Project On Lease Financing Lease Financing A lease

Project On Lease Financing

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. 1

Types of Leases Full-service lease ◦ Lessor responsible for maintenance, insurance, and property taxes. Net lease ◦ Lessee responsible for maintenance, insurance, and property taxes. 2

Types of Leases Operating lease ◦ short-term ◦ may be cancelable Financial lease ◦ long-term ◦ similar to a loan agreement 3

Types of Lease Financing Direct leases Sale-and-lease-back agreements Leveraged leases 4

Direct Lease Lessee Manufacturer/ Lessor Lease or Lessee Lease Lessor Sale of Asset Manufacturer/ Lessor 5

Sale-and-Lease-Back Lessee Sale of Asset Lessor Lease 6

Leveraged Lease Manufacturer Sale of Asset Lessee Lease Single Purpose Leasing Company Lien Lender Loan Equity Investor 7

Advantages of Leases Ø Efficient use of tax deductions and tax credits of ownership Ø Expectation of service potential or profitable operation over the asset’s economic life Ø Gain from appreciation in value Ø Realisation of a residual value Ø Reduced risk Ø Reduced cost of borrowing Ø Bankruptcy considerations Ø Tapping new sources of funds Ø Circumventing restrictions Ødebt covenants 8

Disadvantages of Leasing Ø Lessee forfeits tax deductions associated with asset ownership. Ø Lessee usually forgoes residual asset value. Ø Losses from idle capacity Ø Technological obsolescence Ø Changes in value due to changing economic conditions 9

The Differences Between Leasing and Buying 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 10

Basic Advantages and Disadvantages 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 11

Disadvantages 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 12