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LEASE FINANCING

LEASE FINANCING. AN ALTERNATIVE TO EXTERNAL FINANCING?. MAGNITUDE OF LEASE FINANCING. 80%+ OF ALL FIRMS LEASE SOME OR ALL OF THEIR ASSETS IN THE LATE 1990’S: $580 BILLION IN ASSETS ACQUIRED $180 BILLION IN LEASED ASSETS. SENSIBLE MOTIVATIONS TO LEASE. CONVENIENCE - EASY TRANSACTION

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LEASE FINANCING

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  1. LEASE FINANCING AN ALTERNATIVE TO EXTERNAL FINANCING?

  2. MAGNITUDE OF LEASE FINANCING • 80%+ OF ALL FIRMS LEASE SOME OR ALL OF THEIR ASSETS • IN THE LATE 1990’S: • $580 BILLION IN ASSETS ACQUIRED • $180 BILLION IN LEASED ASSETS

  3. SENSIBLE MOTIVATIONS TO LEASE • CONVENIENCE - EASY TRANSACTION • RISK SHARING [LESSOR ASSUMES OBSOLESCENCE] • LESSOR SCALE ECONOMIES

  4. SENSIBLE MOT. CONT. • CONTRACT STANDARDIZATION BY LESSOR FOR SAME ASSETS • TAX DIFFERENTIAL BETWEEN LESSEE AND LESSOR

  5. QUESTIONABLE MOTIVATIONS • WINDOW DRESSING OF DEBT-EQUITY RATIO • AVOID CAPITAL BUDGETING CONSTRAINTS • PRESERVE CAPITAL

  6. TYPE OF LEASE: • OPERATING LEASE • ACQUISTION CONSIDERED RENTAL • LEASE IS OFF-BALANCE SHEET • LESSOR MAINTAINS LEASED EQUIPMENT

  7. TYPE OF LEASE cont. • CAPITAL LEASE • ACQUISTION CONSIDERED PURCHASE • ASSET PART OF BALANCE SHEET • LESSEE MAINTAINS EQUIPMENT

  8. ACCOUNTING TREATMENTS • OPERATING LEASE: • 1. No automatic ownership transfer at end of lease • 2. No bargain purchase option at end of lease • 3. Initial lease term </= 75% of asset’s economic life • 4. PV of minimum lease payment </= 90% of asset’s fair market value.

  9. LEASING STRUCTURES • SEE OPTIONS ON P. 294: • DIRECT LEASE • SALE AND LEASEBACK • LEVERAGED LEASE

  10. COMPARATIVE ANALYSIS • LEASE VERSUS BUY • LEASE FINANCING VERSUS BANK FINANCING

  11. LEASE/BUY • 100% FINANCING WITH NO DOWNPAYMENT • PRESERVE LINES OF CREDIT • LEASING IS HEDGE AGAINST OBSOLESCENCE/ASSET FAILURE • FIXED RATE FINANCING

  12. LEASE/BANK FINANCING • BANK RATES BELOW LEASING RATES. OFFSET BY TAX BENEFITS • “SOFT COSTS” OF LEASING - SERVICE, INSTALL, TRAINING ETC. • BANK COMPENSATING BALANCES - USES CASH AND NOT TAX DEDUCT.

  13. LEASE/BANK cont. • BANK FINANCING DOWNPAYMENT EXCEEDS THAT OF (FIRST+LAST RENTALS) IN LEASING • RESTRICTIVE COVENANTS IN LOANS • BANK USES “BLANKET LIEN” ON ALL ASSETS; SPECIFIC ASSETS FOR LEASE

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