Different Types Of Leases Explained: A Comprehensive Guide

As millennials look for more and more investment platforms, the possibility of making money from an unconventional option becomes real.

Investment through leasing is still a new concept that the Indian populace is getting used to. Experts have repeatedly stated that investing is crucial for a healthier financial future, and investment via leasing is emerging as a preferred option worldwide.

This article will examine the different lease types and their key features.

Introduction On Lease

A lease is a legal agreement between two parties, a lessor (owner of the asset being leased) and a lessee (the one who borrows the asset). It grants the lessee the right to use an asset for a predetermined period in exchange for regular payments, just like rental payments. 

Lease agreements are prevalent across asset classes, including real estate, vehicles, furniture, aircraft, equipment, and machinery. The real estate space, especially, is driven by lease agreements of both types- commercial rental agreements and home rental agreements.

Commercial leases specifically involve renting assets for business purposes. These include office spaces, warehouses, retail storefronts, and industrial facilities. These agreements often outline responsibilities for maintenance, repairs, property taxes, rental amount, and lease term.

Asset leasing offers a unique opportunity for investors looking to diversify into alternative asset classes. As an investor, you can lease out an asset you own for a regular, predictable fixed income. 

With technology, several investors can now pool their funds and acquire assets for leasing. This approach can be attractive for several reasons. For the lessee, it requires a lower initial investment than buying the asset outright, and the lessor benefits from a steady income stream.

Types Of Leasing

Here are the major types of commercial leases that you should know about if you are looking to invest via leasing.

1. Financial Lease

This is quite a popular type of leasing, in which the company/lessor that provides the product for leasing is the legal owner.

The lessee (person renting the product) controls the asset. A possible number of things can happen at the end of the lease term-

• The ownership is transferred from the lessor to the lessee.
• The asset is returned to the lessor, and he can decide what he wants to do with it.
• The lessee will extend the lease period by entering into a secondary phase.

A financial lease is preferred for several things, including transportation and equipment. Imagine you own a logistics company, and you need 50 cars for your business. In this case, you would opt for a financial lease because you do not have to return the vehicle in good condition. For a lessor, a financial lease agreement operates as an instrument that transfers all the risks and benefits of the asset to the lessee in exchange for a periodic income.

2. Operating Lease

An operating lease starkly contrasts a financial lease because it does not transfer ownership from the lessor to the lessee at the end of the term. Once the leasing period ends, the asset will either be re-hired for another lease purpose or returned to the lessor.

Once the lease period expires, the leased asset will have a resale or residual value. From the lessor’s perspective, a commercial lease agreement for an operating lease would entail bearing all the costs and providing specialised services to the lessee in using the asset.

Investment via leasing is emerging through this process, as financial platforms allow retail and businesses to invest in assets via lease. The good part is that you do not need an abnormally large amount to start investing.

3. Leveraged Lease

A leveraged lease occurs when the lessor cannot finance the lease himself. As a result, it calls upon other investors to invest in the asset collectively. The asset is then given on lease to a lessee. Traditionally, leveraged leases involve three parties: the lessor, the lessee, and a financier or lender. 

Owing to the high cost of the asset, the lender or financier would lend a part of the cost, with the asset and lease rents forming the collateral. However, with innovation, multiple investors can now come together to finance high-value assets and benefit from proportional lease rents.

4. Tax-Oriented Lease

In a tax-oriented lease, also called a true lease, the lessee is given full possession of the asset for a monthly fee. Once the lease term is over, the asset must be returned to the lessor.

It is called a tax-oriented lease because, through this lease agreement, the lessor can claim all the specified tax deductions and benefits associated with leasing.

5. Sales And Lease-Back

In the sale and lease-back model, a company sells an asset, often real estate or equipment, to an investor in exchange for immediate cash. Subsequently, the company leases the same asset back from the investor, allowing them to continue using it for their operations. This strategy frees up capital for the company while providing the investor with a steady rental income stream. If the lease agreement terms are carefully structured, it is a win-win for both parties.

Types Of Commercial Leases

There are three primary types of commercial leases in India:

1. Gross Lease: A gross lease is also known as a full-service rental agreement. Under this commercial lease agreement, the lessor takes care of all expenses and costs, including taxes, licensing, and maintenance out of the lease rent. At the same time, the lessee focuses solely on their business operations. This setup offers the advantage of predictable costs for lessee, as they are not burdened with additional expenses. Consequently, gross lease rates may be higher than those of other lease types.

2. Net Lease: This commercial lease requires the lessee to cover operating costs, such as taxes, insurance, and maintenance of the asset leased. While this lease allows the lessor to earn a passive income, it can pose financial challenges for the lessee, especially if unexpected costs arise.

3. Modified Gross Lease: This commercial lease resembles a gross lease with some variations, allowing for specific terms for different expenses. This lease agreement offers the lessee greater flexibility and control over their expenses.

Conclusion

This blog post briefly discussed leases and how commercial lease agreements are becoming increasingly popular as an alternative investment avenue. We have also looked into the different types of leases and their key features. As investing through leases becomes popular, an investor must understand how different types of lease agreements work and what they offer.
Visit Grip Invest to understand more about leasing and explore investment opportunities in asset leasing.

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