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Lessor versus Lessee

See Also:
Sale and Leaseback
Capital Lease Agreement
Lease Term
Make-or-Buy Business Decision
Cost Driver

Lessee Defined

In a lease agreement, the lessee is defined as the party that pays for the use of the asset or property. The lessor is the party that receives payments from the lessee in exchange for the usage of its asset or property.

Lessor Defined

In a lease agreement, the lessor is defined as the party that receives payments in exchange for the usage of its asset or property. The lessee is the party that pays the lessor for the use of the asset or property.

Lessor versus Lessee

What’s the difference between lessee vs lessor? When you sign a lease, are you the lessor or lessee? When engaging in a lease agreement, a legally binding contract, it is important to know the difference between these two terms.

For example, consider a rental apartment. The tenant is the lessee. And the landlord is the lessor. The lessee pays rent to the landlord whereas the lessor receives payment from the tenant. The same is true for any lease or rental agreement. The lessee pays the lessor for the right to use the asset or property. In addition, the lessor receives payment from the lessee in exchange for the usage of the asset or property.

Operating Lease vs Finance Lease

In accounting, a distinction is made between an operating lease versus a finance lease. The difference is in the way the lease is recorded by the lessee in the lessee’s financial statements. There is also a difference in which party assumes the benefits and responsibilities of ownership of the asset or property.

Operating Lease Definition

An operating lease is a short-term off-balance-sheet lease agreement. An operating lease is not recorded on the lessee’s balance sheet. This type of lease typically spans a small portion of the asset’s useful life, and the lessor retains the risks and benefits of ownership. For example, in an operating lease, the lessor is responsible for service and maintenance of the asset throughout the duration of the lease. An operating lease is also called a service lease.

Finance Lease Definition

A finance lease, also called a capital lease, is a type of long-term lease agreement. A capital lease is recorded on the lessee’s balance sheet. Additionally, this type of lease typically spans most of the useful life of the asset. In a capital lease agreement, the lessee, the party receiving the asset or property, assumes both the risks and benefits of ownership.

Lessor versus Lessee

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Lease Term

See Also:
Capital Lease Agreement
Lease Agreements
Operating Lease
Why Is Intellectual Property Risk Everybody’s Problem?

Lease Term Definition

Defined as the period of time in which a contracted lease is in place, lease term establishes the time period to both the lessee and lessor. Lease terms generally come on 3 forms: fixed, periodic, and indefinite. Additionally, a lease can cover either material or non-material property. An example of this would be a real estate lease as compared to a software lease.

Lease Term Explanation

Lease term, explained to many as the period of time where they have usage rights to a piece of property, is a deeper concept than this. It forms part of the lease term sheet, the document which spells out the entire lease agreement. Lease term, also known as lease tenure, lease period, and more, is merely a part of this agreement. Still, it serves as the basis and arguably most crucial aspect to any lease.

Lease term can last for a specific period of time (fixed), can be extended at the will of both parties (periodic), or can last for an undetermined period of time (indefinite). Additionally, leases can exist as either capital or operating leases. Here, these leases would be casually referred to as “lease-to-own” or “rental”. These two leases often create a lease term which is differed by the needs of both parties. Capital leases, often, are not at will, periodic, or indefinite. Operating leases, on the other hand, can be more lax on time expectations while more specific to the rights of the tenant. Naturally, the soon-to-be property owner will begin negotiations with more clearly defined rights than the soon-to-leave renter. The flexibility of leases negates mathematical calculations on a lease term calculator. Negotiating leases is as much an art as a science.

Lease Term Example

Tex, an entrepreneur from Texas, has been quite successful as a “land man”. With a keen eye, a good team, and a little luck he has gained the mineral rights to several properties which are oil rich. Finding and tapping the natural resources that the land offers has created a mutually lucrative environment for both Tex and the property owners he leases from.

As a part of his business, Tex works with all kinds of leases. Based on his research, the work of his team of geologists, his legal counsel, and his sense of adventure, Tex decides which lease term options to take part in. Tex is now working with two property owners.

First Property Owner

One, Louie, has a property with a small well. This well, close to the surface of the land, can be easily accessed by the equipment Tex uses. Tex has encouraged Louie to get his land appraised so that the two men can make an agreement which benefits both parties. It is now time to negotiate the lease to the mineral rights of the land. At the table, Tex expresses that he is interested in an indefinite operating lease on Louie’s land. Tex thinks the well will be tapped within a couple years but wants to hedge his bet by keeping rights until the job is finished.

The two men agree and begin to decide on the terms of the lease. They decide on fixed payments, rights of use on Louie’s property, and that the lease will be at will. To ensure that he maintains use for as long as he needs, Tex includes a commission plan which gives Louie a percentage of the income made from the oil in this commercial lease term sheet. As Tex puts it, “you can catch a cow better with sweet feed than with sour grapes”.

Second Property Owner

Next, Tex begins talks with another property owner known as Okie. The two men meet at the table after each has performed the proper due diligence on the property. The findings indicate that there is little limit to the oil that can be gained from this property, though it is deep into the earth. Being a man with many projects, Tex opts for a capital lease rather than buying the property outright. This allows him to eventually own the property while gaining profits from it now.

Okie sees this as a fair trade and the two men begin the specifics of the agreement. They discuss duration until ownership is transferred, the amount of regular payments, and more. It is decided that Tex will start a balloon payment schedule, where he makes minimum lease payments until the end of the lease where he pays much of the property off in a large, final payment. He will sweeten the deal by paying slightly more to Okie for his property than he normally would. The two men agree and complete the lease term agreement.

Tex is satisfied with the two deals he made. He knows that each serves a certain place in his company. Tex also knows that he has given a fair deal to Louie and Okie. To Tex, everything has gone according to plan. He begins the cycle anew by reviewing an equipment lease term sheet that has been placed on his desk.

Lease Term

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