LEASINGby Partho H. Chakraborty
What is Lease FinancingA lease transaction is a commercial arrangement whereby anequipment owner or Manufacturer conveys t...
Essential Elements of Lease• Parties to the contract• Asset• Ownership separated from user• Term of lease• Lease Rentals• ...
Leasing Flowchart                                 Lessor                  Sale        Payment     Lease Lease             ...
Steps in Leasing1. The lessee chooses the equipment and the equipment supplier2. The supplier provides a quotation to less...
Clauses in Lease Agreement• Nature of the lease• Description• Delivery and redelivery• Period• Lease rentals• Use (Purpose...
Legal aspects of Leasing• The lessor has the duty to    Deliver the asset to the lessee    Authorize the lessee to use t...
Importance of Lease FinancingLeasing industry plays an important role in the economic development of acountry by providing...
Types of LeasingLease agreements are basically of two types.(a) Financial lease(b) Operating leaseThe other variations in ...
Financial LeaseLong-term, non-cancellable lease contracts are known as financial leases.The lease agreement is irrevocable...
Operating LeaseAn operating lease stands in contrast to the financial lease in almost allaspects.This lease agreement give...
Operating LeaseOperating lease is further categorized into:• Domestic lease- a lease transaction is classified as domestic...
Sale and Lease BackHere, the owner of an asset sells the asset to a party (the buyer), who in turn leases back thesame ass...
Leveraged LeaseUnder leveraged leasing arrangement, a third party is involved beside lessor andlessee.The lessor borrows a...
Direct LeaseUnder direct leasing, a firm acquires the right to use an asset from the manufacturer directly.The ownership o...
An Illustrative ExampleCompany A wants to acquire a machine. It would cost $ 100,000.Company B is prepared to give it on l...
Other Forms of LeasingNET LEASEIn commercial real estate, a net lease requires the tenant to pay, in addition to rent, som...
Types of Net LeaseSingle net lease• In a single net lease (sometimes shortened to Net or N), the lessee or tenant is respo...
Types of Net LeaseBondable lease• A bondable lease (also called an "absolute triple net lease", "true triple net  lease", ...
Novated LeaseA novated lease is a type of motor vehicle lease common in Australia that allows abusiness to lease a motor v...
Types of Novated LeaseThere are three main types of novated lease:A novated finance lease, where just the vehicle is lease...
Benefits of Novated LeaseBenefits for the employee:• Potential for significant income tax savings• Savings on Goods & Serv...
Wet LeaseLease Agreement• A wet lease agreement means one airline, called the lessor, supplies a complete aircraft package...
Dry Lease• An arrangement whereby the lease of an aircraft is without crew (pilot in  command, second in command, flight a...
Domestic Lease & International LeaseDomestic LeaseA lease transaction is classified as domestic if all the parties to the ...
Appraisal criteria used by LessorsThe degree of the appraisal by a leasing company is determined by the cash flow involved...
How is it different from Debt Financing?Debt financing is money that one borrows to run his business.Debt financing can be...
Difference Between Lease & Hire PurchasePartho H. Chakraborty               Leasing
Advantages of LeasingThere are several extolled advantages of acquiring capital assets on lease:SAVING OF CAPITAL• Leasing...
Advantages of Leasing - To the Lessee• Financing of capital goods      100% financing of capital goods without capital in...
Advantages of Leasing - To the Lessor• Full security    Only because of Ownership Preserved    Can Reposes Goods in case...
Disadvantages of LeasingFor businesses, leasing property may have significant drawbacks:• Restrictions on use of Equipment...
Leasing -Tax ProvisionsLessor:• The depreciation can be claimed by the lessor and not the lessee.• Depreciation can be cha...
Leasing & Islamic Finance• Leasing is based on the proposition that income is earned through the use of assets, rather  th...
Overall Size and Structure of the Leasing Industry in MENA• Most MENA countries have a leasing industry.• Leasing, in both...
Distribution of Types of LessorsPartho H. Chakraborty           Leasing
Type of Lessors by CountryPartho H. Chakraborty                Leasing
Leases Distributed by TypePartho H. Chakraborty                Leasing
Leasing Volume (Individual Countries)           Leasing Volume/GFCF (Gross Fixed Capital Formation)Partho H. Chakraborty  ...
MENA Leasing Markets           MENA Leasing Markets Development (% of GFCF)Partho H. Chakraborty                          ...
Legal FrameworkThe legal framework for leasing in MENA is either absent or ineffective.Only six countries have special lea...
