Lease Financing

Presented By :- Shivam Seth

krishn kr. Sharma Amit Badoni Prati Gupta Aru Goel

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
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to a Lease

Lessee--User Lessee--User of the Asset Lessor--Owner Lessor--Owner of the Asset Trustee--Represents Trustee--Represents the Creditors with a Third Party Lease.

A lease is an agreement allowing one party to use anothers property, plant, or equipment for a stated period of time in exchange for consideration.

. 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.

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.

In lease transaction the lessee does not get the ownership of asset but gets as right only to use the asset.
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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.

Earlier, lease was confined to property related assets only. During sixties, lease movement gathered momentum in the developed countries and equipment like plant and machinery, computer, automobiles, aircraft and agriculture implements were included in the net of leasing.

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The lease finance is a contract. The parties to contract are Lessor and Lessee. Equipment are bought by Lessor at the request of Lessee. The lease contract specifies the period of contract. The Lessee in consideration pays the lease rental to the Lessor. The Lessee claims the rental as expenses chargeable to his income.

Operating lease Finance lease Capital lease Direct finance lease Full payout lease Guideline lease

Leveraged lease Net lease Open-end lease Sales-type lease Tax lease True lease

1.Operating Lease: An operating lease is particularly attractive to

companies that 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. Lease payments under an operating lease should be recognized as an expense in the income statement on a straight-line basis over the lease term. The following disclosures should be made: The total of future minimum lease payments under non-cancelable operating leases for each of the following periods: 1 Not later than one year. 2 Later than one year and not later than five years. 3 Later than five years.

. The total of future minimum sublease payments expected to be received under non-cancelable sublease at the balance sheet date Lease and sublease payments recognized in income for the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments, and A general description of the lessees significant leasing arrangements.

2.Finance Lease: A finance lease is a full-payout, non

cancellable agreement, in which the lessee is responsible for maintenance, taxes and insurance. Lessors should recognize assets held under a finance lease in their balance sheets and present them as receivable at an amount equal to the net investment in the lease.
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A finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes and insurance.

Finance leases are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high. These leases are structured as equipment financing agreements with residuals up to 10 percent. The lessee purchases the equipment upon lease termination at a pre-agreed amount. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment.

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); ` (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.

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.

Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset.

Leveraged Lease

Manufacturer

Sells Asset

Lessor

Leases Asset

Lessee

Lender

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.

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. This type of lease finances is particularly suitable in India where a large number of small companies have emerged more recently. 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.

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.

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. ` 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.
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Easy source of finance. Convenience & Flexibility. Enhanced Liquidity. Conserving Borrowing Capacity. Protects Against Obsolescence. Less Costly. Tax Benefits. Permits Alternative use of Funds. Boon For Small Firms. Absence Of Restrictive Covenants. Invisible Privileges.

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Full Security. Tax Benefit. High Profitability. Trading on Equity. High Growth Potential.

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. 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.

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Restriction on use of Equipment. Limitation of Finance Lease. Loss of Residual Value. Consequences of Default. Understatement of Lessees Asset. No protection against Suppliers Warranties.

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High Risk of Obsolescence. Competitive Market. Price Level Changes. Increased Cost due to Loss of User Benefit. Long-Term Investment.

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Shriram Trans Fi M&M Financial Sundarm fin Bajaj Finance Cholamandalam Manappuram Fin SREI Infra Sakthi Finance VLS Finance BCC Finance Golden Goenka

http://www.allbusiness.com/businessfinance/leasin g/2540-1.html http://en.wikipedia.org/wiki/Finance_lease http://en.wikipedia.org/wiki/International_Lease_Fi nance_Corporation