Much more than just making deals and sealing agreements, leasing has revolutionized to a complex art. People often ask worrisome questions about the lease deal they are about to dot the lines on, others seem to be at ease when negotiating a lease deal.
Leasing has become a vital practice in economies. Individual and organizations all attest to the significant roles; leasing has played in the daily economy.
What is a lease?
A lease is a legal agreement or contract between two parties in which one party (the lessor) allows the other party (lessee) to use and control the asset for a specified period in exchange for a periodic fee. The lessor can give (according to the lease arrangement) the lessee an option to buy the property at the expiration of the contract duration. The lease agreement has been in its form-Legal is bidding to all parties under the contract law of the applicable jurisdiction.
The lessor is the legal owner of the asset in question; the lessee gains the right to use the asset by virtue of the contract, in return for regular payments in the form of rents. The lessee also will have to oblige to the various terms regarding their use of the property and abide by it. For example, a document binding that state the lessee of a car may have to accept that the car will only be used for personal use. The lease agreement comprising of the terms and conditions of the lease is also known as the Lease Deed.
Leasing is so much appreciated by several investors, as they see it as a means of making optimum use of assets without necessarily putting in much amount for its acquisition.
What is leasing
Leasing is the art of hiring out mostly a fixed asset by an individual, groups of individual or a firm to another entity in return for a stipulated payment at a stipulated time. The lessor still retains the full ownership rights, only that it permits the lessee to make use of such right for an agreed time interval in return for rent.
They are a whole variety of “leasable” properties, from the intangible to the tangible. Properties like; house, land, cars, store or office space, livestock, brand identity, and intellectual properties. The lease-style may be a capital lease (characterized by long term contracts and transferable ownership rights) or an operational lease (a not too long contract without a shift of ownership right).
People are prone to mix up renting and leasing. Though both terms are synonymous in a way, the nature of the contracts and deals is what strikes the difference in both.
Duration: the rent duration is short, whereas the lease duration is long.
Parties: the parties involved in rent are referred to as tenant and landlord; the lessor and lessee are synonymous to lease.
Modifications: the terms of a lease contract cannot be modified once it has been signed. The rental agreement in rent can be changed at the disposition of the landlord.
Accounting: the lease agreement uses a specified AS-19 standard accounting. The rent agreement has no standard accounting method.
Considerations: the lease deed considers the lease rentals where the rental arrangement considers the rent.
Maintenance: asset maintenance and repairs are based on the terms in the lease deed. The lessor mostly bears responsibility. The responsibility of asset maintenance and repairs falls on the tenant in rent arrangement.
Buy option: at the end of the lease deed, the lessee can be allowed to buy the asset even at down payments or easily swap assets. The rental arrangement offers no such option.
DIFFERENT TYPE OF LEASES
The financial type of lease deed involves longer period agreement. The lessee pays much more, placing him as the financier. The lessor is saddled with the duty of asset maintenance and repairs.
An operating lease setting permits either party to terminate the lease after giving due notice. The lessor bears the cost of insurance, machinery, maintenance, and repair costs. The asset in question stands to be prone to obsolescence. The lessee uses the asset for a specific period as the lessor bears the risk of the asset obsolescence.
Leveraged and non-leveraged leases
Companies sometimes may have to leverage what they have to achieve a set goal. In leveraged and non-leveraged leases, the value of the asset to be leased may be of a huge amount and seem impossible for the lessee to finance alone. So, the lessee may bring in one more financiers to have charge over the leased asset.
Sale and Lease-Back Leasing
Sale and leaseback leasing is done solely for the aim of raising capitals. A company may sell off its asset to a firm to raise capital. The firm (lessee) buys the asset fully from the company (which now makes the firm a lessor after acquisition of the asset) but leases the same asset back to the company (now turned lessee) who utilizes it. However, the new ownership of the asset is now the firm (lessor) who then leases the asset back to the company it bought it from.
Sales Aid Lease
Sales aid lease arrangement involves the lessor and the manufacturer. The lessor agrees with the manufacturer to market his product through his leasing operations; the manufacturer will pay the lessor a commission in return.
Conveyance lease type
In this agreement, the lease deed will convey a buy option to the lessee. The lease is usually for a long period.
Full and non pay-out lease
A full payout lease is one in which the lessor gains the full value of the leased out asset using lease rentals and interests contained in the lease agreement. In a non-pay-out lease, the lessor leases out the same asset over and over again without fully gaining the value of the leased asset.
