Leasing Finance.pptx

7/29/2019 Leasing Finance.pptx

1/48

Why own a cow when the milk is so cheap? All you

really need is milk and not the cow.

Presented by: -

Rahul Patel

Vivek Tripathi

Yash Deep Srivastava


2/48

Introduction

Importance

Features

Advantages of Commercial Lease

Leasing in India

Leasing Internationally

Lessors & Lessees

Types of Lease

Benefits


3/48

In India, the concept was pioneered in 1973 whenthe First Leasing Company was set up in Madras andthe eighties have seen a rapid growth of thisbusiness.

Leasing is a process by which a firm can obtain theuse of a certain fixed assets for which it must pay aseries of contractual, periodic, tax deductiblepayments.

Lease as a concept involves a contract whereby theownership, financing and risk taking of anyequipment or asset are separated and shared by

two or more parties.


4/48

A lease transaction is a commercial arrangementwhereby an equipment owner or Manufacturer

conveys to the equipment user the right to use

the equipment in return for a rental. In other words, lease is a contract between the

owner of an asset (the lessor) and its user (the

lessee) for the right to use the asset during a

specified period in return for a mutually agreed

periodic payment (the lease rentals).


5/48

Providing money incentives to lessee.

The lessee does not have to pay the cost of assetat the time of signing the contract of leases.

Leasing contracts are more flexible so lessees canstructure the leasing contracts according to theirneeds for finance.

The lessee can also pass on the risk ofobsolescence to the lessor by acquiring those 229appliances, which have high technologicalobsolescence.


6/48

The important feature of a lease contract is

separation of the ownership of the asset from its

usage.


7/48

Formality of a lease: -A tenancy for years greater

than 1 year must be in writing in order to satisfy

the Statute of Frauds.

Term of a lease: -The term of the lease may befixed, periodic or of indefinite duration.

If it is for a specified period of time, the term

ends automatically when the period expires, andno notice needs to be given, in the absence of

legal requirements.


8/48

A fixed-term agreement For a specified period of time (the "term"), and end

when the term expires.

Conditional, i.e. last until some specified event occurs,

such as the death of a specified individual.

A periodic agreement

Usually on a monthly or weekly basis

At will, i.e. last only as long as the parties wish it to,

and be terminated without penalty by either party.


9/48

Rent: -Rent is a requirement of leases in commonlaw jurisdiction, but not in civil law jurisdiction.

There is no requirement for the rent to be a

commercial amount. "Pepper corn" rent or rentof some nominal amount is adequate for this

requirement.


10/48

1. A definite term (whether fixed or periodic)

2. At a rent

3. confer exclusive possession


11/48

An owner of the fee simple holds all the rights andprivileges to that property and, subject to the laws,codes, rules and regulations of the local law, can sellor by contract or grant, permit another to have

possession and control of the property through alease or tenancy agreement.

For this purpose, the owner is called the lessor orlandlord, and the other person is called the lessee or

tenant, and the rights to possess and control the landare exchanged for some payment(called consideration in legal English), usually amonthly rent.


12/48

An owner can allow another the use of a vehicle(such as vehicle leasing of a car, a truck or

an airliner) or a computer either for a fixed

period of time or at will. This can be a simple

leasing transaction, or it can be a transaction

intended to allow the user the right to buy the

item at some future time.


13/48

Whether it is better to lease or buy land will bedetermined by each state's legal and economic

systems.

In those countries where acquiring title is

complicated, the state imposes high taxes on

owners, transaction costs are high, and finance is

difficult to obtain, leasing will be the norm. But,

freely available credit at low interest rates withminimal tax disadvantages and low transaction

costs will encourage land ownership.


14/48

Rental, tenancy, and leaseagreements are formal andinformal contracts between anidentified landlord and tenant

giving rights to both parties, Example: - The tenant's right to

occupy the accommodation for anagreed term and the landlords

right to receive an agreed rent. Ifone of these elements is missing,only a tenancy at will or barelicense comes into being.


