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I c e rtify that I have read this thesis and in my o p inion it is fijlly adequate, in scope and quality, as a thesis for t\ye degree of Master of Business Administration.
Assoc. Prof. Gökhan Qapoglu
I certify that I have read this thesis and in my opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration.
Assoc. Prof. Kür^at Aydogan
I c e rtify that I have read this thesis atid in my o p inion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration.
Assist. Prof, ur Mura d o g l u 9®rigül
A p p r o v e d for the Gradu a t e School of Business Administrati o n .
\ P ' L}'c^U^ ■ /
A SURVEY ON LEASING WITH S P ECIAL EMPHASIS ON PRACTICE IN TÜR K İ Y E
BY
S. GÜLAY GÜNER
SUPERVISOR: ASSOC. PROF. GÖKHAN CAPOGLU SEPTEMBER 1991
L00.sin9 cont ract· whore the lessor (owner) purchases an ?.sset
and t r ansfer its poss0 ss i o!i right to the lessee ( se r ) for a specified period of time in e x c h a n g e for a periodic rental payments. It is extensively used for investment financing all over
the world espec i a l l y in devel o p i n g countries. It has several
advantage-s in satisfying i ric r e as i rig capital needs of ccmpafiies
e s p e sially in i nf 1 at i oîiary economies. Leasing allows use of
eQuipmfent by the lessee w i t h o u t p u r c h a s i n g it a.ncl increases p r oductivity and profitability by allov/ing companies use scarce funds in more profitable i n v estments rather than fixed asset- pur chase .
It is introduced in Türkiye in 1 985 with the Law on Fina.ncial Leasing. I believe that leasing will be used widely in our country if the p r oblems arising from l e g islation are solved and the investors are more informed about it.
Keywords: Financial leasing» accounting, taxation, adv a n t a g e s of 1 e a s i n a ,
ÖZET
FINANSAL K İ R A L A M A VE T Ü R K İ Y E 'DEKİ UYGULA M A Y A
GENEL b i r BAKIŞ
S. GÜLAY GÜNER
"y' ü k s0 k Lisans T e 2 i > I $ 1 e t me E n s t- i t ü s ü
T02 Y ö n s t i c i s i : Doç. Dr. GÖKHAN ÇAPOGLU
Lsa.sing ya da. F i nansa. 1 K i ra. 1 a.ma. h0 rha.n9 İ bir ma. 1 ‘!n bir fi nansa 1 kiralama, şirketi t a r a f ı n d a n satın alınıp, kı.n Tanım hcikkının belirli
bir s ü re ve ö n ceden belirle r\ fi! i ş p e r i v o d i 1·. l·; i r a c* d e îiie Teri
k a r ş 1 1 1 Ğ 1 n d a k i r a c 1 y a d e / r e d i 1 d i 9 i bir s ö z 1 e s nıe d i r .
Tüm dünyada öze 1 ! i k 1 e .Amerika ve V r 1 J n ' ri l'ı p, r. C', i*; yel i şÎT;i s
ülkelerde yal1 1 *'■ 1 ¡T; 1 a r 1 n 0 r t a V a d e 1 i f i n a n s rn a n 1 n d a j ^ - ^1 ■.' P \·' 0 O ! ara!··,
k 1 j 1 1 m 1 Pi î'·^ ! e a. s i! ” i 9 ^ n^p-llii'lp e n f 1 a s y 0 n i s t P k 0 om i 1 e !' de ,
k u r ulusların her yeçen. gü.n a.f^tan i ^• letrne serrrıavesi ıhtı y a c 1 a r 1 n 1
k a r ş 1 1 a ^v·. aı d a a 1 ternat i f f i nansman yön t e H'i 1 e r i n e l·. a r ^: 1 büvü!·
a'/ a n t a j 1 a r saylar. L e a s i n 9 , e k i p m a .n 1 a r’ ı n. s a 11 rı a 1 1 n m a s 'i yer 'i n e , !·'. i r a 1 a n a·, r a. k. 1 1 a n 1 1 !T; a s · ile v 0 r i m 1 i 1 i ğ i n \' e a r 1 1 1 1 9 1 fi a r‘ t rrı a sı n d a önemli f' o I ü s 11 e n i r .
1985 y 1 1 n d a F i n a n s a 1 K i r a j ama K an u n ile T ü r k. i y e ' y e yele n
1 e as i ny i n bütün avantaj 1 a r 1 n 1 n k'j. 11 an 1 c 1 1 ara an 1 at 1 1 mas 1 ve
me V 2 u a 1 1 a n k a y n a k 1 a n a n s o r unların çöz ü m 1 e n me s i ile ü 1 [■. e m i 2 d e de
orta vadeli f inansman yc>ntemi olarak y a y 9 in bir şekilde
k u 1 lanı 1 acay 1 na i n a n ı y o r u m .
A n a h t a r k e 1 i m e 1 er: Fi n a n s a 1 ki r a 1 ama ^ muhasebe 1 eş t irilmes i > v e ro i avantaj 1 ar 1 .
I am grateful to Assist. Prof. Qokhan Qapoglu for his s'jperv i s i on and constructive c o mments throughcj.t the st'jdy. I woijld also like to express my thanks to the other mem.bers o^f the examining comm.ittee for their contribution.
