Structuring a lease involves determining the periodic lease payment based on the terms of the lease, in such a way as to cover all costs associated with the lease investment and the target rate of return, while remaining competitive in the market. Our focus is to consider the various methods and steps involved in structuring leases of various payment configurations and terms.
Major structuring issues in leasing.
Every lease contract contains special features and attributes structured or built-in by you to properly suit the lessee’s needs without necessarily compromising your target return on investment. Typically, a Nigerian finance lease the following items will be taken into consideration while structuring the lease.
- The name of the Lessor (owner of the asset)/Lessee (user of an asset)
- The cost of the asset
- The primary lease term or tenor
- Any packaging and out-of-pocket expenses including legal fees, credit checking and bank charges incurred by the Lessor (owner of the asset).
- Collateral requirements to include title to the asset on lease and comprehensive insurance cover.
- Other indenture covenants or conditions attached to the lease including:
(i) Payments in advance – in which case one or two rentals may be made simultaneously with the disbursement. This appeals to Lessees because rentals could effectively be lower considering the time value of money
(ii) Payment of rentals in arrears to give the lessee enough breathing room between the time of disbursement and the beginning of the repayment of the facility.
- Incorporation of moratorium in the lease contract to suit the lessor and the lessee. In this case, the lessee is given some time off before the commencement of the rental payments
- Security deposit made up of certain percentage of the rental payment or the total cost of the asset, paid to the lessor which may or may not be refundable. The security deposit is often equivalent to the residual value of the asset agreed upon by both the lessor and the lessee and is often geared towards the payment for the residual value at the end of the lease term.
- The schedule of the rental payments might be monthly, quarterly, semi-annually or annually. It could also be step-up, step-down or skip payments depending on the peculiar circumstances of both parties to the lease particularly the cash inflow pattern of the Lessee’s operation.
- A bargain purchase option agreed upon at the inception of the lease, at which title to the asset can revert to the lessee at the end of the primary lease term. This gives the lessee the first option to nominate a third party to purchase the leased asset under an arm’s length transaction. A PURCHASE OPTION CLAUSE must not be inserted in your lease agreement, this might make the lease to be construed a hire-purchase transaction. However, the bargain purchase option is an end of leasing transaction that must be agreed upon in a separate contractual agreement.
Therefore, it is expedient for operators to perfectly understand the operational dynamics of this business model and learn the secrets to succeed as a lessor. Learn from the experts and learn from the best. Visit the Secretariat or call 08023176691, 08023179048, info@elannigeria.org for further engagements