RUSHI PAREKH 109-00-4211

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KRUNAL JOSHI 109-00-4209

FINA 500 – MONEY, BANKING AND FINANCIAL MARKET.

What is LEASE?A lease is a contract whereby the owner of an

asset grant to another party the exclusive right to use the asset usually for an agreed period of time in return for the payment of rent.”

Parties to a LeaseLessee--User of the AssetLessor--Owner of the AssetTrustee--Represents the Creditors with a Third

Party Lease 

ABOUT LEASE FINANCE…….A lease is an agreement allowing one party to use

another’s property, plant, or equipment for a stated period of time in exchange for consideration. Leases have become more prevalent as businesses and consumers look for alternatives to finance the acquisition of fixed assets. A lease agreement involves at least two parties ) a lessor (such as a bank), who owns the property, and a lessee, who uses the property. The lessor, essentially a

creditor in the transaction, is repaid from a combination of lease or rental payments, tax benefits, and proceeds from the sale or re-lease of the property at the end of the lease term.

MAP of FINANCE SOURCES

CHARCTRISTICS.... In lease transaction the lessee does not get the ownership of

asset but gets as right only to use the asset.The amount regularly paid for the use of such asset is called

lease rental. As it is treated as rent it is revenue expenses. Such transaction can we made for both immovable and

movable properties.Sometimes the agreement provides that the lessee will have a

right to buy the asset when lease contract will be over , at the time of making the contract or at the end of contract.

If there is not right to buy in the lease contract, the lease will have to return the to the lesser . when period of lease contract is over.

When the contract for lease is made the ownership of asset does not pass to the lesser when the lease contract is over.

When prices of asset are constantly rising due to inflation the lease arrangement keeps the lessee free from effect of price rise. His rent remain the same when price rise or fall.  

1. Operating lease

2. Finance lease

3. Capital lease

4. Direct finance lease

5. Full payout lease

6. Guideline lease

7. Leveraged lease

8. Net lease

9. Open-end lease

10. Sales-type lease

11. Synthetic lease

12. Tax lease

13. True lease

Common Lease Types of

1.Operating Lease: An operating lease is particularly attractive to companiesthat continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence.

2.Finance Lease: A finance lease is a full-payout, non cancellable agreement, in which the lessee is responsible for maintenance, taxes and insurance.

3. Capital Lease: Type of 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 (exceptions for used property leased toward the end of its useful life); or (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.

LEASE TYPES…..

LEASE TYPES……..4.Direct Financing Lease : A non-leveraged lease by a lessor (not a manufacturer

or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.

5. Full Payout Lease:A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value

6. Guideline Lease:A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.

7.Leveraged Lease:In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership. 

LEASE TYPES………8.Net Lease:A lease wherein payments to the lessor do not include insurance

and maintenance, which are paid separately by the lessee.

9.Open-end Lease :A conditional sale lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease.

10.Sales-type Lease:A lease by a lessor who is the manufacturer or dealer, in which the lease meets the definitional criteria of a capital lease or direct financing lease.

11.Tax Lease:A lease wherein the lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment. Generally, the lease rate factor on tax leases is reduced to reflect the lessor's recognition of this tax incentive

12.True Lease:A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.

Advantage:Provides full finance : provision of 100% finance is main

benefit of leasing . if the lease borrows money from banks to purchase the asset he gets 70 to 80% finance only. While in case of lease he does not have to make any provision for finance. He gets 100% finance. He will be required to pay rent only.

Flexible : it is flexible In the sense that risk of obsolesecne because he is not of financial lease, agreement is for the whole useful life of asset. The lessee is required to make the rental payment for the whole period even if the asset become obsolete. 

Advantage:

Save from recurring cost of finance : In case asset are taken on lease, the firm will not have to incur the cost of raising finance frequently whenever it wants to purchase any asset.

Absence of restriction : - it is main advantage of leasing. If money is borrowed from banks or other financial institution , they would put restriction on borrower as regard further amt. to be borrowed dividend etc.. but in case of lease it is absolutely free from all such restriction.

Tax benefit : - both the parties get certain deduction. The lessee gets full rent as deduction. This is higher then depreciation charges because it includes interest and some amt. toward profit of the lesser

Increase the capacity to borrows : - the lesser does not show the asset in his balance sheet nor the future liability for payment of rentals. Hence less debts equity ratio remains law and he will be able to borrow more funds in future.

Advantage:Useful is case if fast changing technology : - it is particularly useful to the lessee in case were fast technology

change are taking i.e reason why more and more business resort to leasing in case of very costly and expensive machines. 

Faster and cheaper credit : - its is faster than if money is to be borrowed from banks or other financial institution. Leasing company promptly sanction the request and it is more accommodative in respect of terms of financing.

Disadvantages: No benefit of residential value :- when a firm purchase an asset, it is has full right to value of asset at the end of its

useful life. But the benefit is not available to the lessee in case of lease .No benefit of ownership : - the lessee does not get any benefit, which would be available if he were the owner of

asset e.g price of an asset has increased considerably, the lessee can’t sell it.

Disadvantages:

High cost of leasing : - It is experience that leasing is more costly than borrowing. The rate of interest charged very much higher than that on borrowing. This is because the lease rental includes the cost of asset, some profit to the lesser payment for the employing experts by the lesser and also payment for related service. Of course if the lesser is making purchase of asset in large scale hr gets the benefit of the lower cost and this can be form of lower rent.

Not flexible : - In case the lessee is not able to arrange for finance for buying an asset he will have to lease the asset. In that case, the amt. of lease rent is fixed in advance for the whole period. If the rate of interest declines in market the borrowing can be returned and interest can be saving. But that is not possible in a change, because rent amt. is not changed.

Why the Lease Financing is important in this era?Leasing is big business in the 21st century with over billions of dollars worth of commercial equipment financing being done by American business annually. Whether it is commercial equipment leasing or a sale lease back, both are increasingly being used to acquire liquid funds for a company.

Financing through lease financing company can help your business conserve working capital. And, because commercial equipment financing frees up your working capital for other investments or profit making activities it just makes sense to be leasing rather than buying.

REFRENCE : • http://www.allbusiness.com/businessfinance/

leasing/2540-1.html • http://en.wikipedia.org/wiki/Finance_lease

• http://ideas.repec.org/a/onb/oenbmp/y2008i1b3.html

• http://en.wikipedia.org/wiki/International_Lease_Finance_Corporation

• OCC Bank Accounting Advisory Series, BAAS, Topic 5 — “Leases”

 

THANK YOU…..