Various Types of Lease

(1) Finance lease :

A lease in which all risks and rewards related to asset ownership are transferred to the Lessee for the leased asset is called finance lease. It is one of the long-term leases and cannot be cancelable before the expiry of the agreement.
If any one of the following conditions is satisfied then it is a finance lease:

(a) Lease transfers ownership to lessee at end of lease term whether in main or by separate agreement

(b) Lessee has the option to purchase leased asset at a price sufficiently lower than fair value of asset at the date when the option become exercisable.

(C) Lease term covers major part of the life of the asset leased.

(d) Lease term covers the major part of the life of the asset.

(e) At the inception of lease Present Value of minimum lease payments (receivable over the non-cancellabale lease period amount at least substantially all the fair value of leased asset.

(f) Leased asset is special in nature which only lessee can use .

Example : Hiring a factory, or building for a long period.

(2) Operating lease :

Operating lease is one of the short-term and cancelable leases. In Operating lease the owner, called the Lessor, permits the user, called the Lesse, to use of an asset for a particular period which is shorter than the economic life of the asset without any transfer of ownership rights.

Example : Hiring a building for an event for 7 days.

(3) Sale and lease back :

A sale and lease back is a type of lease where the Lessee sells one of his assets to a prospective Lessor and then immediately leases it back for a guaranteed minimum time period for a specified amount of Rental payments. It may be in the form of operating leasing or financial leasing. This type of lease is popular in Real estate matters.

(3) Direct lease :

It is a contract in which a lessor purchases new asset from the manufacturer and leases it to the lessee.It may involve 3 or 2 parties.

(5) Single investor lease :

It is a lease in which the lessor funds the entire investment by an appropriate mix of debt and equity funds. The debts raised by the lessor to finance the asset are without recourse to the lessee, that is, in the case of default in servicing the debt by the leasing company, the lender is not entitled to payment from the lessee.

(6) Leveraged lease :

Under this lease, there are three parties involved; the Lessor, the lender and the lessee.
Under the leverage lease, the Lessor acts as equity participant supplying a small portion of
the total cost of the assets while the lender supplies the major part.In this the lessor has no risk on the finance the lender gave. And the lessee’s payments go to the lender who takes the leased asset on default and lender holds the title of asset.

(7) Domestic Lease :

If all the parties in the lease i.e, Lessor , lessee , lender belong to same country then it is called as domestic lease.

(8) International lease :

A lease in which the parties are domiciled from different countries is called as international lease.