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Lease Types
Common
Lease Types
EFSI draws from
multiple funding sources, giving the company the flexibility to
structure leasing transactions based on many transaction variables,
including credit rating, size of transaction, asset type, industry, and
location.
EFSI offers many types of leases to choose from. We'll help you
select the type of lease that matches your equipment needs, business goals and cash flow
requirements.
The most common types of leases are operating leases and finance
leases.
Operating Lease
An operating lease is particularly attractive to companies that
continually update or replace equipment and want to use equipment
without ownership, but also want to return equipment at lease-end and
avoid technological obsolescence. An operating lease usually results
in the lowest payment of any financing alternative and is an excellent
strategy for bypassing capital budgeting restraints. It typically
qualifies for off-balance sheet treatment and can result in improved
Return On Asset (ROA) due to a lower asset base. It can also result in
higher reported earnings in the early years of the lease.
Finance Lease
A finance lease is a full-payout, noncancellable agreement, in
which the lessee is responsible for maintenance, taxes and insurance.
Finance leases are most attractive in cases where the lessee wants
the tax benefits of ownership or expects the equipment's residual
value to be high. These leases are structured as equipment financing
agreements with residuals up to 10 percent. The lessee purchases the
equipment upon lease termination at a pre-agreed amount. The term of a
finance lease tends to be longer, nearly covering the useful life of
the equipment.
Other types of leases are listed below:
Capital Lease
Type of lease classified and accounted for by a lessee as a
purchase and by the lessor as a sale or financing, if it meets any one
of the following criteria: (a) the lessor transfers ownership to the
lessee at the end of the lease term; (b) the lease contains an option
to purchase the asset at a bargain price; (c) the lease term is equal
to 75 percent or more of the estimated economic life of the property
(exceptions for used property leased toward the end of its useful
life); or (d) the present value of minimum lease rental payments is
equal to 90 percent or more of the fair market value of the leased
asset less related investment tax credits retained by the lessor.
Direct Financing Lease (Direct Lease)
A non-leveraged lease by a lessor
(not a manufacturer or dealer) in which the lease meets any of the
definitional criteria of a capital lease, plus certain additional
criteria.
First Amendment Lease
The first amendment lease gives the
lessee a purchase option at one or more defined points with a
requirement that the lessee renew or continue the lease if the
purchase option is not exercised. The option price is usually either a
fixed price intended to approximate fair market value or is defined as
fair market value determined by lessee appraisal and subject to a
floor to insure that the lessor's residual position will be covered if
the purchase option is exercised.
If the purchase option is not
exercised, then the lease is automatically renewed for a fixed term
(typically 12 or 24 months) at a fixed rental intended to approximate
fair rental value, which will further reduce the lessor's end-of-term
residual position. The lessee is not permitted to return the equipment
on the option exercise date. If the lease is automatically renewed,
then at the expiration of that initial renewal term, the lessee
typically has the right either to return the equipment without penalty
or to renew or purchase at fair market value.
Full Payout Lease
A lease in which the lessor
recovers, through the lease payments, all costs incurred in the lease
plus an acceptable rate of return, without any reliance upon the
leased equipment's future residual value.
Guideline Lease
A lease written under criteria
established by the IRS to determine the availability of tax benefits
to the lessor.
Leveraged Lease
In this type of lease, the lessor
provides an equity portion (usually 20 to 40 percent) of the equipment
cost and lenders provide the balance on a nonrecourse debt basis. The
lessor receives the tax benefits of ownership.
Net Lease
A lease wherein payments to the
lessor do not include insurance and maintenance, which are paid
separately by the lessee.
Open-end Lease
A conditional sale lease in which
the lessee guarantees that the lessor will realize a minimum value
from the sale of the asset at the end of the lease.
Sales-type Lease
A lease by a lessor who is the
manufacturer or dealer, in which the lease meets the definitional
criteria of a capital lease or direct financing lease.
Synthetic Lease
A synthetic lease is basically a
financing structured to be treated as a lease for accounting purposes,
but as a loan for tax purposes. The structure is used by corporations
that are seeking off-balance sheet reporting of their asset based
financing, and that can efficiently use the tax benefits of owning the
financed asset.
Tax Lease
A lease wherein the lessor
recognizes the tax incentives provided by the tax laws for investment
and ownership of equipment. Generally, the lease rate factor on tax
leases is reduced to reflect the lessor's recognition of this tax
incentive.
Trac Lease
A tax-oriented lease of motor
vehicles or trailers that contains a terminal rental adjustment clause
and otherwise complies with the requirements of the tax laws.
True Lease
A type of transaction that qualifies
as a lease under the Internal Revenue Code. It allows the lessor to
claim ownership and the lessee to claim rental payments as tax
deductions.
Modified with permission from
Equipment Leasing Association's LeaseAssistant.org.
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