Project On Lease Financing

A lease is a rental agreement that extends for one year or longer.

The owner of the asset (the lessor) grants exclusive use of the asset to the lessee for a fixed period of time.◦ In return, the lessee makes fixed periodic

payments to the lessor. At termination, the lessee may have the

option to either renew the lease or purchase the asset.

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Full-service lease◦ Lessor responsible for maintenance, insurance,

and property taxes. Net lease

◦ Lessee responsible for maintenance, insurance, and property taxes.

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Operating lease◦ short-term◦ may be cancelable

Financial lease◦ long-term◦ similar to a loan agreement

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Direct leases Sale-and-lease-back agreements Leveraged leases

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Lessee Manufacturer/ Lessor

Lease

Lessee LessorLease Sale of Asset Manufacturer/ Lessor

or

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Sale of Asset

Lease

Lessee Lessor

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LenderLien

Equity Investor

Lessee Lease

Single Purpose Leasing

Company

Manufacturer

Sale of A

sset

Equity

Loan

Efficient use of tax deductions and tax credits of ownership

Expectation of service potential or profitable operation over the asset’s economic life

Gain from appreciation in value Realisation of a residual value Reduced risk Reduced cost of borrowing Bankruptcy considerations Tapping new sources of funds Circumventing restrictionsdebt covenants◦off-balance sheet financing

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Lessee forfeits tax deductions associated with asset ownership.

Lessee usually forgoes residual asset value.

Losses from idle capacity Technological obsolescence Changes in value due to changing

economic conditions

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You have decided you want a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what's best for you based on the initial cash outlay, money and operating costs, equity and ownership, and tax and insurance considerations.PAYING IN CASH

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Advantages Leasing

- Lower monthly payments*- Little or no down payment* - More expensive car for less money- More cash available for other purchases- Sales taxes paid over term of lease

- Buying- - Equity and ownership

- Lower insurance requirements

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Leasing - No equity/ownership in the vehicle

- Higher insurance requirements- Early termination liability- Fewer dollars available for other-Potential incremental end-of-lease uses costs like excess wear and tear and additional mileage charges

Buying- Higher initial cash outlay

- Monthly payments often higher

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