AC K NOW L E DG E M E i>J T S
I a l s o t h a n k t o m.y f a ^ n i l y f o r t h e i r c o n t i nLic^us s u p p o r t and e n c o u r a g e m e n t d u r i n g tf'ie p r e p a r a t i o n c>f t h i s t h e s i s and t h r o u g h o i J t my 1 i f e .
TABLE OF CONTENTS A BSTRACT ... ... ... i i i ÖZET ... . . : ... ... . iv A C K N O W L E D G E M E N T S ... ... : ... v TABLE OF CONTENTS. ... ... . vi LIST OF T A B L E S ... ... . ... ... ix LIST OF FIGURES. ... ... ... ix 1 . INTRODUCTION ... 1 2 . L E A S I N G ... 3 / " 2.1. V'/hat i s Leasing ... 3 2 . 2 . How Leasi ng W o r k s ? ... . . . .. . . .. 3 2.3 . H i st or.y of Leas i ng . . . 0 - . . ... ... 4 2.4. Su.Hima ry ... r". ... ... 9 V3. LEASING I N D U S T R Y ... 10
^ 3.1. Won 1 d Leas i ng Indust ry ... ... 10
3 . 2 . Leasi ng in Dev e l o p i n g C o u n t r i e s ... . 14
3.3 . Types of Eq uİ pment to be Leased ... . 15
3 . 4 . S u m m a r y ... 10
4. TYPES OF LEASES. . ... 18
4 . 1 . True Lease Def i n i ti on ^ - ... * * 16
4.3. Lease Programs ... _ 24
4.4. S u m m a r y . ... ... ... .. ^ 25
5. A DVANTAGES A!^!D DISADV A N T A G ES OF LEASING. ... ... 27
5 . 1 . A d V a n t a g e s of Leasing.*...,,,,, . . . . . . 7
5.1.1. Lessee B e n e f i t s ... . . * . 27
5 . 1 . 2 . L e s s o r B e n e f i t s . . . * . ... ... . '^.4
5. 1 . 3 . Ad van tage s of Leasing for Tür!', i ye. ... 36
5 . 2 . Benefits of Leasing for the Lessee Economy in General 39 5.3 . D i sad vantages of Leas i ng ... . 40
5.4 . S L ! mma ry.*... ... ... ... 42
6. ACCOU N T I N G OF LEASES. ... ... ... a a 6 . 1 . Accoiuit i ng of Operat ing Lease. ... ... 44
6.2. Accounti ng of Capi tal L e a s e .... ... 45
5.3. The Impact of Accounting Treatm.ent of a Lease. ... 47
6.4. S>jmmar y ... ^'’9
7. LEASE EVALUATION. ... ... ... . ... 51
7, 1 .The Deri Vatican of the Lease Evalu a t i o n Formula. ... 51
7 . 1 . 1 . M y e s , Dill, and Baut i sta Model ( M D B ) ... . 51
7.1 .2. Franks and Hodges Formula for Lease Evaluation. 56 7 . 1 . 3 . Internal Rate of Return A n a l y s i s . ... 5S 7.2 . Choi ce of Eva 1 Licit i on Method ... . 60
7.3. Non-tax Related Factors. . ... ... . 6-2 7 . 3 . 1 . User C h a r a c t e r i s t i c s * .. ... . . * . . . * . . . . * . . . . 63
7 * 3.2 . L 0 s s o r C h a r 0. c 10 r i s t i c s ... . * . ... . . . 63 7.4. NuFT!0 r i c Exc.mp 1 0 ... ... 64 7.5. SumrTiary... . . . .. . . 67 8 . LEASING IN T Ü R K İ Y E . . . , ... . 68 8 . 1 .Int roduc1 1 on ... ... . 68 8 .2 . R 0 1 ateo L09 i s ’! a.t i on ... . 68 8 .3.1 nc 0 P: t i V0S ... ... ... . 7 3 8 .4 . A c c o u n t i n ö and T a. x a. t i o n ... . 7 5 8 . 5 . St· ructu T0 of Lea.sino Industry in Türk i yo . . . . 79
8.5.1 . Donıost i c L e a s i n g . . . ... ... . . 80
8 . 5 . 2 . C r o s s “ B o T' d 0 r Leasing. . . ... . . . 82
8 . 6 . Leasi ng I n s t i t u t i o n s ... ... 84
S . 1 .Current P raeti ce of Leasi n g ... . 86
8 . 7 . 1 . Domesti c Leas i n g ^ ... '.. ... 86
8 .7.2 . C r o s s - B o r d e r* L e a. s i n g ... ... . 88
8 . 8 . Some Problems of Leasing Indirstry in Turki ye ... . 90
9. SUMMARY AND CONCLUSICjN, q 2 R E F E R E N C E S ... ... . 98
LIST OF TABLES TABLE 1 ... ... ... 110 TABLE 2. ... ... ... . 1 1 1 LIST OF FIGURES FIGURE 1 ... ... ... . 1 1 3 FIGURE 2 . . . ... ... 114 FIGURE 3 . . . ... ... ... ... . 1 1 5 FIGURE 4 ... 116
The subject of this thes_is is leasing industry in general and in
Türkiye. It consists of both the theory and the application in
Türkiye. The theory side includes a c c o u n t i n g > taxation issues,
advantages of leasing over other types of financing^ benefits and
costs of leasing, and e v a l u a t i o n of leasing contracts. In the
applic a t i o n part the current situation in the leasing industry in Türkiye^ changes and developments^ legal aspects, and problems are a n a l y z e d .
