Types of Leases
What is a lease?
A lease is a contractual arrangement where the lessor grants the lessee the right to use an asset in return for periodical rental payments. While leasing of land, buildings, and animals has been known for a long time, the leasing of industrial equipment is a relatively recent phenomenon, particularly on the Indian scene.
What are the Types of Leases
Finance Lease v/s Operating Lease
Finance Lease:
The lease transfers ownership to the lessee before the lease expires
The lessee can purchase the asset for a bargain price when the lease expires
The lease lasts for at least 75 percent of the asset’s estimated economic life
The present value of lease payments is at least 90 percent of the asset’s value
Operating Lease:
The lease term is significantly less than the economic life of the equipment
The lessee enjoys the right to terminate the lease at short notice without any significant penalty
The lessor usually provides the operating know-how and the related services and undertakes the responsibility of insuring and maintaining the equipment. Such an operating lease is called a ‘wet lease’. An operating lease where the lessee bears the costs of insuring and maintaining the leased equipment is called a ‘dry lease’
Conclusion:
Operating Lease does not result in a substantial transfer of risks and rewards of ownership from the lessor to the lessee.
The lessor who is structuring an Operating Lease transaction has to depend upon multiple leases or on the realisation of a substantial resale value (on the expiry of the first lease) to recover the investment cost plus a reasonable rate of return.
Therefore, specializing in operating lease calls for an in-depth knowledge of the equipments per se and the existence of a secondary (resale) market for such equipments.
Given the fact that the resale market for most of the used capital equipments in India lacks breadth, operating leases are not in popular use. In recent years there have been
A lease is a contractual arrangement where the lessor grants the lessee the right to use an asset in return for periodical rental payments. While leasing of land, buildings, and animals has been known for a long time, the leasing of industrial equipment is a relatively recent phenomenon, particularly on the Indian scene.
What are the Types of Leases
Finance Lease v/s Operating Lease
Finance Lease:
The lease transfers ownership to the lessee before the lease expires
The lessee can purchase the asset for a bargain price when the lease expires
The lease lasts for at least 75 percent of the asset’s estimated economic life
The present value of lease payments is at least 90 percent of the asset’s value
Operating Lease:
The lease term is significantly less than the economic life of the equipment
The lessee enjoys the right to terminate the lease at short notice without any significant penalty
The lessor usually provides the operating know-how and the related services and undertakes the responsibility of insuring and maintaining the equipment. Such an operating lease is called a ‘wet lease’. An operating lease where the lessee bears the costs of insuring and maintaining the leased equipment is called a ‘dry lease’
Conclusion:
Operating Lease does not result in a substantial transfer of risks and rewards of ownership from the lessor to the lessee.
The lessor who is structuring an Operating Lease transaction has to depend upon multiple leases or on the realisation of a substantial resale value (on the expiry of the first lease) to recover the investment cost plus a reasonable rate of return.
Therefore, specializing in operating lease calls for an in-depth knowledge of the equipments per se and the existence of a secondary (resale) market for such equipments.
Given the fact that the resale market for most of the used capital equipments in India lacks breadth, operating leases are not in popular use. In recent years there have been