This document provides an overview of leasing. It discusses the history of leasing beginning in ancient times and its expansion after World War II. It then defines leasing and outlines different types of leases including financial leases, operating leases, conveyance leases, and sale and leaseback agreements. The document also reviews the advantages of leasing such as liquidity and hidden liabilities, and the disadvantages like the lessee only obtaining use of the asset. Finally, it provides a high-level overview of the leasing process.
3. HISTORY
HISTORY Prior to 1950, leasing was not popular as it concentrated only on
real estates.But now it concentrate almost all types of fixed assests.
In India the equipment leasing services was introduced by leasing company
of India Ltd in 1993.
The history way back in 200BC. But in modern age leasing was started in
1877 in USA. Subsequently Railway Industry started Leasing in 1930โs. After II
World War leasing expanded. In 1952 Henry of USA set up a separate
company to handle the lease transaction with capital of $20,000.
In India leasing started by Chidambaram group of Madras in 1973. The first
All Indian Financial Institution which started leasing is I.C.I.C.I. In 1980. The
first commercial bank was SBI. Since then there was virtual explosion in the
number of leasing companies, rising about 400 in 1990.
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4. 01 A lease is a legal, binding contract
outlining the terms under which one
party agrees to rent property owned
by another party.
02 The owner of the asset is known as
lessor and the user is called lessee
03 Residential leases tend to be the same
for all tenants, but there are several
different types of commercial leases.
MEANING
Consequences for breaking leases
range from mild to damaging,
depending on the circumstances
under which they are broken.
04
05 Certain protected groups are able to
vacate their leases without any
consequences, for which some form of
proof is usually required.
5. TYPES
1. Financial Lease
In an operating lease, the lessee uses the asset for a
specific period.
The lessor bears the risk of obsolescence and
incidental risks.
There is an option to either party to terminate the
lease after giving notice. In this type of leasing
lessor bears all expenses
lessor will not be able to realize the full cost of the
asset
specialized services are provided by the lessor.
This kind of lease is preferred where the equipment
is likely to suffer obsolescence.
2. Operating Lease
Financial leasing is a contract involving payment over
a longer period.
It is a long-term lease and the lessee will be paying
much more than the cost of the property or
equipment to the lessor in the form of lease charges.
It is irrevocable. In this type of leasing the lessee has
to bear all costs and the lessor does not render any
service.
6. 3. Leveraged and non-
leveraged leases
In Conveyance type lease, the lease will be for a
long-period with a clear intention of conveying the
ownership of title on the lessee.
4. Conveyance type
lease
In leveraged and non-leveraged leases, the
value of the asset leased may be of a huge
amount which may not be possible for the
lessor to finance.
So, the lessor involves one more financier who
will have charge over the leased asset.
5. Sale and leaseback
In a sale and leaseback, a company owning the asset
sells it to the lessor.
The lessor pays immediately for the asset but leases
the asset to the seller.
Thus, the seller of the asset becomes the lessee.
The asset remains with the seller who is a lessee but
the ownership is with the lessor who is the buyer.
This arrangement is done so that the selling
company obtains finance for running the business
along with with the asset.
6. Full and non pay-out
lease
A full pay-out lease is one in which the lessor
recovers the full value of the leased asset by way of
leasing. In case of a non pay-out lease, the lessor
leases out the same asset over and over again.
7. 7. Specialized service
lease
In non-net lease, the lessor is in charge of
maintenance insurance and other incidental
expenses.
In a net lease, the lessor is not concerned with
the above maintenance expenditure.
The lessor confines only to financial service.
8. Net and non-net lease
The lessor or the owner of the asset is a
specialist of the asset which he is leasing out.
He not only leases out but also gives specialized
personal service to the lessee.
Examples are electronic goods, automobiles, air-
conditioners, etc.
9. Sales aid lease 10. Cross border lease
Lease across national frontiers are called cross
border lease, Shipping, air service, etc., will come
under this category.
In case, the lessor enters into any tie up
arrangement with manufacturer for the marketing,
it is called sales aid lease.
8. 11. Tax oriented lease
In an Import lease, the company providing
equipment for lease may be located in a foreign
country but the lessor and the lessee may
belong to the same country.
The equipment is more or less imported
12. Import Lease
Where the lease is not a loan on security but
qualifies as a lease, it will be considered a tax
oriented lease.
13. International lease
Here, the parties to the lease transactions may
belong to different countries which is almost similar
to cross border lease.
9. ADVANTAGE
LIQUIDITY HIDDEN LIABILITY
CONVENIENCE TIME SAVING
The lessee can use the
asset to earn without
investing money in the
asset.
Lease obligations are
not reported as a
liability in the
companyโs balance
sheet.
Leasing is the easiest
method of financing
fixed assets.
The asset is available for
use immediately
without loss of time in
applying for the loan,
wanting for approval
and sanction, etc.
NO RISK OF
OBSOLESCENCE
The risk of the asset
becoming obsolete due
to technological
advancements is borne
by the lessor.
COST SAVING
Lease rentals are
deductible from taxable
income.
FLEXIBILITY
Leasing arrangement is
more flexible.
10. DISADVANTAGE
The lessee gets
only the right to
use the asset.
The lessee has to
pay lease rentals on
a regular basis to
the lessor.
The lessee cannot
make alterations or
improvements in the
asset without the
prior approval of the
lessor.
Sales tax may be
charges twice. firts at
the time of purchase
of asset and second at
the time of leasing the
asset.
11. THE PROCESS
There are 5 processes to lease a
building or a land.
LEASE CONTRACT
LEASE SELECTION
ORDER, DELIVERY AND
PAYMENT
LEASE PERIOD
LEASE AGREEMENT
01
02
03
04
05
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