Requirements to Develop The Leasing Industry in MENATo improve the enabling environment for leasing in MENA, it is importa...
Lease Potential – 2012 (USA)                        By Equipment Type (Unweighted)Partho H. Chakraborty                   ...
2010 V/s 2009 Leasing Business Volumes (USA)                         By Equipment Type (Unweighted) Partho H. Chakraborty ...
Final Overall Score & Ranking (USA)                        Lowest score being the bestPartho H. Chakraborty               ...
Equipment Survey Results – 2011 V/s 2010 (USA)                        Overall Ranking ScoresPartho H. Chakraborty         ...
Top 10 Equipment Acquisition Trends for 2012 (USA)ELFA issued the following Top 10 Equipment Acquisition Trends for 2012 t...
Top 10 Equipment Acquisition Trends for 2012 (USA)ELFA issued the following Top 10 Equipment Acquisition Trends for 2012 t...
Global Leasing Volume & Growth•   33% of countries suffered negative growth in 2010, compared to 84% in 2009.•   20% of co...
Global Leasing Report for 2011Partho H. Chakraborty                          Leasing
Volume & Market PenetrationPartho H. Chakraborty                         Leasing
Leasing in IndiaLeasing in India is certainly reviving, with growing economy, infrastructuraldevelopments and several new ...
Equipment Leasing -% of Capital FormationLeasing of equipments and real assets is a prominent source of private capital fo...
Key Factors                Key Factors expected to shape the Leasing sector in IndiaPartho H. Chakraborty                 ...
Modules, Methodology & BusinessThe Leasing Sector has again shown signs of revival since 2005, this time aroundfuelled by ...
Modules, Methodology & BusinessModules Required                                                   Time Frame : 30 Days•   ...
Thank You  Partho H. Chakraborty  A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road,  Brookefields, Kundalahalli, Ba...
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Leasing

  1. 1. LEASINGby Partho H. Chakraborty
  2. 2. What is Lease FinancingA lease transaction is a commercial arrangement whereby anequipment owner or Manufacturer conveys to the equipment userthe right to use the equipment in return for a rental.Lease is a contract between the owner of an asset (the lessor) andits user (the lessee) for the right to use the asset during a specifiedperiod in return for a mutually agreed periodic payment (the leaserentals). The important feature of a lease contract is separation ofthe ownership of the asset from its usage.Leasing essentially involves the divorce of ownership from theeconomic use of an asset/equipment.Lease financing is based on the observation made by Donald B.Grant:“Why own a cow when the milk is so cheap? All you really need ismilk and not the cow.”Partho H. Chakraborty Leasing
  3. 3. Essential Elements of Lease• Parties to the contract• Asset• Ownership separated from user• Term of lease• Lease Rentals• Modes of terminating lease:  The lease is renewed on a perpetual basis or for a definite period.  The asset reverts to the lessor.  The assets reverts to the lessor and the lessor sells it to a third party.  The lessor sells the asset to the lessee. Partho H. Chakraborty Leasing
  4. 4. Leasing Flowchart Lessor Sale Payment Lease Lease Payments Equipment Delivery Lessee SupplierPartho H. Chakraborty Leasing
  5. 5. Steps in Leasing1. The lessee chooses the equipment and the equipment supplier2. The supplier provides a quotation to lessee3. The lessee submits an application to the lessor4. The lessor evaluates the application5. The lessor and lessee sign a lease contract6. The lessor orders the equipment from the supplier7. The supplier delivers the equipment to the lessee and presents the bill to lessor8. The lessor registers and insures the equipment9. The supplier provides after-sales services as per contract10. The lessee maintains the equipment (routine maintenance)11. The lessor monitors the lease operation12. The lessee pays installments as per contract13. At the end of the lease period, the lessee either returns the equipment or exercises the option of purchase14. If the option is purchase, the lessee pays the agreed final sum and the lessor transfers the ownership of the equipment to the lessee Partho H. Chakraborty Leasing
  6. 6. Clauses in Lease Agreement• Nature of the lease• Description• Delivery and redelivery• Period• Lease rentals• Use (Purpose)• Repairs and maintenance (Lessor or Lessee)• AlterationPartho H. Chakraborty Leasing
  7. 7. Legal aspects of Leasing• The lessor has the duty to  Deliver the asset to the lessee  Authorize the lessee to use the asset  Leave the asset in peaceful possession• The lessee has the obligation to  Pay the lease rentals periodically  Take reasonable care of the asset  Return the leased assetPartho H. Chakraborty Leasing
  8. 8. Importance of Lease FinancingLeasing industry plays an important role in the economic development of acountry by providing money incentives to lessee.The lessee does not have to pay the cost of asset at the time of signing thecontract of leases.Leasing contracts are more flexible so lessees can structure the leasingcontracts according to their needs for finance.The lessee can also pass on the risk of obsolescence to the lessor byacquiring those appliances, which have high technological obsolescence.To day, most of us are familiar with leases of houses, apartments, offices,etc. Partho H. Chakraborty Leasing
