Leasing Types

leasing types - leasing vs. buying

The leasing agreements may be grouped in many ways and following different principles, thus there is a multitude of leasing types.

Types of leasing according to the leasing contract

This is perhaps the criterion for the most often used grouping of leases. The two main types of leasing contracts are “financial leases” and “operating leases”. The leading difference between the two types of leasing is the ownership of the leasing asset during the lease and at the end of the leasing term.

Leasing types - financial_vs_operational

Under financial leasing, ownership is normally transferred to the lessee at the start of the lease. Accordingly, the lease asset is also recorded as an asset on the lessee’s balance sheet  (for corporate lessees), and it also charges the corresponding depreciation. Further, at the end of the leasing term, upon payment of all installments, the lessee has the right of full ownership of the leasing asset.

Under operating leasing, ownership of the lease asset is retained by the lessor who leases it to the lessee for temporary use only. The lease asset is also reflected in the lessor’s balance sheet while the lessee has only the operating costs of using the asset. Operational leasing is most often used for leasing cars and often for leasing aircraft. At the end of the leasing term the lessee cannot become the owner of the leasing asset and must return it to the lessor.

leasing types - airplane_leasing

Usually, financial leasing outperforms the operating leases by funding volume. The reason for this is the relatively more limited asset group which is amenable to operating leases – mainly  cars. At the same time, in some markets, operating leases occupy a very small portion of the leasing market. Unfortunately, in this latter group is also Bulgaria, although in recent years there has been an accelerated increase of the operating leases.

 Leasing types according to the geographic location of the leasing deal

Normally both the lessor and the lessee of each leasing deal are from the same country. For various reasons, however, this may not be the case. This may be due to tax considerations, the specificity of the equipment, the peculiarity of distribution, etc.

leasing types -corssborder leasing

When the lessor and the lessee are not from the same country, the contract between them is called “cross-border leasing”. Most often, cross-border leasing is used for big-ticket leasing transaction of aviation equipment, where the lessor is usually the manufacturer himself or one of the few specialized air-leasing companies.

Leasing types according to the leasing asset

Contracts on the leasing market are divided into groups also according to the type of the leasing asset. For example, there is leasing of cars, leasing of commercial vehicles, leasing of industrial equipment, leasing of computer equipment, leasing of agricultural machinery, leasing of construction machinery and last but not least – leasing of real estate. The reason for the division is the specificity of the different asset groups, which also affects the terms and conditions of the leasing contracts for them.

leasing types by_asset

Taking examples from the Bulgarian leasing market, for instance, cars must be registered with the road police, must have CASCO insurance and civil liability insurance and may have residual value under the leasing contract. In contrast, with computer technology, the residual value is excluded due to rapid depreciation, civil liability insurance does not make much sense, and the liability insurance covers very different risks.

Leasing of real estate has quite different characteristics, duration, and peculiarities.

Some specific leasing types

A number of specific leasing types exist in order to achieve certain, precisely sought results or to meet the specific needs of some industrial sector.

leasing types - Sale_leaseback

Such is the example with “Sale & Leaseback” (or “sale and reverse lease”). In this type of leasing, the vendor and the lessee are the same person. This form of leasing is the closest leasing contract to bank lending. Through the “sale and reverse lease”, the leasing company literally credits the lessee, taking as collateral the ownership of the leased asset. This entire deal is shaped as a leasing transaction. This type of leasing applies only to customers with an impeccable reputation and high credit rating.

leasing types - leveraged_leasing

Another specific type of leasing is “leveraged leasing”. In this modification, further to the lessor, there is another participant – a “creditor”, who participates by financing a part of the purchase price of the leasing asset. This type of leasing is most often used for the proper and efficient planning of VAT (creditor banks alone, are usually not registered under the VAT law) for the financing of expensive equipment.

leasing types - wet_leasing

Other specific types of leasing are three types, which have been specifically designed to serve the aviation industry – wet, dry and wet leasing.

The most popular, of the three, recently is Wet Leasing. Wet leasing implies that the lessor will lease the flying equipment (most often airplanes), as well as almost everything needed – pilots, aircrew, ground crew, full machine maintenance, as well as the necessary insurance coverage. When the lessor has provided everything – ACMI (Aircraft, Crew, Maintenance, and Insurance), then the aircraft usually flies under the lessor’s certificate (AOC).

For wet leasing, the lessee, in turn, pays the lease payments, as well as fuel, airport taxes, and duties, if necessary. Wet leasing is relatively short-term and typically lasts from 2 to 24 months. The leasing installments for Wet leasing are calculated by the number of operating hours.

Dry leasing involves leasing only the aircraft (similar to operating lease of a car), no crew, no maintenance, and no insurance. The aircraft as a standard is entered on the lessee’s AOC. This is also a basic condition for classifying a lease as “Dry” in the UK. Dry leasing is relatively long-term, with the most common duration being between 6 and 8 years.

“Damp” (“Moist”) leasing is most common in the UK and involves the provision by the lessor of the airplane, ground support staff, maintenance, and insurance. The lessee also provides the flight crew (main difference), fuel and various taxes and fees. This type of leasing is used by reputable air carriers, who wish to have strong control over the speed and quality of service of their staff (flight crew), who have direct contact with their customers (and quite often this is expected from the passengers themselves).

Innovative leasing types

The needs of the market and the inventiveness of the leasing companies continuously add newer types of leasing. Sometimes they are completely new forms for which there is no ranking yet, and sometimes they are innovative combinations of already existing leasing types with some added functionality.

leasing types - novated_lease

Such is the case of the “novated lease”. It emerged only a decade ago in Australia and has now entered many of the countries with advanced leasing markets. Novated leasing can hardly fit into any of the categories above, although at its core is a full-service operating lease. Novate leasing is a mixture of a lease and an employment contract and aims to optimize the tax burden for the acquisition or use of cars by highly-rated employees of a given company.

In the coming years, we will probably see the emergence of “shared travel” or “shared leases” which reflect popular modern attitudes. Peer to peer funding of leasing deals will definitely be next.

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