I need clarification regarding this. I have heard of operational, tax, synthetic, master lease and a bunch others. It seems to me that they overlap in their scope, that several classifications–obeying different criteria–are tossed around without clearly distinguishing which particular lease types belong to a specific category.
Will you help me get a clearer grasp of the panorama governing the inner workings of this enigmatic “lease spectrum” and, while you are at it, explain what are the relevant aspects of each one of these leases, their advantages and disadvantages, when is one more recommendable than the others?
Thanks a plenty for your help!!!
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In what context? As an investor? As a lessor, as a lessee?
These different lease forms all embody quite different contractural (and often quite complex) arragements and are not necessarily “on a spectrum” any more than apples and oranges are and discussion of them along the lines of what you requested could easily fill a college textbook.
Astro, first of all, thanks for the link. That was very informative. I have a few questions regarding it, but first a clarification.
You said, in reference to the question stated in the OP:
What I meant was that it appeared to me that they were several different classifications of leases, obeying different criteria. Just like you can come up with different categorizations of planets according to the attributes you assign to them: shape, size, ability to hold onto an atmosphere, formation, composition, “orbital subjugation” (orbiting about a star or around a secondary celestial object), etc. Mercury and Venus can be disregarded as planets on the basis of not having moons. Titan can be considered a planet if we ignore the fact that it orbits Jupiter, size wise Pluto’s planetary status might be questioned. Categorization is sensitive to its underlying criteria.
In that vein, what I am striving for is a list of the different types of leases according to the different classification schemes used to group them (assuming there are, as I imagine, several classifications), and an explanation of each lease type in particular with, if possible, a detail of their advantages/disadvantages from the perspectives of all parties involved, fundamentally lessor and lessee.
As to my specifics questions arising from Astro’s link:
–How does an off balance sheet structure help improve the financial ratios, specifically the debt to equity ratio, earnings per share and interest coverage? What is interest coverage? Any complementary explanations of off balance sheet finance’s effects on the other ratios will also be welcomed!
–What are the tax benefits and burdens of an off balance sheet operation?
–Why would a lessee want to transfer the tax benefits to the lessor?
–I understand that credit ratings are assigned to companies to determine their solvency and thus assess their ability to amortize the full amount of the loan. Who establishes these credit ratings? An official government agency? Several independent companies? Is this the fundamental importance of having good financial ratios, to get a good credit rating? Or are there any other benefits?
–Why are the financial ratios so important? After all, off balance sheet operations require the lessee to present a notation referring to the transaction on its financial statements. Wouldn’t this prove the improvements on the financial ratios to be artificial in the sense that any interested party would know, just by checking out financial statements, about the existence of the liabilities and assets derived from the lease agreement? Wouldn’t that detract from the validity of the ratios as gauges of the financial strength of a company?
–This confuses me. Why would depreciation distort earnings? Isn’t it is supposed to be a tax break that is deducted before calculating fiscal obligations and then added again to after tax income? It is a virtual cost, right? The amortization of the loan is the real cash outflow that covers the acquisition of the asset, not its depreciation, right? Please tell me I am correct, else I would be hopelessly confused.
–What exactly is the LIBOR rate?
I apologize for the overabundance of questions. It just goes to show the ample and steady supply of ignorance residing outside the boundaries of my limited knowledge of this subject. :rolleyes:
Of course, I don’t expect any of you to answer all of these questions. Hopefully the combination of your expertise will collaborate to evacuate the totality of these inquisitions and placate my abundant thirst for knowledge!
Once again, thanks in advance for any help that might be forthcoming
