CHAPTER-5 LEASE AND DEVELOPMENT

5.1 Lease and Major Goals of Lease

5.2 Different Types of Lease
5.3 Basic Characteristics of Lease Contracts
5.4 Lease Period
5.5 Site Leasehold
5.6 Lease Rights and Ownership Rights
5.7 Sublease and Joint Property Units
Meaning of Lease and Leasing

• A lease is a contractual arrangement calling for the

lessee (user) to pay the lessor (owner) for use an
asset

• Leasing is a process by which a firm can obtain the

use of a certain fixed assets for which it must pay a
series of contractual, periodic, tax deductible
payments.
 Important Terms:
• Lessee is the receiver of the services or the assets
under the lease contract.
• Lessor is the owner of the assets.
• Tenancy is the relationship between the tenant and the
landlord.
• Term is the fixed or an indefinite period of time
involved in the lease contract.
• Rent is the consideration for the lease.
 Concept of leasing
 Lease finance denotes procurement of assets
through lease.The subject of leasing falls in the
category of finance.

 Leasing has grown as a big industry in the USA and UK

and spread to other countries during the present century.

 In India, the concept was pioneered in 1973 when first

leasing company was set up in Madras and the eighties
have seen a rapid growth of business.
 Major goal of leasing
A lease is a contractual agreement in which:
A party owing an asset i.e. lesser
Provides an asset for use to another party i.e. lessee
For an agreed period of time i.e. lease period
For a consideration i.e. lease rentals.
Types of leasing
Financial lease
Operating lease
Leverage lease
Sale and lease back
Cross border lease
International leasing
Import leasing
Consumer leasing
 Financing lease
• A finance lease or capital lease is an a commercial
arrangement where:
• The lessee (customer or borrower) will select
an asset (equipment, vehicle, software);
• The lessor (finance company) will purchase that
• The lessee asset;
will have use of that asset during the lease;
• The lessee will pay a series of rentals or installments
for the use of that asset;
• The lessor will recover a large part or all of the cost of
the asset plus earn interest from the rentals paid by the
lessee;
• The lessee has the option to acquire ownership of the
asset (e.g. paying the last or bargain option
rental,
purchase price);
The finance company is the legal owner of the asset
during duration of the lease.
 Features
 It's not cancel-able.
 The lessor may or may not bear the cost of insurance,
repair, maintenance etc. Usually the lessee has to bearall
cost.
 The lessor may transfer ownership of the asset to the
lessee by the end of the lease term.
 The lessee has an option to purchase the asset at a price
which is expected to be sufficiently lower than the value
at the end of the lease period
 Operating lease
• Definition: Operating lease is a contract wherein the
owner, called the Lessor, permits the user, called the
Lessee, to use of an asset for a particular period which
is shorter than the economic life of the asset without
any transfer of ownership rights. The Lessor gives the
right to the Lessee in for regular payments for
return
an agreed period of time.
 Example of operating lease
• An example of operating lease would be when a person
is starting his or her own manufacturing business but
he or she does not have enough cash to buy machinery
then the person will take machinery on operating lease.
Operating lease is that lease which allows lessee to use
the assets for short period of time.
 Features of operating lease
• Operating lease is a short term arrangement for the use
of asset between the lessee and the owner of the asset.
• Various costs related to that asset like maintenance,
taxes etc…. are paid by the owner of the asset.
• The term of operating lease is always shorter than
the economic life of that asset.
• The lessee can cancel the operating lease prior to the
end date of the operating lease.
• The terms related to an operating lease can vary
significantly depending upon the agreement between
the lessee and the owner of the asset.
• The rent which is paid by the lessee for the duration of
the operating lease is lower than the cost of asset.
 Forms of financial lease
1. Sales and lease back.
2. Direct leasing.
3. Leveraged leasing.
4. Straight lease and modified lease.
5. Primary lease.
6. secondary lease
1. Sales and leaseback:
A sale and leaseback constitutes an arrangement
where the seller of an asset leases back the same
asset from the purchaser.
The lease arrangement is made immediately after the
sale of the asset with the amount of the payments and
the time period specified. Essentially, the seller of the
asset becomes the lessee and the purchaser becomes the
lessor in this arrangement.
2. Direct leasing:
A contractual financing arrangement in which the lessor,
typically a purchases the property directly from the
bank,
manufacturer and leases that property to the lessee.
3.Leveraged lease:
A lease agreement that is partially financed by the lessor
through a third-party financial institution. In a leveraged
lease, the lending company holds the title to the leased
asset, while the lessor creates the agreement with the
lessee and collects the payment. The payments are then
passed on to the lender.
• In a leveraged lease, if the lessee stops making
payments to the lessor, then the lessor stops making
payments to the financial institution (lender). This
allows the lender to repossess the property.
• The lessor may also have the right to retainthe
property upon lessee default, as long as the lessor
continues making payments to the lender.
4. Straight lease:
A lease agreement which specifies an amount of rent
that should be paid regularly during the complete term of
the lease. Also called a flat lease.
5. Modified lease:
A lease agreement provides several options to the lessee
during the lease period.
For example: terminating the lease, purchasing asset.
6. Primary lease: Equipment or property lease in which
the rental payments are higher in the
beginning periods, andgo down as the lease
period nears its end.
 Other types of leases
1. Floating rental rate lease contracts.
2. Domestic lease
3. International lease.
4. Sale –Aid lease
5. Foreign to foreign lease.
1. Floating rental rate lease contracts:
Under this type of lease, lease rentals are reduced or
increased according to the borrowing rates by the
lessor.
2. Domestic lease:
When all the parties of the lease agreement reside in
the same country, it is called domestic lease.
3. International lease:
When all the parties of the lease agreement reside in the
different countries, it is called international lease.
International lease of further of two types:
a) Import lease:
When lessor and lessee reside in same country and
equipment supplier stays in different country, the
lease arrangement is called import lease.
b) Cross border lease:
When the lessor and lessee are residing in
two different countries and no matter where
the
equipment supplier stays, the lease is called cross
border lease.
4. Sale –Aid leasing:
Under this type of leasing, a manufacturer directly
extends facility of leasing either by one of his
own subsidiaries or by third party.
5. Foreign to foreign lease:
under this type of lease three parties are involved:
a) The manufacturer (who is in one country).
b) Lessor ( who is in another country).
c) lessee ( in the third country).
For example:
China is the manufacturing country and it exports
machinery to Indian based leasing company which
further lease it to Australian based firm.
 MERITS OF LEASING
 Convenience in case of short term need.
 No risk of technology Obsolescence.
 Efficient maintenance services.
 Low administrative and transaction cost.
 Debt Equity ratio remains unchanged.
 Benefits of Tax shield.
DEMERITS OF LEASING
 No benefit of residual value.
 High cost of leasing.
 No benefit of ownership.
 Not flexible.
 Chances of disputes.