Leasing^ one form of e q u i p m e n t financing, is very exten s i v e l y used in E'jrope and the U . S . The new leasing business vol im'ie in the U . S .
in 1989 was US$ 41 billion. The modern leasing started in 19th
century in the U.S. and spread to other co«jntries from there. T h e r efore descriptive parts usually related to the U.S. leasing companies. These parts included in the text to better explain the
subject. However, cases relevant for Türkiye are also provided
within the t e X. t.
1 . i n t r o d u c t i o n
Financial leasing was introduced in Türkiye in 1985 with the Law on Financial Leasing, the first company was e s t a b l i s h e d in 1986
and first leasing c o n t r a c t was signed a year later. The Turkish
leasing industry is very young but there was a big development
since 1987. Last year total rental receivables in d omestic leases
cross-bordor leases is 93 percent·. All these developments in this sector show th?.t the leasin9 industry has a. grea.t· potentia. 1 to grow. Within few years, it will become on^ of the most utilized ways of
equipment financing as it is now in de v e l o p e d coiintries. This is
2. LEASING
2.1. WHAT IS
A leasing is a contr a c t w h e r e i n > over the term of the 1ease> the
lessor (owner) permits the lessee (user) the use of an asset in
e x c h a n g e for a promise by the latter to pay a series of lease
payments. Most corp o r a t e financial executives recognize that
e a r n i n g s are derived from the use of an asset, not its ownership, and that leasing is simply an alternative financing method (Nevitt, Peter K. and Frank J.Fabozzi, 1988).
2.2.HOW LEASING WORKS?
A typical leasing t r a n s a c t i o n works as follows. The user-lessee
first decides on the e p u i p m e n t needed. The lessee then decides on the manuf act ure r , the m.ake and the model. The lessee specifies any special features desired, the term.s of the warranties, guaranties,
delivery, installation, and services. The lessee also negotiates
the price. After the e q u i p m e n t and terms have been specified and the sales contract negotiated, the lessee enters into a lease
a g r e e m e n t with the lessor. The lessee negotiates with the lessor
on the length of the lease; the rental ; v^hether sales tax, delivery, and installation charges should be included in the lease; and other optional c o n s i d e r a t i o n s .
rights to the lessor, which then buys the equipment exactly as
specified by the lessee» When the prope r t y is delivered, the
lessee f o rmally accepts the e quipment to make sure it gets exactly
what was ordered» The lessor then pays for the equipment, and the
lease goes into effect. Rentals are usually net to the leasing
com,oany» Except in sho r t - t e r m o p e rating leases, taxes, insurance, service, and m a i n t e n a n c e are the r e s p o n s i b i 1 ity of the lessee and may not be deducted from rentals.
At the end of the lease term., the lessee usually has the option to renew the lease, to b'jy the equipment, or to terminate the agreement and return t.he equipme.nt (Nevitt, Peter K. and Frank J.Fabozzi, 1988).
2.3.! OF LEASING
Leasing of personal property has e x p e r i e n c e d rapid growth in the United States, Europe, and Asia over the past two decades and is generally thought of as a relatively new device for financing
capital equipment. However, leasing is actua l l y a very ancient
form of commercial transaction. Modern leasing has roots that date back t h o u sands of years.
The earliest· record of equipment·' leasing occurred in the ancient
Samar i an city of Ur in about 2010 B»C. These leases involved
rentals of agr i cul tural tools to farmers by the priests who were»
in effect, the government officials. Ur was a thriving commercial
center, and both land and tools were leased.
Later the ancient Egyptians engaged in leases of both, perso.nal
ijroperty and real property. The Greeks and Romans also leased
perso.nal property and in about 5-50 A.D. the Justinian Codex went so far as to distinguish between, finance leases and s hort-term rentals of equip.ment.
For hundreds of years personal property leasing was not recognized
under English common law, although, real property v*^as leased
e.xtensi ve 1 y . Under E.ngli sh common law, the p ossession of personal
p r operty im.plied ownership. Eventually, the English courts also
recognized the need for commercial use of personal property by nono w n e r s and developed a law of bailments based on European law.
The first recorded leases of personal property in the United States seem to have been leases of horses, teams of horses, buggies, and v^agons by liveryman or livery stables in the 1700 s. Modern e q u i p m e n t leasing in the United States had its s ignificant b e g innings in the 1870s in c o n n e c t i o n with the financing of barges, railroad cars, and railroad locomotives under e q u i p m e n t trust c e r t i f i c a t e s .
Consumer leasing in the United States began on a large scale with leases of sewing ma c h i n e s by Singer Sewing M a c h i n e Company. Vendor leasing began to evolve in the 1920s as m a n u f a c t u r e r s sought to encourage sales of their equipment. One form of short-term, lease involved the lease c'if equipment v/ith an c>perator> such as a truck
with a driver or construction e quipment with an operator. These
leases were called operating leases because an operator was
furnis.hed. Over time, the term c>perating lease has come to refer
tc^ a wide variety of short-term leases.
