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Why own a cow when the milk is so cheap?

All you really need is milk and not the cow. Donald B. Grant
Presented by: Rahul Patel Vivek Tripathi & Yash Deep Srivastava

Introduction Importance Features Advantages of Commercial Lease Leasing in India Leasing Internationally Lessors & Lessees Types of Lease Benefits

In India, the concept was pioneered in 1973 when the First Leasing Company was set up in Madras and the eighties have seen a rapid growth of this business. 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. Lease as a concept involves a contract whereby the ownership, financing and risk taking of any equipment or asset are separated and shared by two or more parties.

A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals).

Providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases. Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance. The lessee can also pass on the risk of obsolescence to the lessor by acquiring those 229 appliances, which have high technological obsolescence.

The important feature of a lease contract is separation of the ownership of the asset from its usage.

Formality of a lease: -A tenancy for years greater than 1 year must be in writing in order to satisfy the Statute of Frauds. Term of a lease: -The term of the lease may be fixed, periodic or of indefinite duration. If it is for a specified period of time, the term ends automatically when the period expires, and no notice needs to be given, in the absence of legal requirements.

A fixed-term agreement
For a specified period of time (the "term"), and end

when the term expires. Conditional, i.e. last until some specified event occurs, such as the death of a specified individual.

A periodic agreement
Usually on a monthly or weekly basis At will, i.e. last only as long as the parties wish it to,

and be terminated without penalty by either party.

Rent: -Rent is a requirement of leases in common law jurisdiction, but not in civil law jurisdiction. There is no requirement for the rent to be a commercial amount. "Pepper corn" rent or rent of some nominal amount is adequate for this requirement.

1. A definite term (whether fixed or periodic) 2. At a rent 3. confer exclusive possession

An owner of the fee simple holds all the rights and privileges to that property and, subject to the laws, codes, rules and regulations of the local law, can sell or by contract or grant, permit another to have possession and control of the property through a lease or tenancy agreement. For this purpose, the owner is called the lessor or landlord, and the other person is called the lessee or tenant, and the rights to possess and control the land are exchanged for some payment (called consideration in legal English), usually a monthly rent.

An owner can allow another the use of a vehicle (such as vehicle leasing of a car, a truck or an airliner) or a computer either for a fixed period of time or at will. This can be a simple leasing transaction, or it can be a transaction intended to allow the user the right to buy the item at some future time.

Whether it is better to lease or buy land will be determined by each state's legal and economic systems. In those countries where acquiring title is complicated, the state imposes high taxes on owners, transaction costs are high, and finance is difficult to obtain, leasing will be the norm. But, freely available credit at low interest rates with minimal tax disadvantages and low transaction costs will encourage land ownership.

Rental, tenancy, and lease agreements are formal and informal contracts between an identified landlord and tenant giving rights to both parties,
Example: - The tenant's right to

occupy the accommodation for an agreed term and the landlords right to receive an agreed rent. If one of these elements is missing, only a tenancy at will or bare license comes into being.

Express terms: - These include what is in the written agreement (if there is one), in the rent book, and/or what was agreed orally (if there is clear evidence of what was said). Implied terms: - These are the standard terms established by custom and practice or the minimum rights and duties formally implied by law.

In the modern legal framework, commercial real property leases fall into one of just a few categories:Office, Retail, Warehouse, Ground, and a catch-all hybrid often referred to as "Mixed Use". Each has certain typical characteristics, although Ground leases may differ somewhat, taking on some characteristics of Retail leasing when associated with a retail project, like a shopping center; and although Mixed Use projects can vary greatly depending upon the various inclusions and the size of the overall project, among other things.

1. Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright. 2. Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.

3. Because of investments which are done with leasing, new businesses are formed. Furthermore, unemployment in that country is decreased. 4. Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term. 5. In some cases a lease may be the only practical option; such as for a small business that wishes to locate in a large office building within tight locational parameters.

6. Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses. Lease payments are considered expenses, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period.

A net lease may shift some or all of the maintenance costs onto the tenant. If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term.

Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly 1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan. The prospects of leasing in India are good due to growing investment needs and scarcity of funds with public financial institutions.

This type of lease finances is particularly suitable in India where a large number of small companies have emerged more recently. Leasing in the sphere of land and building has been in existence in India for a long time, while equipment leasing has become very common in the recent times.

