lease financing (2)
TRANSCRIPT
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UP-FRONTED LEASES- More rentals are charged in the
initial years and less in the later years of the contract.
BACK-ENDED LEASES-Less rentals are charged in the
initial years and more in the later years of the
contract.
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PRIMARY LEASE- Provides for the recovery of the cost
of the asset and profit through lease rentals during a
period of about four or five years.
SECONDARY LEASE- It may follow primary lease on
nominal lease rentals.
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TYPES OF LEASES
LEASES
OPERATING FINANCIAL
LEVERAGED LEASE
SALE AND LEASEAC
CROSS-BORDERLEASE
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OPERATING LEASES
Short term, cancellable lease agreements
Convenience and instant services are hallmarks
It may run 3 to 5 years
Lessor is generally responsible for maintenance and
insurance.
The shorter the lease period , the higher will be the
lease rentals It may not fully amortize the cost of the asset.
E.g. tourist renting a car, office equipment.
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FINANCIAL LEASE
Long term, non-cancellable lease contracts.
It amortize the cost of the asset over the term of the
lease.
Also called Capital or Full-payout leases.
Most financial leases are direct leases.
The lessor buys the asset identified by the lessee.
Maintenance and insurance are normally theresponsibility of the lessee.
E.g.; ships, aircraft etc.
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FINANCIAL LEASE LEVERAGED
LEASE
Lessor, lessee and financier.
Lessor provides equity equal to about 25 per cent of
the assets cost.
Remaining amount is provided by the financier as a
loan.
For financing Expensive assets.
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FINANCIAL LEASE - SALE-AND-
LEASE BACK
Special financial lease arrangement.
A user may sell an (existing) asset owned by him to the
lessor and lease it back from him.
This provides liquidity as well as possible tax gains to
the lessee.
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FINANCIAL LEASE CROSS BORDER
LEASE
Also called international lease.
Lesser and lessee situated in two countries
More complex than the domestic lease.
When the lease transaction takes place between
three parties vendor, lessor and lessee in three
different countries , it is called foreign to foreign
lease
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TERMS USED ININ LEASING
INDUSTRY
Closed ended Asset gets transferred to the lessor at
the end.
Open ended Lessee has the option of purchasing
the asset at the end of the contract.
Direct lease Provides purchase option to the lessee.
Master lease Provides for a period longer than the
assets life and the lessor is responsible for providingequipment in good working condition during the lease
period .
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TERMS (Cntd.)
Percentage lease Fixed rent plus some percent of
the previous years gross revenue.
Wet and dry lease When the lease involves financing
as well as servicing and fuel
Net net net lease The lessee is obliged to take care
of maintenance, taxes and insurance of the
equipment.
Update lease Lessor agrees to replace obsolete
asset with new one at specified rent.
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ADVANTAGES OF LEASING
Convenience and flexibility
Shifting of risk obsolescence
Maintenance and specialized services
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THANK YOU
ABDUL SUBEER K K