15/48

Express terms: - These include what is in thewritten agreement (if there is one), in the rent

book, and/or what was agreed orally (if there is

clear evidence of what was said). Implied terms: - These are the standard terms

established by custom and practice or the

minimum rights and duties formally implied by

law.


16/48

In the modern legal framework, commercial realproperty leases fall into one of just a few categories:-

Office, Retail, Warehouse, Ground, and a catch-all

hybrid often referred to as "Mixed Use".

Each has certain typical characteristics, although

Ground leases may differ somewhat, taking on some

characteristics of Retail leasing when associated with

a retail project, like a shopping center; and althoughMixed Use projects can vary greatly depending upon

the various inclusions and the size of the overall

project, among other things.


17/48

1. Leasing is less capital-intensive than purchasing,so if a business has constraints on its capital, it

can grow more rapidly by leasing property than

it could by purchasing the property outright.2. Capital assets may fluctuate in value. Leasing

shifts risks to the lessor, but if the property

market has shown steady growth over time, abusiness that depends on leased property is

sacrificing capital gains.


18/48

3. Because of investments which are done withleasing, new businesses are formed. Furthermore,

unemployment in that country is decreased.

4. Leasing may provide more flexibility to a business

which expects to grow or move in the relatively

short term, because a lessee is not usually obliged

to renew a lease at the end of its term.

5. In some cases a lease may be the only practicaloption; such as for a small business that wishes to

locate in a large office building within tight

locational parameters.


19/48

6. Depreciation of capital assets has different taxand financial reporting treatment from ordinary

business expenses. Lease payments are

considered expenses, which can be set offagainst revenue when calculating taxable profit

at the end of the relevant tax accounting period.


20/48

A net lease may shift some or all of themaintenance costs onto the tenant.

If circumstances dictate that a business mustchange its operations significantly, it may be

expensive or otherwise difficult to terminate a

lease before the end of the term.


21/48

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% inUK and 10% in Japan.

The prospects of leasing in India are good due

to growing investment needs and scarcity offunds with public financial institutions.


22/48

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 inthe recent times.


23/48

The practice of leasing is well established inmost countries of the world .

The benefits to the lessee and lessor will vary

widely depending on national accountingstandards and tax regulations.

These largely divide into countries observing:

Legal Form: the lessors legal ownership of theproperty. or

Substance: the lessee legal right to use the property.


24/48

National accounting standards vary in the teststhat decide if the lease is a:-

Capital or Finance Lease, which is considered a

financing transaction - as the lessor has less of the

risks of ownership, such as the value of the

equipment in future years.

Operating Lease, whose term is short compared to

the useful life of the asset, where the lessee does nothave to show the lease on their balance sheet.


25/48

Specialized leasing companies

Banks and bank-subsidiaries

Specialized Financial institutions

One-off lessors

Manufacturer-lessors


26/48

Corporate customers with very high credit

ratings

Public sector undertaking

Mid-market companies

Consumers


27/48

Government departments and authorities

Commercial vehicles

Earth-moving machinery customers

Car customers


28/48

While many leasing companies may use the

same name to describe a lease, the actual

terms and conditions written in their contractsoften vary.


29/48

This lease agreement gives to the lessee only a limitedright to use the asset.

The lessor is responsible for the upkeep andmaintenance of the asset.

Best For: Equipment that will rapidly depreciate orbecome obsolete in a short period of time - i.e. Mines,Computers hardware, trucks and automobiles

How It Works: In a true or operating lease, the leasing

company retains ownership of the equipment during thelease. True or operating leases typically have nopredetermined buyouts - customers usually classify thesepayments as an operating expense.


30/48

Lower payments and typically the most tax-

friendly form of leasing, Additionally true or

operating leases offer three choices at the end

of your lease.

Return the equipment to the leasing company,

Purchase the equipment at its fair market value or

option amount

Extend your lease term.


31/48

Long-term, non-cancellable lease contracts areknown as financial leases.

It contains a condition whereby the lessor agrees

to transfer the title for the asset at the end ofthe lease period at a nominal cost.