The practice of leasing is well established in most countries of the world . The benefits to the lessee and lessor will vary widely depending on national accounting standards and tax regulations. These largely divide into countries observing:
Legal Form: the lessors legal ownership of the

property. or Substance: the lessee legal right to use the property.

National accounting standards vary in the tests that decide if the lease is a: Capital or Finance Lease, which is considered a

financing transaction - as the lessor has less of the risks of ownership, such as the value of the equipment in future years. Operating Lease, whose term is short compared to the useful life of the asset, where the lessee does not have to show the lease on their balance sheet.

Specialized leasing companies Banks and bank-subsidiaries Specialized Financial institutions

One-off lessors

Corporate customers with very high credit ratings Public sector undertaking Mid-market companies Consumers

Government departments and authorities Commercial vehicles Earth-moving machinery customers Car customers

While many leasing companies may use the same name to describe a lease, the actual terms and conditions written in their contracts often vary.

This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. Best For: Equipment that will rapidly depreciate or become obsolete in a short period of time - i.e. Mines, Computers hardware, trucks and automobiles How It Works: In a true or operating lease, the leasing company retains ownership of the equipment during the lease. True or operating leases typically have no predetermined buyouts - customers usually classify these payments as an operating expense.

Lower payments and typically the most taxfriendly form of leasing, Additionally true or operating leases offer three choices at the end of your lease.
Return the equipment to the leasing company, Purchase the equipment at its fair market value or

option amount Extend your lease term.

Long-term, non-cancellable lease contracts are known as financial leases. It contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease.

Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. All the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee, who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor.

Best For: If you would prefer to own the equipment when the lease agreement ends. How It Works: The full purchase price, plus interest, is spread over the length of the lease agreement. The lessor receives an amount sufficient to amortise his capital outlay on the asset, earn interest, and make some profit on the project. Benefits: At the end of the lease, you own the equipment for a minimal payment, usually a small percentage of the original purchase price.

It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. Under this arrangement, the assets are not physically exchanged but it all happens in records only. It is suitable for those assets, which are not subjected depreciation but appreciation, say land.

Best for: - Customers who have purchased their equipment, but now have decided that leasing would be more beneficial. Sale-leaseback also allows companies to raise cash for other investments or cash flow purposes. How It Works: The business that has already purchased equipment sells it to a leasing company, which then takes ownership of the equipment and leases it back to the business. Access Equipment Leasing requires that the equipment be purchased within 90 days.

The sale-leaseback allows you to put money back into your business or into investments that appreciate rather than depreciate. The lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement.

A third party is involved beside lessor and lessee. Best For: Businesses that need equipment for operation and development that will not immediately generate revenue. How It Works: A 60 or 90-day deferred lease can be structured as a finance lease or a true lease. With this form of lease, there is usually no advance payment required, and the first payment is not due for 60 or 90 days after the lease begins.

The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset.

The equipment you need can be acquired with little to no money up front and no payments for 2-3 months.

This distinction is made on the basis of the maintenance aspect. Wet Lease: - If the maintenance and insurance costs are born by the lessor. Dry Lease: - The lessee bears the maintenance and insurance costs.

Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc

Best For: Seasonal businesses, agricultural companies, recreational services firms, and other organizations which might require a more flexible payment schedule due to seasonal business conditions. How It Works: Lessee can specify months when he would prefer not to make payments. Benefits: Flexible, in that it can be adjusted to irregular cash flow.

Best For: If your leasing requirements will likely be expanding over time. How It Works: Separate lease schedules are created to accommodate the addition of equipment over a period of time of your specification. The master lease governs the basic terms and conditions. Benefits: Acquiring additional equipment is made more convenient.

Best For: Local and state government organizations that wish to acquire equipment. How It Works: The tax structures and details of municipal leases will vary considerably from standard business leases. Seek the advice of your financial advisor to better understand your municipal lease options. Benefits: Municipal leases are designed specifically for local and state government organizations.

Best For: Businesses whose financed equipment will allow more profitability over a period of time. How It Works: Payments increase according to a regular schedule over the life of the lease. Benefits: Payments can be structured to match current cash flow

Buy or Lease Evaluation of Lease Case Study

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