Page 171 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes 2. Sales & Lease Back and Direct Lease
3. Single Investor and Leveraged Lease
4. Domestic and International Lease
Let us understand each of them one by one.

Finance Lease

A Finance lease is mainly an agreement for just financing the equipment/asset, through a lease
agreement. The owner lessor transfers to lessee substantially all the risks and rewards incidental
to the ownership of the assets (except for the title of the asset). In such leases, the lessor is only
a financier and is usually not interested in the assets. These leases are also called "Full Payout
Lease" as they enable a lessor to recover his investment in the lease and derive a profit. Finance
lease are mainly done for such equipment/assets where its full useful/ economic life is normally
utilized by one user - i.e. Ships, aircrafts, wagons etc.

Generally a finance lease agreement comes with an option to transfer of ownership to lessee at
the end of the lease period.
Normally lease period is the major part of economic life of the asset.

Operating Lease

An operating lease is one in which the lessor does not transfer all risks and rewards incidental
to the ownership of the asset and the cost of the asset is not fully amortized during the primary
lease period. The operating lease is normally for such assets which can be used by different users
without major modification to it. The lessor provides all the services associated with the assets,
and the rental includes charges for these services. The lessor is interested in ownership of asset/
equipment as it can be lent to various users, during its economic life.

Examples: 1. Earth moving equipments,
2. Mobile cranes,

3. Computers,
4. Automobiles, etc.

Sale and Lease Back

In this type of lease, the owner of an equipment/asset sells it to a leasing company (lessor)
which leases it back to the owner (lessee).

Direct Lease

In direct lease, the lessee and the owner of the equipment are two different entities. A direct
lease can be of two types: Bipartite and Tripartite lease.
1. Bipartite lease: There are only two parties in this lease transaction, namely
(a) Equipment supplier-cum-financer (lessor) and

(b) Lessee.
The lessor maintains the assets and if necessary, replace it with a similar equipment in
working condition.

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