  9. 9. Types of LeasingLease agreements are basically of two types.(a) Financial lease(b) Operating leaseThe other variations in lease agreements are(c) Sale and lease back(d) Leveraged leasing(e) Direct leasingPartho H. Chakraborty Leasing
  10. 10. Financial LeaseLong-term, non-cancellable lease contracts are known as financial leases.The lease agreement is irrevocable.The essential point of financial lease agreement is that it contains a condition whereby the lessoragrees to transfer the title for the asset at the end of the 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 of thelease.Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and thelease period is 75% of the economic life of the asset.Practically all the risks incidental to the asset ownership and all the benefits arising there from aretransferred to the lessee who bears the cost of maintenance, insurance and repairs.Only title deeds remain with the lessor.Financial lease is also known as ‘Capital Lease or Full Payout Lease’It is suitable for Ships, Aircraft, Railway Wagons, Engines, Land Buildings and, Heavy Equipment Partho H. Chakraborty Leasing
  11. 11. Operating LeaseAn operating lease stands in contrast to the financial lease in almost allaspects.This lease agreement gives to the lessee only a limited right to use the asset.The lessor is responsible for the upkeep and maintenance of the asset.The lessee is not given any uplift to purchase the asset at the end of the leaseperiod.The primary lease period does not cover the cost of the assetNormally the lease is for a short period and even otherwise is revocable at ashort notice.Mines, Computers hardware, trucks and automobiles are found suitable foroperating lease because the rate of obsolescence is very high in this kind ofassets. Partho H. Chakraborty Leasing
  12. 12. Operating LeaseOperating lease is further categorized into:• Domestic lease- a lease transaction is classified as domestic if all parties to the agreement , namely, equipment, supplier, lessor and the lessee, are domiciled in the same country.• International lease- if the parties to the lease transaction are domiciled in different countries, it is known as international lease. It is sub- classified into:-  Import lease- here the lessor and the lessee are domiciled in the same country but the equipment supplier is located in a different country. The lessor imports the asset and leases it to the lessee.  Cross-border lease- when the lessor and lessee are domiciled in different countries, the lease is classified as cross-border lease. The domicile of the supplier is immaterial.The international lease transaction is affected by country risk and currency risk.The country risk arises from the need to structure the lease transaction according to thepolitical and economic climate and a knowledge of the tax and regulatory environmentgoverning them in the foreign country concerned. Partho H. Chakraborty Leasing
  13. 13. Sale and Lease BackHere, the owner of an asset sells the asset to a party (the buyer), who in turn leases back thesame asset to the owner in consideration of lease rentals.However, under this arrangement, the assets are not physically exchanged but it all happensin records only.This is nothing but a paper transaction.Sale and lease back transaction is suitable for those assets, which are not subjecteddepreciation but appreciation, say land.The advantage of this method is that the lessee can satisfy himself completely regarding thequality of the asset and after possession of the asset convert the sale into a leasearrangement. Partho H. Chakraborty Leasing
  14. 14. Leveraged LeaseUnder leveraged leasing arrangement, a third party is involved beside lessor andlessee.The lessor borrows a part of the purchase cost (say 80%) of the asset from the third partyi.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 aftermeeting the claims of the lender goes to the lessor.The lessor, the owner of the asset is entitled to depreciation allowance associated with theasset. Partho H. Chakraborty Leasing
  15. 15. Direct LeaseUnder 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 purpose leasing companies etcDirect Lease is of 2 types:• Bipartite Lease: In such lease, there are two parties in the lease transaction namely equipment supplier cum lessor and lessee• Tripartite Lease: In such lease, there are three parties in the lease agreement namely equipment supplier, lessor and lessee Partho H. Chakraborty Leasing
  16. 16. An Illustrative ExampleCompany A wants to acquire a machine. It would cost $ 100,000.Company B is prepared to give it on lease on lease rentals of $ 22.50 per month payablemonthly in advance, for 60 months.Let us suppose the deal is to be put through.A will be allowed to negotiate all commercial terms with the supplier including the technicalspecifications. B would walk in after everything is finalized: B would place its orders in theterms A instructs, and acquire the asset.The asset would be put on lease for 60 months; if the asset is expected to last for more than5 years, the lessee will be given a convenient renewal option, for, say, next 5 years at anominal rental. [Alternatively, depending on the regulations prevailing, the lessee could begiven an option to buy the asset as a token value.]The lessee has been put virtually in the position of an asset owner - he has the right to usethe asset for 5 years, with a power to extend the lease period for another 5 years.The first 5 years are called the primary lease period and the extended period is called thesecondary lease period Partho H. Chakraborty Leasing
