Leasing: basic features and types

Financial leasing is an arrangement whereby the owner of an asset (lessor) grants use of it to a customer (lessee) in exchange for periodic payments covering the cost of use plus interest and financial charges, which are tax deductible.

The main attraction of this option for business customers is that the payments are tax-deductible under current tax legislation. For the finance company, the fact that it retains ownership of the asset gives it more security.

Under a leasing arrangement, the lessor grants the use of an item of movable or immovable property to the lessee or customer in exchange for periodic payments covering the cost of use plus interest and financial charges. Asset items financed in this way are purchased ad hoc by a leasing company under a financing agreement with the customer.

The lease contract is usually of a shorter duration than the useful life of the leased asset and the lessee often has the option to buy the asset after paying the last instalment. The price of the option is usually equal to the residual value of the asset at the end of the lease. Depending on the terms and conditions of the contract or further negotiation between the parties, at the end of the lease, the customer may return the asset, buy it, or extend the lease.

There are types of leasingarrangement may be distinguished: 

  • Equipment leasing. The goods comprise movable property leased as described above.
  • Real estate leasing. The financed asset is a property purchased by a leasing company from a third party and then built or refurbished according to the lessee’s plans or requirements. Real estate leasing also includes turnkey construction projects, which consist of building or refurbishing properties with specific features for subsequent use as factories, logistics warehouses or any other type of business property. The contract may also include fitting the premises with machinery or specialised equipment necessary for the intended purpose.

One particular type of real estate leasing is leaseback, whereby the customer sells a property it owns to a leasing company but retains possession by leasing it back with a purchase option. This allows the customer to obtain liquidity or finance for other purposes, while enjoying the tax advantages of the periodic repayments of the borrowed capital. The property may also undergo refurbishment and/or be fitted out to adapt it to the lessee’s business needs, with the cost of this work be included in the lease arrangement if the parties so decide.

  • Operational lease. The leased goods usually hi-tech equipment likely to become obsolete quickly, such that, upon agreement between both parties, the manufacturer or supplier undertakes to replace the obsolete goods with updated ones on the agreed date.

The main attraction of this option for business customers is that the payments are tax-deductible under current tax legislation. For the finance company, the fact that it retains ownership of the asset gives it more security.

Applicable fees and expenses

  • Study of the operation.
  • Fees of a notary or other attesting official to witness the contract at the time of signing.
  • Arrangement fee, applied to the total or a limit in the case of gradual withdrawals. Payable when the contract is signed or at the time of subsequent withdrawals.
  • Fees for total or partial early repayment.
  • Charges for arrears or unpaid instalments.
  • Past-due notice charge in the case of unpaid instalments.
  • Postage expenses involved in sending printed bills.
  • Amending terms and conditions or guarantees.
  • Charges for partial novation, subrogation and renewal.

 

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