At lease it must give an option to the lessee to

purchase the asset he has used at the expiry ofthe lease.


32/48

Under this lease the lessor recovers 90% of thefair value of the asset as lease rentals and the

lease period is 75% of the economic life of the

asset.

All the risks incidental to the asset ownership

and all the benefits arising there from are

transferred to the lessee, who bears the cost of

maintenance, insurance and repairs.

Only title deeds remain with the lessor.


33/48

Best For: If you would prefer to own theequipment when the lease agreement ends.

How It Works: The full purchase price, plusinterest, is spread over the length of the leaseagreement. The lessor receives an amountsufficient to amortise his capital outlay on theasset, earn interest, and make some profit on

the project.Benefits: At the end of the lease, you own the

equipment for a minimal payment, usually asmall percentage of the original purchase price.


34/48

It is a sub-part of finance lease.

Under this, the owner of an asset sells the assetto a party (the buyer), who in turn leases backthe same asset to the owner in consideration of

lease rentals.Under this arrangement, the assets are not

physically exchanged but it all happens in

records only. It is suitable for those assets, which are not

subjected depreciation but appreciation, sayland.


35/48

Best for: - Customers who have purchased theirequipment, but now have decided that leasingwould be more beneficial. Sale-leaseback alsoallows companies to raise cash for other

investments or cash flow purposes.

How It Works: The business that has alreadypurchased equipment sells it to a leasing

company, which then takes ownership of theequipment and leases it back to the business.Access Equipment Leasing requires that theequipment be purchased within 90 days.


36/48


37/48

The sale-leaseback allows you to put money

back into your business or into investments

that appreciate rather than depreciate.

The lessee can satisfy himself completely

regarding the quality of the asset and after

possession of the asset convert the sale into a

lease arrangement.


38/48

A third party is involved beside lessor and lessee.

Best For: Businesses that need equipment for

operation and development that will not

immediately generate revenue.How It Works: A 60 or 90-day deferred lease can

be structured as a finance lease or a true lease.

With this form of lease, there is usually no advancepayment required, and the first payment is not due

for 60 or 90 days after the lease begins.


39/48

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 meetingthe claims of the lender goes to the lessor. The lessor, the owner

of the asset is entitled to depreciation allowance associated with

the asset.


40/48

The equipment you need can be acquired

with little to no money up front and no

payments for 2-3 months.


41/48

This distinction is made on the basis of the

maintenance aspect.

Wet Lease: - If the maintenance and

insurance costs are born by the lessor.

Dry Lease: - The lessee bears the maintenance

and insurance costs.


42/48

Under direct leasing, a firm acquires the right

to use an asset from the manufacturer directly.

The ownership of the asset leased out remains

with the manufacturer itself.

The major types of direct lessor include

manufacturers, finance companies,

independent lease companies, special purposeleasing companies etc


43/48

Best For: Seasonal businesses, agricultural

companies, recreational services firms, and

other organizations which might require a

more flexible payment schedule due toseasonal business conditions.

How It Works: Lessee can specify months

when he would prefer not to make payments.Benefits: Flexible, in that it can be adjusted to

irregular cash flow.


44/48

Best For: If your leasing requirements will likely

be expanding over time.

How It Works: Separate lease schedules are

created to accommodate the addition of

equipment over a period of time of your

specification. The master lease governs the

basic terms and conditions.Benefits: Acquiring additional equipment is

made more convenient.


45/48

Best For: Local and state governmentorganizations that wish to acquire equipment.

How It Works: The tax structures and details of

municipal leases will vary considerably fromstandard business leases. Seek the advice ofyour financial advisor to better understandyour municipal lease options.

Benefits: Municipal leases are designedspecifically for local and state governmentorganizations.


46/48

Best For: Businesses whose financed

equipment will allow more profitability over a

period of time.

How It Works: Payments increase according to

a regular schedule over the life of the lease.

Benefits: Payments can be structured to match

current cash flow


47/48

Buy or Lease

Evaluation of Lease

Case Study


48/48

Leasing Finance.pptx

Documents