In 1 954, U.S. Leasing Corporat i o.n, e s t a b l i s h e d by Henry Schoenfeld, became the first com.pany formed to en g a g e in genera.l equipment- leasing. In 1956, Boothe Leasing C o r p o r a t i o n was formed to engage in General e q u i p m e n t leasing. General E l e c t r i c Credit Corporation, Commercial Credit Corporation, and National Equip.ment Leasing Corporation began to engage in the leasing of the personal property
in the 1950s (Nevitt, Peter K. and Frank J.Fabozzi, 1988).
In 1959, in the f irst of many ventures into f o reign markets, U.S. Leasing Inc. p a r t i c i p a t e d in a joint v e n t u r e leasing com.pany in
Canada called Can a d i a n Do.m.inion Leasing Corporation. In 1 960,
leasing .moved to Europe when U.S, Leasing Inc. and Mercantile
Credit Company e s t a b l i s h e d the first Brit i s h leasing company. In
1961 the first leasing companies were st a r t e d in Italy and France
had been e s t a b l i s h e d in most of the major West European countries. Several A u s t r a l i a n leasing c ompanies commenced trading in the early 19 6 0 s .
The pop u l a r i t y of leasing at that time can be attributed to several factors: it provided up to 100 percent finance, flexi b i l i t y in timing and amounts of rental payments, and financing on a basis a p p r o p r i a t e to the life or income generation potential of the
equipment. The main competition was me d i u m - t e r m bank loans, yet
with a g g r e s s i v e lease miarketing, c ustomers often found that it was faster and simpler to deal with a leasing company than with a bank.
In some countries, such as the U.S., Canada, the U.K. and Au s t r a l i a a favo r a b l e tax environment further stimulated the growth of
leasing. By 1963, the U.S. Co m p t r o l l e r of Currency had decided
that banks and industrial c o r p o r a t i o n s could enter the leasing ind'jstry and large numbers of nev^ lessors were established by both
banks and commercial and industrial c o r p o r a t i o n s . Prior to that
time, banks had invested in e q L n p m e n t trust certi f i c a t e s and
dis c o u n t e d receivables under financial leases w r itten by
in d e p e n d e n t leasing companies (Porter, David, 1991).
The A m e r i c a n Association of Equipment Lessors was formed in 1962
as a trade association to promote leasing and to monitor federal and state laws and regulations a ffecting leasing.
A very major event of the late 1960s v.'as the d e v e l o p m e n t of modern leveraged lease s t r uctures in which the lessor provided only a portion of the purchase price of the asset} borrowed the remainder from i ns t i tLit i ona 1 lenders on a nonrecourse basis, but claimed tax benefits on a 100 percent of the purchase price of the leased equ i n m e n t .
Until the early 1970s, leasing remained something of a novelty for
most companies. Altho»jgh most airlines and railroads utilized
leases in financing major portions of their eqLiipment needs, most nontransportation comp a n i e s still did not 'utilize leasing except for s h o r t “ term operating leases of comp'uters, office copiers, and tra n s p o r t a t io n equipment. Equipment leasing V'/as regarded as " Iasi·“"
resort f i n a n c i n g ” that a company did not use so loîig as
conventional f i nanc i ng was available ( ev i 11 > Pete r f.. a.nd F !'*ank J .F a bo z z i , 1988).
Today all kinds of office equipment, computers, cars, aircraft,
agricultural toc>ls, can be a s'jbject of a lease a.greement.
Moreover, some industrial com.panies do not sell their products, instead they lease and provide the necessary ma i n t e n a n c e and repair services, and change the e q u i p m e n t with the new one when there is a technological i m p rovement in the prod'uct in question (Arikel, Nazi 1 , 1986) .
Leasing ca.n be defined a.s a. contract where the lessor purchases the equipment· and gives it to the lessee who will use it in the operations and pay the lessor rentals for the ijse of the equipment ,
for a period of time specified in tfie contract. In 19th century
modern leasing was first introduced in the U.S. and thereafter it spread to other countries, especially ELJropea.n ones. The favorable leoal struct'jre and tax treatment in these countries helped the growth of their leasing industry.
2 . 4 . S U M M A R Y
It was -Started as leasing of t r a n s p o r t a t io n equipment. Hov^ever,
today all kinds of office equipment, computers, cars, airlines, railroads, medical equipment, agricultural tools, and even the labor can be leased.