  17. 17. Other Forms of LeasingNET LEASEIn commercial real estate, a net lease requires the tenant to pay, in addition to rent, some or all ofthe property expenses which normally would be paid by the property owner (known as the"landlord" or "lessor").These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities andother items.The precise items that are to be paid by the tenant are usually specified in a written lease.For properties that are leased by more than one tenant, such as a shopping center, the expensesthat are "passed through" to the tenants are usually prorated among the tenants based on the size(square footage) of the area occupied by each tenant.The term "net Lease" is distinguished from the term "gross lease".In a net lease, the property owner receives the rent "net" after the expenses that are to be passedthrough to tenants are paid.In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to payexpenses or in any other way as the landlord sees fit. Partho H. Chakraborty Leasing
  18. 18. Types of Net LeaseSingle net lease• In a single net lease (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxes as well as the base rent.• Double- and triple-net leases are more common forms of net leases because all or the majority of the expenses are passed on to the tenant.Double net lease• In a double net lease (Net-Net or NN) the lessee or tenant is responsible for property tax and building insurance.• The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance.• "Roof and structure" is sometimes calculated as a reserve, per square foot.Triple net lease• A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "Nets") on the property in addition to any normal fees that are expected under the agreement (rent, premises utilities, etc.).• In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area.• This form of lease is most frequently used for commercial freestanding buildings.• However, it has also been used in single family residential rental real estate properties. Partho H. Chakraborty Leasing
  19. 19. Types of Net LeaseBondable lease• A bondable lease (also called an "absolute triple net lease", "true triple net lease", or a "hell-or-high-water lease") is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the property.• Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds, and to pay rent after partial or full condemnation.• These leases are not terminable by the tenant, nor are rent abatements permissible.• The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the "hell-or-high water".• An example of this type of lease would be a leaseback arrangement in which a retailer leases back the building it formerly owned and continues to run the store.• Bondable leases are typically used in so-called "credit tenant lease" deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated "credit" tenant. Partho H. Chakraborty Leasing
  20. 20. Novated LeaseA novated lease is a type of motor vehicle lease common in Australia that allows abusiness to lease a motor vehicle on behalf of an employee, with the responsibilityfor the lease lying with the employee and the lease payments being made from theemployees pre-tax income.The term novated lease is also used in the UK to refer to a car lease which hasbeen novated (transferred) between two parties.In Australia, a novated lease is generally a three way agreement ("novationagreement") between an employer, employee and lease company, under which theemployee leases a vehicle from the lease company, and employer agrees to takeon the employees obligations under the lease.Normally, the employer then makes the lease payments on behalf of the employee,and deducts them out of the employees pre-tax income (known as salarypackaging a vehicle).If the employee ceases to be employed by that employer, or the lease agreementends, the employee retains the vehicle but all obligations assumed by the employerunder the novation agreement revert back to the employee. Partho H. Chakraborty Leasing
  21. 21. Types of Novated LeaseThere are three main types of novated lease:A novated finance lease, where just the vehicle is leased,A fully maintained novated lease, where the vehicle and its running costsare wrapped up into the lease,A fully maintained novated operating lease, where the vehicle and itsrunning costs are wrapped up into the lease, and the residual value risk isassumed by the lessor.Fully maintained novated leases and fully maintained novated operatingleases are normally managed by a third-party lease managementcompany, and the benefit of their perceived convenience can often beoutweighed by high management fees and hidden costs associated withthe lessor assuming the residual value risk (in the case of a fullymaintained novated operating lease). Partho H. Chakraborty Leasing