Specialized service lease
In this arrangement, the lessor or the owner of the asset has more obligation than being just the owner; he is a specialist of the asset which he is leasing out. The lessor provides specialized personal services to the lessee and not only to lease out the asset. This is the type of arrangement is common in automobiles leasing companies.
Cross Border Lease
The lease deed that cuts across national frontiers is called cross border leasing. The cross border leasing is highly valued in areas like aviation, shipping, and other huge assets.
The parties to this lease deed are based in different countries. The lessor here does not render specialized service in connection with the asset. The lessor gains his principal and interest in the form of lease rentals.
CLASSIFICATION OF LEASE
A lease is generally classified as the operating lease and the capital or finance lease.
Finance lease or capital lease
The finance lease or capital lease arrangement, the lessee receives full right to use the asset and pays all the costs of the leased asset, all the benefits and risk at stipulated criteria substantially. The lease deed features are;
- The lease term is equal to 75% or more of the leased asset useful life.
- Rigid; the lease contract cannot be modified or canceled over the lease term.
- Full payment; the lessee substantially pays all the cost arising from the lease contract to a lessor. The cost of acquiring the asset, the insurance, tax, and funding cost are all fixed by the lessee.
- The net present value (NPV) of the total lease payments is equal to or more than 90% of the value of the leased asset.
- There is a buy clause or option in the lease deed, applicable at the end of the agreement, which permits the lessee to buy the asset at a discount rate.
A lessee in a capital lease arrangement can record the asset and the corresponding lease liability in its balance sheet.
In an operating lease, the lessee receives the right to use the asset but does not record the asset on its balance sheet, only as rental expense in income and expenses account. The operating lease is the reverse of a finance lease; it is considered as “off-balance sheet financing.”
The advantages and disadvantages of leasing to both the lessor and the lessee can be summed as;
- Higher Profits
- Easy Source of Finance
- Tax Benefits
- Quick and high return
- Enhanced Liquidity
- Low capital expenditure
- Convenient and flexible
- Better planning
- Better capital usage
- Reduce risk of obsolesce
- Fixed price level
- Long-term Investment
- Loss of Moratorium Period
- No Alteration or Change in Asset
- Loss of Ownership Incentives
- Loss of Salvage Value of the Asset.
- Penalties on Termination of Lease
How to get a great lease
Negotiating a leasing deal can be a very confusing process for most people. The issue of getting a good lease can be terrifying. To master the art of leasing, a sound knowledge of the language is vital. Some terms synonymous to leasing one ought to know;
- Purchase Option Fee
- Due at Signing
- Disposition Fee
- Acquisition Fee
- Buyout Price
- Residual Value
- Money Factor
- Cap Cost Reduction
- Capitalized Cost
- Trade-In Value
- Mileage Cap and Charges
Also, the knowledge of the asset you are leasing (building, cars or machinery), how it works, what can be negotiable and not is all you need. Here are some tips to help you spot a great lease deal.
- Residual Value
This is considered as the most important factor in a lease. Before you sign any dot on any lease agreement, consider the residual value of the leased asset.
The residual value of a lease vehicle predicts the worth at the expiration of the lease deed. A vehicle with high residual value is the best bet. Higher residual percentage equates to a lower payment. The residual value of a vehicle is set by the leasing information provider.
- Low Lease Factor
The interest rate you will have to pay in a lease deal is worth noting. The interest rate, sometimes called a “lease factor” or a “lease fee,” is mostly derived from the money factor. If the money factor you’re offered doesn’t seem impressive to you, it may be possible to negotiate for something lower. However, in some cases, the money factor always remains fixed and can’t be changed by the dealership. In such case, down payment using your financial institution is the best alternative. Look for a dealership that can work with tour financial institution.
- The Buy Offer
A great lease deed should come with the purchase option. The dealership (lessor) offers various discounts in the form of incentives and rebates. The automobile leasing companies are famous for offering great discounts to customers with the target of winning them away from existing competitors. Also, the buy option in a good lease deed should favor credit and zero down payments.
- Favorable Acquisition Fee
In negotiating a good lease, ask for a reduction in some fees in the lease contract. Some fees like acquisition fee, disposition fee and the irrelevant security deposit fees are all possible to strike a good bargain. You can get a lessor to waive off the security deposit and disposition fee. A great lease contract acquisition and lease price should be considered favorably to the lessee.
Contributed by: VIP Auto Lease Westchester 1139 W Boston Post Rd Mamaroneck NY 10543 (914) 381-2886 https://vipwestchester.com/, the premier choice for leasing in the greater Westchester County and North NYC area. Call us now for the best lease deals around on any make or model, guaranteed!