Lecture slides: Rental & Leasing agreements

Question 1

Name the characteristics of rental agreements?

Answer 1

2-party transaction:
- Owner transfers user rights to the tenant
- Tenant in return pays rent

Question 2

What two types of costs do rental agreements consist of?

Answer 2

Division of costs:
1. Costs for daily use
2. Extraordinary costs / costs for preservation

Question 3

Name the most important characteristics of financial leasing?

Answer 3

3-party transaction:
- Supplier or Seller of Goods
- Prospective user = lessee
- Financial institution = lessor

Question 4

Name the four elements of a financial lease’s design?

Answer 4

1. Lessee negotiates with a seller the sale of equipment
2. Leasing agreement between user as lessee and a financial institution as lessor
3. Lessor buys upon instruction of the lessee and becomes owner. Lessor as strongest security right: ownership of leased good
4. Lessee leases for a fixed term, usually with an option to purchase at end of term for the residual value.

Question 5

What is a lease?

Answer 5

compensation for using the leased good + part of the investment value. Lessee carries economic risk

Question 6

Name the most important elements of a leveraged lease?

Answer 6

3-party transaction between:
1. Supplier or seller of goods = lessor & owner
2. Prospective user = lessee
3. Financial institution = Funder

Question 7

Name the five elements of a leveraged lease’s design?

Answer 7

1. Lessee negotiates with a seller the sale of equipment
2. Leasing agreement between user as lessee and supplier as lessor
3. Lessor itself is partly financed by a financial institution
   - Funding agreement
   - Lessor still has strongest security right: ownership of leased good
4. Lessor assigns rights of payment against the lessee to the financial institution
   - Assignment for security reasons
   - Commercial reputation of debtor might require tacit assignment
5. Lessee leases for fixed term, usually with option to purchase at end of term for residual value

Question 8

Who are the players in a sale and lease-back transactions?

Answer 8

2-party transaction:
1. Owner = Seller & lessee
2. Buyer = Lessor

Question 9

What is the design of a sale & lease-back transaction?

Answer 9

1. Owner sells his good to a certain buyer
   - Seller is in need for cash (liquidities / cashflow)
   - Initial owner / seller leases back the sold good from the buyer

Question 10

Who are the parties in an operational lease?

Answer 10

2-party transaction
- Lessee
- Lessor = owner of the good

Question 11

Describe the design of an operational lease transaction?

Answer 11

1. Lessor leases good it owns to lessee
2. Lessee leases for a fixed term. Sometimes with an option to purchase at end of term for residual value

Question 12

Why does a lessor carry all the economic and legal risk?

Answer 12

1. Lessor will never recover its investment from the lessee, not even when the lessee lifts the purchase option
2. The lease = the compensation for the use of the leased good and is not used to reconstitute the invested capital