3. LEASING i n d u s t r y
3.1. WORLD LEASING INDUSTRY
Leasing is a very popular form of financing in developed countries. The following table shows leasing as a percentage of all equipment
investments in stated countries:
C o n t r i e s F i n 1 ci n d USA 11 a 1 y Un i ted Ki ngdom Sweden France Leasing as proportion to all i nvestments 35.9 30.0 1-8.0 16.5 6.7 5.2
In Türkiye this number is very close to 1 percent which so low for
the time being. But it will increases day by day as nev^' compa'iies
Table I LONDON FINANCIAL GROOP GLOBAL LEASING REPORT ( Ranked by Volume ) ANNl lAI (US $ VOLUME BILLION) % GROWTH (1988-1989) % MARKET. PENETRATION 1 UNITED ST.ATES 122.40 8.6 3 3.0 2 JAPAN 53.94 5.2 10.0 .3 GREAT BRITAIN 20.. 26 23.0 2 3.5 4 FRANCE 19.9? 14.8 19.7 5 GER.MANY 18.26 13.5 17.8 6 ITALY 12.12 21 .2 14.7 7 SPAIN 9.85 19.1 27.0 8 A USTRALIA 7.27 16.0 30.0 9 CANADA 3.89 (4.3) 9.3 1 0 NETHPPI AND."^ 3.44 25.9 17.4 1 1 SWEDEN 3.44 46.5 20.0 12 KOREA 3.1 0 13.3 10.9
1 3 SOUTH. AFRICA 2.74 3.4 n/a
1 4 CHINA 2.00 66.7 1 .7 1 5 HOMn KONr; 2.00 29.0 4 5.0 16 AUSTRIA 1 .92 1 3 . 3 13.3 17 BELGIUM 1 . 68 39 . 1 8.3 1 8 INDONESIA 1 . 50 68.8 n/ 8. 19 SWITZERLAND 1 . 43 13.8 9.8 20 DENMARK 1.24 · 57.7 11.0 21 BRAZIL 1.18 39.2 n / a 22 IRELAND 0.98 80.2 28.4 23 PORTUGAL 0.91 19.4 1 0.0 24 FINLAND 0.88 (7.5) 2.8 25 TAIWAN 0.62 14.6 3.5 26 ME.XICO 0.52 33.3 n/ a 27 MALAYSIA 0.51 0.0 n/ a 28 INDIA 0.50 0.0 n/a 29 VENEZUELA. 0.42 (51.3) n / a 30 ISRAEL 0.40 0.0 7 . 1 31 NORWAY 0.40 (49.9) 4.4 32 USSR 0.40 n/ 8. n/a 33 HUNGARY 0.30 0.0 n/ a 34 SINGAPORE 0.26 22.2 n / a 35 TURKEY 0.24 400.0 n/a 36 LU.XEMBOURG 0.19 168.8 9.0 37 CHILE 0 . 1 7 2 4 . 3 1 0 . 0 Total 3 0 2 . 4 6 1 0 . 6 6
Source: LFG Global Leasing Report. This table was prepared by London Financial Group, London, UK. association with the World Leasing Yearbook.
The leasing figures for the years between 1 978 and 1988 in the United K i n g d o m were given in the appendix.
By 1980s financial leasing has been accepted as a major source of e q u i p m e n t financing. By the late 1983 the financial leasing volume has reached to US $ 61 billion and 28 percent of all investments are f i n a n c e d through leasing. In 1983 the financial leasing volume has reached to 19,6 billion ECU in Europe (Üzeler, Mus t a f a and
Doğan Cansızlar^ 1987),
During 1989 the world-wide leasing industry surpassed US$ 300
billion in annual volume for the first time. The growth rate in
1989 was 10.6 percent. In 1988 the industry grew by 21,5 percent
and at an average rate of 22,5 percent per annum over the 1 983- 1988 peri od (P o r t e r , Davi d ^ 1991),
In d e v e l o p e d countries the share of investm.ents realized through
leasing in total investments is larger than in developing
countries. With an annual leasing volume of U8$ 122,4 billion^
the U.S. takes the first place. The most important factor c o n t r i b u t i n g to the growth of the leasing industry is the tax
a d v a n t a g e s provided by the authorities. Moreover, vendor leasing
is seen very extensively in the U,S, since almost all big
m a n u f a c t u r i n g companies either have a financial leasing depart m e n t v^ithin their bodies or p a r ticipate in financial leasing companies.
there is no special law regulatinG financial leasing activities which a.re carried out within the frainework of cornmirn i piies issi^ed
by tax authorities* Also^ Japan Development Bank and Exirriba.nk
c o n tribute to the deve 1 c'>pment of leasing industry by providing low interest bearing loans to financial leasing companies.
In the U*K* leasing was started to be «jsed as a form of finance
extensively in 1950s. There is no special law regulating the
financial 1 e as i n g act i i t i e s w h i c h a re c a r r i e d ou t w i t !i i n the framework of Tax Code, EC decisions, Com.muniques issued by Leasing Union, and Decrees a begirt crc'^ss-border leasing issiied by Uni droit*
In South Korea financial leasing was first introduced in 1972 with
the establishment of Korean Industrial Leasing Co. the
shareholders of which are Korean Development Bank and M anufacturers Trust Co* South Korea is one of the countries having a special law
for leasing* This lav/ brings about some limitations on the
a ctivities of leasing companies as it is the case in Türkiye*
Also, there are several incentives, most of which are tax
advantages, given to the leasing c-ompanies with the aim of developing the leasing industry ( A n k e l , Nazlı, 1986).
The most important- participant in the leasing industries of over 20 developing coijntries has been International Finance Corporation
(IFC), the private sector arm of the World Bank. IFC chose Korea
for its fir-st venture» and in the mid-1 970s Korea Development- Leasing C o r p o r a t i o n was set up with technical a-s-si-stance from
0 r i e n t Leasing Co. of -Japan. -Since 1 977, IFC a s c o n d c t e d
r0 s0 ^ C-h into the feasibility of e s t a b l i s h i n g leasing industries or supporting fledgling industries in m.any developing countries.
