Distinction between Operating and Financial Lease, and Sale and Lease Back and Leveraged Lease.

Operating and Financial Lease:

Finance lease is a lease agreement in which substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee from the lessor. Where lessee is the person who acquired an asset from lessor for use and lessor is the person who is the owner of the asset and has handed over the asset to lessee to earn rentals. On the other hand operating lease is a lease agreement which is not a finance lease. In short, a lease agreement in which risks and rewards associated with the asset are not transferred to the lessee and stays with the owner of the asset i.e. lessor.

Even though the lessor is the rightful owner of the asset and most often owners are responsible to bear any loss and obtain economic benefits associated with the asset but sometimes the risks and rewards associated with the assets are transferred to another person by the owner himself without transferring the title of ownership of the asset. Same is the case with the finance lease.

Sale and Lease Back and Leveraged Lease:

Sale and Lease Back lease is an arrangement in which one party sells a property to a buyer and the buyer immediately leases the property back to the seller. This arrangement allows the initial buyer to make full use of the asset while not having capital tied up in the asset.

Leasebacks sometimes provide tax benefits. A leveraged lease is a lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased. The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the debtor has rights to the asset and the lease payments if the lessor defaults.