of recent origin

and is volume in India is quite modest . Lease financing organisations in India include

many private sector non-banking financial companies, some private sector manufacturing companies.

E.g – 1) Infrastructure Leasing and Financial Services

Limited (IL&FS), 2) ICICI Bank, Industrial Reconstruction Bank of India (IRBI), 3) IFC, 4) LIC,5) GIC, 6) HDFC Bank, 7) State Industrial Investment Corporations(SIICs), and many other organisations .

Porsche Lease

Porsche Lease is a finance lease product that has been developed for those customers who wish to lease their vehicle and use it predominantly for business purposes.

To be eligible to finance a vehicle with Porsche Lease, customers should be able to demonstrate that the vehicle will be used for business purposes for more than 50% of the time.