3 . 2 . l e a s i n g i n d e v e l o p i n g c o u n t r i e s
By 1989 I F C ’-s interest in leasing had helped to create or develop
leasing in Bangladesh, Botswana, Brazil, Colom.bia, Dom.inican
Republic, Ecuador, India', Indonesia, -Jordan, Korea, Malawi,
Pakistan, Peru, Philippines, Portugal, Sri Lanka, Thailand,
T ij n i -s i a , and T ü r k i y e .
IFC will act initially as a project catalyst, bringing together technical expertise, financial backers and domestic- sponsors. I F C ’s -status with governments and regulatory authorities helps to create a f a v o r a b l e regulatory fram.ework, if this is necessary, for
a new leasing industry. IFC will provide both ecjuity and loan
finance to the new ventures and will assist each new company vnth its funding generally. With e x p e r i e n c e gained, IFC now acts as an advisor to a o v e rnment-s and regulatory a u t horities in developing
coun t r i e s w i shing to esta b l i s h a ppropriate regulatory framev^orks for leasing (Porter, David, 1991).
3.3, :S OF EQUIPMENT TO BE
Both t a ngible and intangible goods can be leased. We can classify the ta n g i b l e goods that can be SLibject to a leasing agreement in three g r о <j p s :
a.l C o n s u m e r goods: Household appliances, communication equipment, t r a n s p o r t a t i o n vehicles.
bl Inv e s t m e n t goods: These are for industrial and commercial Lise
i^uch as transportation v ehicles (automobiles, const ruction
eq'j i p m e n t , t rucks ) , faci 1 i ti es ( computer systems , f ac i 1 i t i es for e n v i r o n m e n t protection), and equ i p m e n t s (lab equipments, quality control equi p m e n t s ).
cl Immovable: Warehouses, factories, cleaning and service plants. The i ntangibles include trademarks, tradenames, patents (Acba, Sai t , 1 986 ).
A c c o r d i n g to available world data on financial leasing the
fo l l o w i n g goods are usually subject to a leasing agreement: - tra n s p o r t a t io n vehicles
- of f i c e equipment - commLin i cat i on media
- m a c h i n e r y used in agri c u l t u r e - c o n s t r u c t i o n machines
- oil-well drilling equipment - printing machines
- medical equipment
In Türkiye automobiles constitute the largest portion of the total
dom e s t i c leasing volume each year. According to Article 5 of
Financial Leasing Law the lease of intangible goods like patents is not possible.
3.4.SUMMARY
Leasing is a very popular form of financing in developed coLmtries. Annual leasing volume in the U.S. increased by 8.6 percent as compared to previous year and reached to US$ 122.4 billion in 1 9 8 -^ The growth in world-wide leasing ind'jstry was 10.6 percent in 1989 and average growth was 22.5 percent over 1983-1988 period.
The T u r k i s h leasing volume grew by 400 percent in 1 989. Since it
iş a very young industry it grew very fast. The Gulf crisis
aff e c t e d leasing negatively as it affected every other bLisiness. Despite this negative effect leasing companies expect that this year leasing volume will be doubled.
The leasing industry of most developing countries was e s t a b l i s h e d by IFC> the private sector arm of World Bank. IFC plays three main
c o ij n t r 1 e s :
- -bringing potential pa.rties to a leasing agreement together, - p roviding finance to new v e n t u r e s >
- playing an advisory role to related authorities in
establishiing a-ppropriate regulatory framework.
By playing these roles, IFC helped leasing spread to developing
The lease definition is important· for accoijntinG and tax purposes since full amount of the annual lease payment is a dedijctible expense for income tax piir poses provided the Internal Revenue •Service (IRS) agrees that a p a r ticular contract i-s a genuine lease
and not sim.ply an i nstal 1 m.ent lc>an called a lease. This makes it
im.portant that a lease contract be written in a form acceptable
to the IRS. The following are the major factors that are examined
to d e termine whether a given contr a c t is likely to be c l a s sified as a bona fide lease transacticMi from, thie sta.ndpoint of the IRS:
1 . The term, or years involved i.n the lease, mirst not be less than 75 percent of the life of thie asset; o therwise the lease
is likely to be regarded as a sale for tax purposes.
The rent must provide a reaso.nable rate of return to the lessor in relation to rates of return on loans.
•3. The renev^al option rriust be bona fide> and this requirement can best be met by giving the lessee th.e first option to m.eet an equal bona fide outside offe,>^.
4. There should be no repurchase option; if there is, the lessee should merely be given parity with an equal outside o f f e r .
The reason for the I R S ’s concern about these factors is that, w i t h o u t r e s t r i c t i o n s , a com.pany could set up a "lease transaction
calling for very rapid p a y m e n t s > which would be tax deductions.
The effect would be to depreciate the equipment· over a m.uch
shorter period than its irseful life (Brigham, Eugene F. , 1 983).
A lease agreement that· transfers s u b stantially all the benefits and risks associated v-'ith o wnership to the les-see is ci c^.pitsl 7ea-se. The impact of capital lease on the financial sta.tements is
se if, at inception,
the same as a purchase. It is a capital leas
it is n о ГК ance 1 1 ab 1 e and meets one or more of the following c: о n d i t i о n s :
1 . The lease a greement transfer's ow n e r s h i p of the property to the lessee at the end of the lease term.