  22. 22. Benefits of Novated LeaseBenefits for the employee:• Potential for significant income tax savings• Savings on Goods & Services Tax (Australia) that would normally be incurred on vehicle expenses• Potential access to volume discounts if the employer has many vehicles under this scheme• More flexibility in the choice of a car compared to a company car arrangement vehicle stays with the employee and can be transferred to a new employerBenefits for the employer:• A way to provide an effective increase in employees salaries with no or minimal cost to the business• Potentially a cost effective alternative to operating a fleet of company vehicles• Compared to company cars, the business does not assume any risk for the vehicles• Compared to company cars, employee vehicles are "off balance sheet" Partho H. Chakraborty Leasing
  23. 23. Wet LeaseLease Agreement• A wet lease agreement means one airline, called the lessor, supplies a complete aircraft package to another airline, called the lessee.• This complete package includes the aircraft, a crew, maintenance for the aircraft and insurance.Lessees Financial Obligations• The lessee pays for fuel, airport fees, crew meals and transportation, crew visa fees and other taxes.By the Hour• The lessor charges the lessee by the hour and usually requires a minimum number of hours.• These hours are paid for even if they are not used.Short Term• A wet lease agreement is for short-term leasing.• Most wet lease agreements are for at least one month, and some extend up to two years.• A longer term of leasing is called a dry lease.Why a Wet Lease?• A lessor airline decides to do a wet lease agreement for a variety of reasons.• Some airlines are not permitted to fly into certain countries.• Using a wet lease agreement, the airline can offer still offer service to those countries.• If an airline has a particularly busy season, it can use another airline via the wet lease agreement to continuing offering service to customers.• Airlines find it is also a good way to try out new service routes. Partho H. Chakraborty Leasing
  24. 24. Dry Lease• An arrangement whereby the lease of an aircraft is without crew (pilot in command, second in command, flight attendant, etc.)• The aircraft and the crew must absolutely be separate and distinct.• The lessor may not provide any of the crew members or the lease could be construed as wet lease and thereby subject to severe restrictions under FAR Part 91 and subject to the ten percent commercial federal excise tax.Note:• The Federal Aviation Administration does not define leases using wet or dry terminology.• The terms were introduced by the Civil Aeronautics Board before the FAA was created and are commonly used in the aviation industry.Partho H. Chakraborty Leasing
  25. 25. Domestic Lease & International LeaseDomestic LeaseA lease transaction is classified as domestic if all the parties to the agreement, namely equipment supplier, lessor and lessee are domiciled in the same country.International LeaseIf the parties to the lease transaction are domiciled in different countries, its known as International LeaseInternational Lease is of 2 types• Import Lease: In an import lease, the lessor and lessee are domiciled in the same country but the equipment supplier is located in a different country.• Cross Border Lease: It means the lessor and lessee are domiciled in different countries. The domicile of the supplier is immaterial in this case. Partho H. Chakraborty Leasing
  26. 26. Appraisal criteria used by LessorsThe degree of the appraisal by a leasing company is determined by the cash flow involved.The aim of the appraiser is to seek to confirm the ability of the user to meet the rentals.Amongst the main areas to be explored by lessor during the course of investigation is the quality of thecompany’s management.Here the lessor wants to know that those responsible for running the company are properly qualified, havea good record of management and a reasonable degree of management succession within theorganization.Lessor looks at the company’s record as shown by the audited balance sheets and accounts, etc..The lessor also takes into account the debt ratio.This is done to ensure that a company is not overstretched through having too much borrowing on toosmall a capital base.The appraiser also satisfies himself that the prospective lessee has sufficient working capital to supportextra sales generated by the new investment.Anticipated residual value of the equipment leased, nature of the industry in which the customer isengaged also constitute important factors. Partho H. Chakraborty Leasing
  27. 27. How is it different from Debt Financing?Debt financing is money that one borrows to run his business.Debt financing can be divided into two categories, based on the type of loanone is seeking: long term debt financing and short term debt financing.Long Term Debt Financing usually applies to assets a business ispurchasing, such as equipment, buildings, land, or machinery.With long term debt financing, the scheduled repayment of the loan and theestimated useful life of the assets extends over more than one year.Short Term Debt Financing usually applies to money needed for the day-to-day operations of the business, such as purchasing inventory, supplies, orpaying the wages of employees.Short term financing is referred to as an operating loan or short term loanbecause scheduled repayment takes place in less than one year. In debt financing you own the asset unlike leasing. Partho H. Chakraborty Leasing
