Leasing: Background note

RT
Lease and Sub-lease
 Lease: A contract by which one party conveys land,
property, services, etc. to another for a specified time,
usually in return for a periodic payment.

 Sub-lease: If that tenant finds himself or herself unable

to continue meeting the terms of their lease, they may
opt to create a sublease if the lease
indenture/landlord/owner allows it.
Parties to lease contract
 Lessor: The lessor is the legal owner of the asset.

 Lessee: The lessee obtains the right to use the asset in

return for rental payment.
Operating lease
 Operating lease is a lease whose term is short
compared to the useful life of the asset being leased.

 An operating lease is not capitalized; it is accounted for

as a rental expense in what is known as "off balance
sheet financing."

 Unlike a finance lease, at the end of the operating lease

the title to the asset does not pass to the lessee, but
remains with the lessor.
Finance Lease
 Finance Lease or Capital Lease is a lease that is
primarily a method of raising finance to pay for assets,
rather than a genuine rental.

 It is a commercial arrangement where:

 the lessee (customer or borrower) will select an asset;
 the lessor (finance company) will purchase that asset;
 the lessee 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 rental, or bargain option purchase price);
 the finance company is the legal owner of the asset during duration of
the lease.
Operating lease vs Finance lease
Leveraged lease
 Leveraged lease is a lease in which the lessor puts up
some of the money required to purchase the asset and
borrows the rest from a lender.

 The lender is given a senior secured interest on the

asset and an assignment of the lease and lease payments.

 The lessee makes payments to the lessor, who makes

payments to the lender.
Wet and Dry lease
 Wet lease:
Form of leasing agreement that provides multiple
services to the individual(s) leasing the property.
This type of lease typically applies to the
airline industry and under this agreement
the owner will provide a crew, maintenance, and
other services needed for the aircraft.
 Dry lease:
Form of a leasing agreement that do not
provide multiple services to the individual(s)
leasing the property. In dry lease
the lessee arranges and pays for the
crew, fuel, maintenance and other charges if any.
Impact on financial statements
Thank you