2. The lease contains a purchase option that allows the lessee to purchase the leased property at a price sign i f i c a n t ly below the fair market value of the property at the option date. •3. The noncance 11 ab 1 e lease period equals or exceeds 7 5 percent of the econo m i c life of the leased property.
4. Thi^ present value of the m. ini mum lease payments equals or exceeds 90 p e rcent of the fair market value of the property, less any related investment tax credit retained by the lessor (Benke, Ralph L. Jr. CMA and Charles P. Bail, 1990).
An o D o r B t i n o Ig b s s has little impact on les-see’-s financial ratios
because no additional debt or asset is reported. But a capital
to the present value of the minimum lease paym.ents. The monthly lease payments include implicit interest in the lease payment and
principal reduction portion of the lease payable. Also>
COrresponding depreciation should be recorded. In addition to
these, FASB recji_n res the following information to be disclosed on the financial statements of the lessees with capital leases:
1. The gross amount of assets recorded under capital leases as c>f the date of each balance sheet presented by major
classes according to nature or function. This information
may be combined with the comparable information for ov^ned a s s e t s .
2. Future minimum lease payments as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal years individually, with separate
deductions from the total for the am.ount representing
executory costs, including any profit thereon, included in the minimum, lease paym.ents and for the amount of the imputed interest necessary to reduce the net m.ini.mum lease paym.ents to p.resent value.
3. The total minim.um. sublease rentals to be received in the future under noncancel 1able subleases as of the date of latest balance sheet presented.
4. Total c o n tingent rentals (the increases or decreases in lease pay.ments that result from changes occurring subsequent to the beginning of the lease in the factors on which lease payments are based) actually incurred for each period for
which an income statement- is presented*
A leveraged les.se^ or third-ps.rty leciso^ involves a third party (a
lender) in a d d i t i o n ·to the lessor and the lessee* The lessor
borrows parts of the a s s e t ’s purchase price from the lender, and the lease rentals are »used to service the loan, any excess 9oing
to the lessor. Both the d e p r e ciation (for tax purposes) and the
investment tax credit on the asset are allocated to the lessor. The loan is on a nonrecourse basis, i .e. the lender has a claini a gain s t the a s s e t a n d t- !'i e lease rental s i f tli e r· e is d e f a t o n t h e
loan b'Jt thie lender may not demand additional payments from the
lessor. Therefore, even in the unlikely event that the asset
becomies worthless and the lessee becomes bankrupt, the most that the lessor could lose would be the down pciyment that was made in
p urchasing the asset. Of course, the loan will carry an interest
rate which adequately compensates the lender ‘for the risks
i n V o 1 V e d .
In a net lease the rent payment is "net" i*e. the lessee pays m a i n t e n a n c e costs, insurance, and property taxes.
Under a full-service lease the lessor m.aintains and insures the asset and pays property taxes on the asset. This is similar to a
ma i n t e n a n c e lease, which obli g a t e s the lessor to provide
m a i n t e n a n c e services. A f u l I - s e r v i c e lease is the opposite of the net lease (Haley, Charles W. and Lawrence D. Schall, 1988).
Under a sal e-and-lesiseback arrangement·, a firm that own-s land, buildings, or eqijinment sells the property to another firm and s i m u l taneously executes an agreement to lease the property back for a -specified per^iod under specific terms (Brigham, Eugene F. and Louis C. Ga.penski , 1 987 ).
Through a sal e-and-leaseback agreem.ent a business ret a. ins the use of the ecjuip.ment while disposing of ownership. The reasons for entering such a.n agreement can be following:
1 . to provide working c a p i t a l ,
2 . to generate a book or ta.xable profit where the fair ma.rket value of the equipment exceeds the depreciated value in the u s e r ’s a.ccоli n t s ,
3 . to refinance on a medi u m - t o - 1 ong term basis if the original purchase of the equipment was financed with short term funds, 4 . to reduce financing costs by refinancing at a lower
implicit interest rate»
This last item can be possible if the equipment is eligible for some investment incentives and/or tax benefits but the original owner (the user) is not in a position to utilize them» Under these c i r c u m s t a n c e s the user passes such benefits to the leasing company along with the title to the equipment, and the leasing company r e ciprocates by leasing at low rental rates.
In B. closod ond locisç t h 0 r0 is no cIb.u s o in th0 100.90 0.9 r00m 0 nt to
pass th0 ownsrship of ths propsrty to tho I0 SS00 at ths and of ths
l0 as0 torrn» Full risk of rssidual valus loss rssts v-nth ths
10 s s o r .
In an opoD o nd Igb.s s ths Isssss has a purchase option to be
exercised at the end of ths^ lease terrn* The lessee either
exercises this option c*r pays the guaranteed residual and the ownership of the assent passes to the lessee. In such a lease
residual val'ue risk is shared between the lessor and the lessee.
In a psr c o n t s g e the lessee should pay a percentage of the
profit made in the previous period in addition to the rental
payments if the revenue exceeds a specified m.inimum value. S'jch
agreements are usually structured for long term leases to be hedged against inflation risk ($en, Me Ida).
