Leasing Explained PDF

**What is Leasing?** A Lease occurs when an asset owned by one party (the lessor) is rented to another (the lessee) for a predetermined amount of time. Despite not becoming the owner, the lessee makes recurring payments to use the asset. Lessees can utilize assets without having to pay for them upf...

**What is Leasing?** A Lease occurs when an asset owned by one party (the lessor) is rented to another (the lessee) for a predetermined amount of time. Despite not becoming the owner, the lessee makes recurring payments to use the asset. Lessees can utilize assets without having to pay for them upfront when they lease them. Property, machinery, automobiles, and technology are examples of common leased assets. To give both parties flexibility based on their needs, leasing agreements might vary in length, conditions, and terms Types of Leasing ---------------- **1. Operating Lease:** Under an operating lease, the lessor maintains ownership of the [real estate](https://www.geeksforgeeks.org/real-estate-investment-features-types-examples-careers/). Like a rental agreement, its duration is usually shorter. These types of leases are typical for machinery that needs to be updated or altered frequently. **2. Capital Lease (Capital Lease): **In a finance lease, the tenant receives most ownership rights and benefits. A financing lease, in contrast to an operational lease, is often longer in duration and looks more like a purchase agreement. [Insurance](https://www.geeksforgeeks.org/what-is-insurance-functions-of-insurance/), asset upkeep, and other costs are usually covered by the renter **3. Sale and Leaseback:** In a sale and leaseback, businesses can sell a piece of equipment to a lessor and then lease the item back to them for ongoing usage. This releases the asset\'s capital. Financing for equipment and real estate is a common usage for this arrangement. **4. Single Investor Lease:** Here, the lease is financed by a single lessor. This is typically applied to large-scale [assets ](https://www.geeksforgeeks.org/assets-meaning-types-formula-examples/)and infrastructure initiatives for which the necessary funding can be provided by a single investor. What Is an Operating Lease? --------------------------- An operating lease is a contract that allows for an asset\'s use but does not convey ownership rights of the asset. These leases allow businesses to use the asset without incurring the high expenses involved in purchasing it. The business that leases the asset is called the lessee, and the business that loans it under a lease is called the lessor. The responsibilities of each party in the agreement are spelled out in the lease contract and documents, but generally, the lessee must maintain the asset to ensure it remains in operational condition, less any normal wear and tear. Essentially, an operating lease is a contract for a company to use an asset and return it in a similar condition to the lessor. This agreement is beneficial for the lessee, particularly when it has expensive equipment or other assets that need to be replaced regularly. Advantages and Disadvantages of an Operating Lease -------------------------------------------------- Advantages - No ownership - Renting may be cheaper - Short-term Disadvantage - No equity - Financing costs - Might pay more than market value - Continuous terms renegotiation ### Advantages Explained - **No ownership**: Not owning an asset can be beneficial because you won\'t have to pay for repairs or maintenance. - **Renting may be cheaper**: Renting is generally much more affordable than purchasing, benefitting smaller or newer businesses that don\'t yet have the financial strength to collect expensive assets. - **Short-term**: You\'ll only need to lease the asset for as long as you need it, reducing the overall costs of purchasing, maintaining, and selling it if you no longer need it. ### Disadvantages Explained - **No equity**: When you lease, you don\'t gain any equity - **Financing costs**: You might incur financing costs with a lease, such as interest - **Might pay more than market value**: Depending on how long an asset is leased, the total cost could be more than the market value at the time the lease originated. - **Continuous terms renegotiation**: Many leases are short-term. This means the lessor and lessee will renegotiate terms every time the lease expires. This provides the lessor an opportunity to raise rates or fees. A **finance lease** (also known as a **capital lease** or a **sales lease**) is a type of [lease](https://en.wikipedia.org/wiki/Lease) in which a [finance company](https://en.wikipedia.org/wiki/Finance_company) is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset but also some share of the economic risks and returns from the change in the valuation of the underlying asset.[^\[1\]^](https://en.wikipedia.org/wiki/Finance_lease#cite_note-1) More specifically, it is a commercial arrangement where: - - - - - - A finance lease has similar financial characteristics to [hire purchase](https://en.wikipedia.org/wiki/Hire_purchase) agreements and [closed-end leasing](https://en.wikipedia.org/wiki/Closed-end_leasing) as the usual outcome is that the lessee will become the owner of the asset at the end of the lease, but has different accounting treatments and tax implications. There may be tax benefits for the lessee to lease an asset rather than purchase it and this may be the motivation to obtain a finance lease. What is Leasing Company? ======================== By definition: \"Financial leasing companies engage in financing the purchase of concrete assets. Though leasing company is the legal owner of the goods, the ownership and possession is effectively conveyed to the lessee, who earns all benefits, costs, and risks linked to ownership of the assets." In Pakistan, leasing is a licensed activity which is performed either by commercial banks or by non-banking finance companies (NBFCs). Commercial banks are regulated by the State Bank of Pakistan (SBP) whereas NBFCs are regulated by the Securities & Exchange Commission of Pakistan (SECP) under regulatory framework provided through Companies Ordinance, 1984. A NBFC with a license for undertaking leasing is called a leasing company. A NBFC with leasing license is required to invest at least 70% of its assets in the business of leasing ***[Functions Of Leasing Companies:]*** The functions of a lease business include lease financing, short-term financing, house building financing, and merchant banking and corporate financing. In this last group of functions, the leasing business in Bangladesh moved away from regular leasing activities and is now involved in stock-market related activities such as issue management, underwriting, trust management, private placement, portfolio management, and mutual fund operation. Broad capital market operations of the lease financing institutions include bridge financing, corporate counseling, mergers and acquisition, capital restructuring, financial engineering, and lease syndication. Prominent among the sectors of the economy that now receive lease financing services are textiles, apparels and accessories, transport, construction and engineering, paper and printing, pharmaceuticals, food and beverage, chemicals, agro-based industries, telecommunications, and leather and leather products. 1\. Lease Financing, 2\. Short-term Financing, 3\. House building financing, 4\. Merchant Banking 5\. Corporate Financing. 6\. Issue Management 7\. Underwriting 8\. Trust Management. 9\. Private Placement 10\. Portfolio Management. 11\. Mutual Fund Operation. 12.Bridge Financing, 13\. Corporate Counseling 14\. Mergers and Acquisition, 15\. Capital Restructuring, 16\. Financial Engineering, 17\. Lease Syndication.