Types of Leasing
Types of Leasing
Types of Leasing
LEASE FINANCING
Types of Leases
Operating Leases
Financial Leases or Capital Leases
Sale-and-Leaseback Arrangements
Combination Leases
Synthetic Leases
Operating Leases
Fully amortized
Not cancellable
Sale-and-Leaseback Arrangements
Lessee sells asset to lessor and
simultaneously executes lease agreement
Lessee gets sale price today and continues to
use asset
Similar to a mortgage (and financial lease);
lease payments calculated like mortgage
payments
Combination Leases
Synthetic Leases
Firm wants to acquire long-term asset with
debt sets up a Special Purpose Entity (SPE)
SPE obtains financing: 97% debt and 3%
equity from party other than the company
SPE purchases asset and leases to
company on short-term basis with
expectation to renew
Synthetic Leases
When lease eventually expires, firm (not
SPE) required to:
1. Pay off loan
2. Refinance loan
3. Sell asset and pay off loan
Tax Effects
Lease payments are tax-deductible expenses
IF guideline or tax-oriented lease contract:
Term less than 80% of useful life
Residual value > 20% of value at start of lease
Cannot agree to buy asset at fixed value
Lessee cannot make any investment in equipment
Leased asset must be for general use
Chapter 19
Suggested Problems
Questions:
19-2, 19-3, 19-6, and 19-8
Problems:
19-1, 19-2, and 19-4