Leases are classified into different types based on the variation in the elements of a 

lease. Very
popularly heard leases are – financial and operating lease. Apart from these, there are the sale and
leaseback and direct lease, single investor lease and leveraged lease, and domestic and international
lease.

A lease is a very important financing option for an entrepreneur with no or inadequate money for
financing the initial investment required in plant and machinery. In a lease, the lessor finances the
asset or equipment and the lessee use it in exchange for fixed lease rentals. In other words, lease
financing is an arrangement where the lessee who requires the equipment or machinery gets the
finance from the lessor for the agreed rental payments. Such kind of lease is called a finance lease.
There are many such arrangements and hence, there are many types of lease. Let us have a look at
the different kinds of the lease.

Table of Contents

1. Types of Leases

1. Lease Classification

1. Finance Lease and Operating Lease

2. Sale And Lease Back and Direct Lease

3. Single Investor Lease and Leveraged Lease

4. Domestic and International Lease

5. Combination Lease

2. Leases For Home

1. Sub Lease

2. Modified Gross lease

3. Gross Lease

4. Triple Net Lease

A certain variation in the elements of lease classifies lease into different types. Such elements are as
follows:

 The degree of ownership risk and rewards transferred to the lessee.

 No. of parties involved

 Location of the lessor, lessee, and the equipment supplier

 The lessor and the lessee

Here, risk means the chance of technological obsolescence and reward refers to the cash flow
generated by the use of the equipment and the residual value of the equipment.
Types of Leases

On the basis of the above dimensions, leases are classified into two parts

Lease Classification

1- Leases for Business

2 -Leases for home (house)

1- Leases For Business

Finance Lease and Operating Lease

Finance lease, also known as Full Payout Lease, is a type of lease wherein the lessor transfers
substantially all the risks and rewards related to the asset to the lessee. Generally, the ownership is
transferred to the lessee at the end of the economic life of the asset. The lease term is spread over
the major part of the asset life. Here, a lessor is only a financier. An example of a finance lease is big
industrial equipment.

On the contrary, in an operating lease, risk and rewards are not transferred completely to the lessee.
The term of a lease is very small compared to the finance lease. The lessor depends on many
different lessees for recovering his cost. Ownership along with its risks and rewards lies with the
lessor. Here, a lessor is not only acting as a financier but he also provides additional services required
in the course of using the asset or equipment. An example of an operating lease is music system
leased on rent with the respective technicians.

Sale And Lease Back and Direct Lease

In the arrangement of sale and leaseback, the lessee sells his asset or equipment to the lessor
(financier) with an advanced agreement of leasing back to the lessee for a fixed lease rental per
period. It is exercised by the entrepreneur when he wants to free his money, invested in the
equipment or asset, to utilize it at the whatsoever place for any reason.

On the other hand, a  direct lease is a simple lease where the asset is either owned by the lessor or
he acquires it. In the former case, the lessor and equipment suppliers are one and the same person
and this case is called ‘bipartite lease’. In a bipartite lease, there are two parties. Whereas, in the
latter case, there are three different parties viz. equipment supplier, lessor, and lessee. And it is
called a tripartite lease. Here, equipment supplier and lessor are two different parties.

Single Investor Lease and Leveraged Lease

In a single investor lease, there are two parties – lessor and lessee. The lessor arranges the money to
finance the asset or equipment by way of equity or debt. The lender is entitled to recover money
from the lessor only and not from the lessee in case of default by a lessor. Lessee is entitled to pay
the lease rentals only to the lessor.

Leveraged lease, on the other hand, has three parties – lessor, lessee, and the financier or lender.
Equity is arranged by the lessor and debt is financed by the lender or financier. Here, there is a direct
connection of the lender with the lessee and in a case of default by the lessor. The lender is also
entitled to receive money from the lessee. Such transactions are generally routed through a trustee.
Domestic and International Lease

When all the parties to the lease agreement reside in the same country, it is called domestic lease.

The International lease is of two types – Import Lease and Cross-Border Lease. When lessor and
lessee reside in the same country and equipment supplier stays in a different country, the lease
arrangement is called import 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.

Combination Lease

Combination Lease offers features of both financing or capital lease and Operating Lease. This is a

2- Leases For Home

Sub Lease

A sublease is a rental agreement where the original lessee(tenant) rents out the premises to another
person called the sub-tenant or sub-lessee. The new tenant gets few rights as the sub-lessee. The
original tenant (lessee) can only give those rights to the new tenant (sub-lessee) which he has got
from the original landlord (lessor). He cannot pass on more rights of use on the property. The flow of
rent is from the sub-lessee to the lessee and the lessor/owner. The risk of rent is always mainly
borne by the lessee. In case the sub-lessee is unable to make full or timely payment to the original
lessee, the lessor is still entitled to his timely rents and the risk is borne by the lessee.

Modified Gross lease

A modified gross lease, also referred to as a modified net lease, finds a middle ground between
a gross lease and a net lease.

In it, some of the building or property expenses are borne by the tenant. while the remaining is
borne by the landlord with no single party responsible for all the operating costs. As an instance we
can consider this: In a modified gross lease, the tenant may pay CAM costs. while the landlord may
take up taxes and insurance.

Gross Lease

Gross lease is the simplest form of a lease. In this format, the lessee agrees to pay the lessor a flat
fee at a regular interval for instance monthly and the lessor takes care of any and every expense
associated with the property.  The rate charged does not change. It is a rent agreement in which the
cost of keeping up the rented asset, including its protection and charges, are borne by the lessor.
Gross lease rental is usually higher than the net lease rental as the lessor would have factored in
different types of expenses in the rentals that are being charged.

Triple Net Lease

A triple net asset is the most commonly used type of lease for commercial and even some residential
estates. Here the tenant will pay for everything from rent, property taxes, insurances and common
area maintenance and repairing expenses (also known as CAMS – Common Area Maintenance
Items). Hiring regular staff and maintenance help can also be part of this – e.g receptionist, lobby
attendant etc.