Project On Lease Financing

 A lease is a rental agreement that extends for one year or longer.  The owner of the asset (the lessor) grants exclusive use of the asset to the lessee for a fixed period of time. ◦ In return, the lessee makes fixed periodic payments to the lessor.  At termination, the lessee may have the option to either renew the lease or purchase the asset. 1

 Full-service lease ◦ Lessor responsible for maintenance, insurance, and property taxes.  Net lease ◦ Lessee responsible for maintenance, insurance, and property taxes. 2

 Operating lease ◦ short-term ◦ may be cancelable  Financial lease ◦ long-term ◦ similar to a loan agreement 3

 Direct leases  Sale-and-lease-back agreements  Leveraged leases 4

5 Lessee Manufacturer / Lessor Lease LesseeLessor LeaseSale of Asset Manufacturer / Lessor or

6 Sale of Asset Lease Lessee Lessor

7 Lender Lien Equity Investor Lessee Lease Single Purpose Leasing Company Manufacturer Sale of Asset Equity Loan

 Efficient use of tax deductions and tax credits of ownership  Expectation of service potential or profitable operation over the asset’s economic life  Gain from appreciation in value  Realisation of a residual value  Reduced risk  Reduced cost of borrowing  Bankruptcy considerations  Tapping new sources of funds  Circumventing restrictions  debt covenants ◦ off-balance sheet financing 8

 Lessee forfeits tax deductions associated with asset ownership.  Lessee usually forgoes residual asset value.  Losses from idle capacity  Technological obsolescence  Changes in value due to changing economic conditions 9

 You have decided you want a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what's best for you based on the initial cash outlay, money and operating costs, equity and ownership, and tax and insurance considerations. PAYING IN CASH 10

Advantages Leasing - Lower monthly payments* - Little or no down payment* - More expensive car for less money - More cash available for other purchases - Sales taxes paid over term of lease - Buying - - Equity and ownership - Lower insurance requirements 11

 Leasing - No equity/ownership in the vehicle - Higher insurance requirements - Early termination liability - Fewer dollars available for other-Potential incremental end-of-lease uses costs like excess wear and tear and additional mileage charges Buying - Higher initial cash outlay - Monthly payments often higher 12