Leasing
 # Lease
Leasing: The process by which a firm can obtain the
use of certain fixed assets for which it must make a
series of contractual , periodic, tax deductible
payments.
LESSEE: The lessee is the receiver of the
service of the assets under lease contract.
Lessor: Ones one who grants a lease.
Owner of the assets
 FINANCIAL LEASE / CAPITAL LEASE
 Long term Lease
 Non cancelable
 Obligate to pay- lessee
 Predefined time
 Similar to Long Term Debt
 Payment fixed – tax deductible
 # Leasing Techniques
1. Direct Lease :
 A Lease under which a Lessor owns or acquires the
assets that are leased to a given lessee.
2.Sale and Leaseback :
 A Lease under which the lessee sells an assets for
cash to a prospective Lessor and then leases back the
same asset, making fixed periodic payments for its
use.
 lessee receive cash
 minimize liquidity problem
 obligation – fixed periodic payment
 Operating Leases
 Contractual agreement
 Maturity - less than 5 years
 Periodic payment
 Cancelable by the option of lessee
 Penalty --- if cancel before maturity
 Short lives assets held to maturity
 Life of the assets may more than the lease period
 Return the asset to the Lessor after lease period
 After lease period owner May sale the asset or may lease
 O.L. require the Lessor to maintain
 Financial Accounting Standards Board (FASB)
Standard No. 13, “Accounting for lease,” a financial or
capital lease is defined as one having any of the
following elements:
 The lease transfers ownership of the property to the
lessee by the end of the lease term.
 The lease contains an option to purchase the property
at a “bargain price”.
 The lease term is equal to 75% or more of the
estimated economic life of the property.
 At the beginning of the lease, the present value of the
lease payments is equal to 90% or more of the fair
market value of the leased property.
3.Leveraged Lease
 A lease under which the Lessor acts as an equity
participant, supplying only about 20% of the cost of
asset, with a lender supplies the balance.
 # Lease agreement
 maintenance clause
 renewal options
 purchase options
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 # Advantages of Lease
 Leasing allows the lessee, in effect to depreciate land,
which is prohibited if the land were purchased.
 Assets & Liabilities in the Balance Sheet, leasing may  # Disadvantages of Leasing
result in misleading financial ratio.
 Sale & Leaseback arrangement may permit the firm to
 A lease does not have a stated interest
increase its liquidity by converting an existing asset cost
into cash, which can then be used as working capital.
 Leasing provides 100% financing.  Lessee is generally prohibited from
 When a firm becomes bankrupt or is Reorganized, the making improvements
maximum claim of lessors against the corporation is 3
years of lease payments, and the lessor of course gets  If a lessee leases an asset that
the asset back.
 In a lease arrangement, the firm may avoid the cost of subsequently become obsolete, it still
obsolescence. must make lease payments
 A lessee avoids many of the restrictive covenants that
are normally included as part of a long term loan.