  28. 28. Difference Between Lease & Hire PurchasePartho H. Chakraborty Leasing
  29. 29. Advantages of LeasingThere are several extolled advantages of acquiring capital assets on lease:SAVING OF CAPITAL• Leasing covers the full cost of the equipment used in the business by providing 100% finance.• The lessee is not to provide or pay any margin money as there is no down payment.• In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories.FLEXIBILITY AND CONVENIENCE• The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.• 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.PLANNING CASH FLOWS• Leasing enables the lessee to plan its cash flows properly.• The rentals can be paid out of the cash coming into the business from the use of the same assets.IMPROVEMENT IN LIQUIDITY• Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.DEPRECIATION• Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses.• Lease payments are considered expenses, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period. Partho H. Chakraborty Leasing
  30. 30. Advantages of Leasing - To the Lessee• Financing of capital goods  100% financing of capital goods without capital investments.  Lessee is able to commence business w/o making any investment.• Additional source of financing  Capital can be deployed in other strategic aspects of business like Working Capital.• Less costly (compared to Bank Finance)• Ownership preserved• No threat of dilution of ownership which is applicable in Equity and Debt Financing• Avoids conditionalities  viz. conditionalities associated with Equity/Debt Issue and Bank Loan• Flexibility in structuring of lease rentals• Obsolescence Risk is averted• SimplicityPartho H. Chakraborty Leasing
  31. 31. Advantages of Leasing - To the Lessor• Full security  Only because of Ownership Preserved  Can Reposes Goods in case of Default• Tax benefit  Mainly Depreciation• High profitability  Since return from business is more than Cost of Capital• Trading on equity• High growth potential Partho H. Chakraborty Leasing
  32. 32. Disadvantages of LeasingFor businesses, leasing property may have significant drawbacks:• Restrictions on use of Equipment  Addition/alteration of asset is not permissible• Loss of residual value  Since Ownership remains with Lessor• Consequences of default  Violation of clauses of Lease Contract may result in to termination of Lease.• Understatement of Lessee assets• Sales tax  Can lead to Double Taxation• A net lease may shift some or all of the maintenance costs onto the tenant.• If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term.• In some cases, a business may be able to sublet property no longer required, but this may not recoup the costs of the original lease, and, in any event, usually requires the consent of the original lessor.• If the business is successful, lessors may demand higher rental payments when leases come up for renewal.• If the value of the business is tied to the use of that particular property, the lessor has a significant advantage over the lessee in negotiations Partho H. Chakraborty Leasing
  33. 33. Leasing -Tax ProvisionsLessor:• The depreciation can be claimed by the lessor and not the lessee.• Depreciation can be charged as a tax deductible expense item by lessor.• The lease rentals received by lessor are taxable as profit & gain from businessLessee:• The lease rentals and Insurance, repairs, maintenance charges paid by lessee are tax deductible items of expenses for the lesseePartho H. Chakraborty Leasing
  34. 34. Leasing & Islamic Finance• Leasing is based on the proposition that income is earned through the use of assets, rather than from their ownership.• It focuses on the lessee’s ability to generate cash flow from business operations to service the lease payment, rather than on the balance sheet or on past credit history.• Being an asset base financing operation, leasing is inherently an Islamic Shariah friendly product. In the Shariah context, such product is referred to as Ijarah (Literally, Ijarah means to give something on rent)• Both conventional leasing and Ijarah serve the same function and involve similar transaction structures.• Leasing and Ijarah institutions (lessors), purchase the equipment that has been selected by the lessee, and then allow the lessee use of that equipment for a specified period of time.• For the duration of the lease, the lessee makes periodic payments to the lessor, at an agreed rate of interest and in an agreed currency.• At the end of the lease period, the ownership (title) of the equipment is transferred to the lessee at a pre-agreed residual value, or the equipment is returned to the lessor, which may then sell it to a third party or declare it worthless and obsolete.• At the same time, although conventional leasing and Ijarah serve essentially the same function and have similar structures, there are a number of important differences between them.• The key differences include ownership responsibilities, interest related characteristics, allowable assets, and the non existence of late fees Partho H. Chakraborty Leasing
