Explain the different types of Leases.
TYPES OF LEASES.
Leases are classified on the basis of the variations on the terms and conditions on which an asset is leased and the rights and obligations of the lessor and the lessee. On the basis of this, the leases are of following types:
In operating lease, risk and rewards are not transferred completely to the lessee. The term of lease is very small compared to finance lease. The lessor depends on many different lessees for recovering his cost. Ownership along with its risks and rewards lies with the lessor. Here, lessor is not only acting as a financier but he also provides additional services required in the course of using the asset or equipment.
Finance lease, also known as Full Payout Lease, is a type of lease wherein the lessor transfers substantially all the risks and rewards related to the asset to the lessee. Generally, the ownership is transferred to the lessee at the end of the economic life of the asset. Lease term is spread over the major part of the asset life. Here, lessor is only a financier.
Sale and Lease Back:
In the arrangement of sale and lease back, the lessee sells his asset or equipment to the lessor (financier) with an advanced agreement of leasing back to the lessee for a fixed lease rental per period.-It is exercised by the entrepreneur when he wants to free his money, invested in the equipment or asset, to utilize it at whatsoever place for any reason.
Leveraged lease has three parties lessor, lessee and the financier or lender. Equity is arranged by the lessor and debt is financed by the lender or financier. Here, there is a direct connection of the lender with the lessee and in case of default by the lessor; the lender is also entitled to receive money from lessee. Such transactions are generally routed through a trustee.
Domestic Lease and International Lease:
When all.the parties of the lease agreement reside in the same country, it is called domestic lease.Intern ational lease are of two types Import Lease and Cross Border Lease. When lessor and lessee reside in same country and equipment supplier stays in different country, the lease arrangement is called import lease. When the lessor and lessee are residing in two different countries and no matter where the equipment supplier stays, the lease is called cross border lease.