FINA 500 – MONEY, BANKING AND FINANCIAL MARKET.

RUSHI PAREKH 109-00-4211

DARPAN PATEL 109-00-4212
KRUNAL JOSHI 109-00-4209
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 Lease
Lessee--User of the Asset
Lessor--Owner of the Asset
Trustee--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.  
 Common Lease Types of
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
LEASE TYPES…..
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……..
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 21 century with over billions of
st

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/25
40-1.html
• http://en.wikipedia.org/wiki/Finance_lease

• http://ideas.repec.org/a/onb/oenbmp/y2008i1b3.html
• http://en.wikipedia.org/wiki/International_Lease_Finan
ce_Corporation
• OCC Bank Accounting Advisory Series, BAAS, Topic 5 —
“Leases”

 
THANK YOU…..