  35. 35. Overall Size and Structure of the Leasing Industry in MENA• Most MENA countries have a leasing industry.• Leasing, in both of its forms, conventional and Islamic, is present in 13 out of 18 MENA countries.• In five other MENA countries (Iraq, Syria, Libya, Yemen and West Bank and Gaza) leasing is still in a very early stage of development.• The size of industry is generally small by international standards, although it may have been underestimated by the lack of reporting by MENA countries and the poor coverage of traditional sources of information. Status of the Leasing Industry in MENA Countries Partho H. Chakraborty Leasing
  36. 36. Distribution of Types of LessorsPartho H. Chakraborty Leasing
  37. 37. Type of Lessors by CountryPartho H. Chakraborty Leasing
  38. 38. Leases Distributed by TypePartho H. Chakraborty Leasing
  39. 39. Leasing Volume (Individual Countries) Leasing Volume/GFCF (Gross Fixed Capital Formation)Partho H. Chakraborty Leasing
  40. 40. MENA Leasing Markets MENA Leasing Markets Development (% of GFCF)Partho H. Chakraborty Leasing
  41. 41. Legal FrameworkThe legal framework for leasing in MENA is either absent or ineffective.Only six countries have special leasing laws, i.e., a specialized leasing legislation isabsent in most countries in the region.Moreover, while some of these specialized leasing laws are considered to beeffective (e.g. Jordan and Yemen), others fail to address key issues and do notprovide a sound basis for the growth of the industry. Types of leasing legislation in MENACurrently, there are no jurisdictions in MENA that exercise effective registration ofnotices of lessors’ interests in movable leased assets.There are no jurisdictions in MENA where contract law and legal procedures aresufficiently developed to eliminate the need for a separate law on leasing. Partho H. Chakraborty Leasing
  42. 42. Requirements to Develop The Leasing Industry in MENATo improve the enabling environment for leasing in MENA, it is important firstto strengthen the legislative framework governing leasing operations.The process for registering leased assets should be strengthened.There is a need to improve repossession procedures.The Tax rules should be clear and neutral, removing the current bias againstleasing transactions.The Insolvency regimes must clarify the rights of lessors and lessees underbankruptcy.Finally, long-term, fixed-rate funding in local currency is essential to the long-term health of the leasing industry in MENA. Partho H. Chakraborty Leasing
  43. 43. Lease Potential – 2012 (USA) By Equipment Type (Unweighted)Partho H. Chakraborty Leasing
  44. 44. 2010 V/s 2009 Leasing Business Volumes (USA) By Equipment Type (Unweighted) Partho H. Chakraborty Leasing
  45. 45. Final Overall Score & Ranking (USA) Lowest score being the bestPartho H. Chakraborty Leasing
  46. 46. Equipment Survey Results – 2011 V/s 2010 (USA) Overall Ranking ScoresPartho H. Chakraborty Leasing
  47. 47. Top 10 Equipment Acquisition Trends for 2012 (USA)ELFA issued the following Top 10 Equipment Acquisition Trends for 2012 to help businesses with their strategicequipment acquisition plans:The equipment finance industry is forecasting nine percent growth in investment in equipment and software for2012, indicating that equipment acquisition by businesses in many industry sectors will increase this year.Aging of equipment and replacement needs will be the main drivers of new equipment acquisition, as businessesawait stronger signs of economic improvement before expanding their equipment investment.The resolution of proposed changes to lease accounting standards by the Financial Accounting Standards Board(FASB) and the International Accounting Standards Board (IASB) later this year will have businesses waiting tofind out how their balance sheets, earnings and other financials will be affected.Used equipment prices will rebound in many, but not all, market segments.Car and truck values will be particularly strong, and construction equipment also will hold its value.Certain segments, such as corporate aircraft, will remain at relatively lower values.End users of equipment will benefit greatly from the efforts of banks and captive and independent financecompanies to grow.They will be providing specialized areas of expertise and value-added customer services that will be a win-win forboth lessors and lessees.Last year credit approvals for the equipment finance industry remained above 75 percent.In 2012, businesses seeking financing for equipment acquisitions will often find credit approvals higher in theequipment finance industry than from bank loans. Partho H. Chakraborty Leasing
  48. 48. Top 10 Equipment Acquisition Trends for 2012 (USA)ELFA issued the following Top 10 Equipment Acquisition Trends for 2012 to help businesses with their strategicequipment acquisition plans:Organizations seeking ways to cut costs and increase operational efficiencies will look to technologyinnovations.The flexibility, scalability and relative costs associated with cloud computing and shared services will begin tocompete with new IT equipment purchases for many businesses.The continuation of the depreciation bonus will allow businesses to write off 50 percent of the cost on newequipment purchases in 2012.It remains to be seen whether the 100 percent bonus depreciation rate that expired at the end of 2011 will berestored.Global financial pressures will continue to add uncertainty to U.S. investment in equipment.The fallout from the euro-zone crisis and other international financial instability will be a wild card in how muchU.S. capital investment picks up this year.Individual equipment markets will see steady growth slightly below 2011 rates.Investment in agriculture, computer and software, industrial, medical and transportation equipment will bepositive, but may not match 2011 growth rates.Construction equipment investment is likely to slow in the immediate near term, but could be buoyed by theenergy and housing sectors later in 2012. Partho H. Chakraborty Leasing
