A lease is classified as an operating lease if substantially all the risks and rewards incidental to ownership are retained by the lessor.
The term of a operating lease
The term of an operating lease is generally shorter than the useful economic life of the asset that is financed. The lease incorporates a residual value at the end of the lease term. The residual value is the amount that the lessor generally needs to realise (either in terms of additional rents or sale proceeds) in order to made financially whole.
Ownership of the asset
The legal and beneficial (“economic”) ownership of the asset remain with ABN AMRO Lease (the lessor). The lessee bears no residual value risk and does not have the right to purchase the asset. In certain circumstances the lessee may agree a sales agency arrangement with the lessor.
Insurance and maintenance of the asset
The lessee will usually be responsible for insurance and maintenance.
Advantages for the lessee
- Off-balance sheet financing
- Hedge against technological obsolescence
- 100% financing of the asset
- Predictable fixed payments
- Flexible payment structure
- The lessee is entitled to claim capital allowances (with a long funding lease)