  49. 49. Global Leasing Volume & Growth• 33% of countries suffered negative growth in 2010, compared to 84% in 2009.• 20% of countries suffered double digit negative growth in 2010, compared to 74% in 2009.• 2% of countries saw a decline of more than 50% in 2010, compared to 10% of countries in 2009.• Performance did vary, with North America regaining its longstanding role as the leading region (34.6% of world trade), having previously relinquished that position in 2006. This was achieved with a growth rate of 11.8% over 2009.• Europe slipped into second position, growing just 0.5% in sales volumes.• Asia continued to grow (31.7%), primarily because of the remarkable expansion• of leasing in China (50% increase over 2009 and 188.4% over 2008).• The People’s Republic overtook both Germany and Japan to second position in the global league table, behind the US.• Australasia experienced a small decline (–0.1%) and Latin America the biggest decline (–15.9%) Partho H. Chakraborty Leasing
  50. 50. Global Leasing Report for 2011Partho H. Chakraborty Leasing
  51. 51. Volume & Market PenetrationPartho H. Chakraborty Leasing
  52. 52. Leasing in IndiaLeasing in India is certainly reviving, with growing economy, infrastructuraldevelopments and several new entrants into the market.At present, the Indian leasing sector is witnessing a transition from being a nascentmarket dominated by simple finance lease structure to an evolving market, marked byemergence a strong market for operating leases.From car companies to healthcare, education, IT equipments, vehicles, used vehiclesand construction equipment to unconventional telecom, planes, windmills, solarpanels, etc, leasing is now looked at as an aggressive funding option whether toboast up sales or to fund capex requirements.As per research data, Indian economy is predicted to require ` 343.2 trillion in capitalexpenditure between now and 2020.Indias earth moving and construction equipment (ECE) sector has exhibited a CAGRof over 18 percent over 2006 to 2010 and has the potential to grow 6 times by 2020and leasing models are expected to play a big role in this growth.Indias operational leasing market is forecast to grow at a rate of 28% annually up to2013, to reach a total fleet of around 100,000 units. Partho H. Chakraborty Leasing
  53. 53. Equipment Leasing -% of Capital FormationLeasing of equipments and real assets is a prominent source of private capital formation and contributor to GDP inmany developed and developing economies across the worldEquipment Leasing (excluding real estate and consumer asset financing) as a % of private capital formationestimated at 16.4% for US, 16.2% for Germany, 23.8% for Brazil, 20.6% for UK and 2.2% for China in 2008.In contrast, leasing penetration in India is abysmally low and is estimated at 1.5% of private capital formation inFY10 which roughly translates into Rs 20,000 crore of annual leasing volumes Partho H. Chakraborty Leasing
  54. 54. Key Factors Key Factors expected to shape the Leasing sector in IndiaPartho H. Chakraborty Leasing
  55. 55. Modules, Methodology & BusinessThe Leasing Sector has again shown signs of revival since 2005, this time aroundfuelled by strong economic growth with the following characteristics: • A high capital investment in several industries • An increase in the presence of MNCs which operate on an asset light business model • An increasing usage of big ticket plant & equipment that come with high technological obsolescence • Emergence of professional lease providers with specialized expertise in asset management and residual value risk management.Information Technology equipment, vehicles and construction equipment are theprimary segments where leasing has shown significant growth and these segmentsare estimated to constitute around 40% of all leasing volumes in India in FY10.Other sectors where leasing is prevalent and/or is expected to gain momentum areaircrafts, containers, railway wagons, office equipment, temporary power, renewablepower and medical equipment. Partho H. Chakraborty Leasing
  56. 56. Modules, Methodology & BusinessModules Required Time Frame : 30 Days• GUI for Leasing Screen• Details of Lessor, Lessee and Bank Business• Documents• Collaterals• Charges – Rentals & Fees • Do a Pilot (Paid or Free) with any• Depreciation bank or NBFC.• Taxes • Monitor it for 3 months for all• GL transactions • Get it CertifiedMethodology • Roll it out.• Get an approval• Create a Team – Functional and Technical• Create the GUI• Join various modules together along with GUI• Test the product• Do a Pilot• Roll it Out Partho H. Chakraborty Leasing
  57. 57. Thank You Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: parthohc@airtelmail.in parthohc@rediffmail.com Skype: parthohc01Partho H. Chakraborty Leasing
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