There is another lease definition for a ccounting and tax purposes. With a true lease the lessor retains the tax benefits of ownership
and the lessee deducts the lease rentals for tax purposes. The
lessor claims the depreciation and owns the leased equipment at the
end of the lease. Even if two parties regard an agreement as a
lease, the a greement is a true lease (i .e. a lease for tax pijrposes) only if it conforms to certain guidelines set forth in
the law. O t h e r w i s e the transaction will be treated for tax
4»3»LEASE PROGRAMS
Lessors can structure lease t r a n s a c t i o n to suit the needs of most
companies. Examples of various lease program.s available are
described below»
A standard lease provides 100 p e rcent long term financing with level payments over the term of the lease» Standard documentation fa c i l i t a t e s quick handling and closing of the lease transaction.
o f t h e i n t e n t o r d e s i r e s o f t h e l e s s o r a n d t h e l e s s e e »
A cu s t o m lease contains special provisions designed to meet
p a r ticular needs of a lease» It may* for example, schedule lease
rjayments to fit cash flow» Such a lease can be particularlv
helpful to a seasonal business»
A master le a s e works like a line of credit» It is an agreement
that al low's the lessee to a c quire during a fixed period of time assets as needed withoi't having to renegotiate a. new lease contract for each item» With this arrangement, the lessee and lessor agree to the fixed terms and c o n d i t i o n s that will apply for various c l a s s i f i c a t i o n s of e q u i p m e n t for a specified period, usually six months to one year» At any time within that period, the lessee can add e q u i p m e n t to the lease up to an agreed maximum, knowing in
A vendor__1 ease program, designed as a sales tool for equipment manufa c t u r e rs or d i s t r i b u t o r s , permits suppliers to offer financino
in the form of true or conditional sale leases.
An o ffshore lease is an a g r e ement to lease equi p m e n t to be used
outside the United States. O ffshore lease programs offer leases
calling for payments in U.S. dollars or local currencies for equi p m e n t 'used abroad.
Under a f ac i 1 i ty 1 e a s e , a.n entire facility-a plant and its
e quipment- can be leased. Under this arrangement a lessor m.ay
provide or arrange c o n s t ruction financing for a facility. Interest costs during construction can often be capitalized into the lease. The lease commences when the completed facility has been accented by the lessee.
Lease agreements designed for specific assets are also available. For example, computer leases permitting additions of memory core, upgrades, and special features during the course of the initial lease can be arranged.
4.4.SUMMARV
All types of leases desc r i b e d in sections 4.2 and 4.3 are not
being present in Turkish leasing industry. Since lessee pays full cost of equipment and the interest implicit in the lease the transfer of ownership at the end of the lease term is requested by the lessee. Therefore operating lease and closed end lease are not relevant for* Türkiye.
The leases are of the net lease type i.e. the lessee pays m a i n t e n a n c e costs^ insurance and p r operty taxes, so full-service
lease, oppc^site of net lease is not used in our country.
Lease types that are relevant for T ü r k i y e are: - Domestic leasing
- C r o s s - b o r d e r leasing - S a 1e - a n d - 1easeback - Sales aid leasing
S a l e - a n d - l e a s e b a c k and sales aid leasing (vendor leasing) are desc r i b e d above and domestic and cross- b o r d e r leasing will be e x p l a i n e d in detail in section 8.7,
5.ADVANTAGES AND
5.1 .ADVANTAGES OF L
GES OF LEASING
The advantages cited for leasing are often based on a comparison between leasing and purchasing Lising borrov/ed funds on an i n te rme d i ate basis,
5 . 1 . 1 . LESSEE BENEFITS
C o s t : Many lessees find true leasing attractive because of its
apparent low cost. This is particularly evident v^here a lessee
cannot currently use tax benefits associated with equipment ownership due to such factors as lack of currently taxable i n c o m e > net operating loss c a r r y f o r w a r d s , or being subject to alternative minimum tax.
From a tax perspective» leasing has a d v a ntages under the fol levying ci rcum.stances that lead to a reduction in cost:
1. A company m.ay be in a tax loss c a r r y f o r w a r d position and consequently be unable to claim tax benefits associated with equipment o w n e r s h i p or for several years in the future.
2. A company may be subject to a l t e r native minimum tax and, therefore be unable to make e f ficient use of accelerated cost recovery sy s t e m depreciation dedLictions.
3. Leasing is ideal for joint venture partnerships in v/hich tax benefits are not available to one or m.ore of the
joint-v e n t u r e r s b e c a u s e o f t h e p a r t i c u l a r t a x s i t u a t i o n o f one o r more o f t h e j o i n t v e n t u r e p a r t n e r s . I n s u c h c a s e s , t h e l e s s o r may u t i l i z e t a x b e n e f i t s t h a t w o'j ld o t h e r w i s e be w a s t e d and p a s s t h r o L ig h t h o s e b e n e f i t s t o t h e j o i n t v e n t i i r e r s i n t h e f o r m o f l o w e r l e a s e p a y m e n t s . 4. Leasing a l s o w o r k s w e l l f o r p r o j e c t f i n a n c i n g s s t r u c t u r e d t h r o L jg h s u b s i d i a r i e s n o t c o n s o l i d a t e d f o r t a x p u r p o s e s a n d , c o s e C| Li e n 1 1 y , not Li sli a 1 1 y i n a p o s i t i o n t o c l a i m a. n d Li s e t· a x b e n e f i t s fr om e q L iip m e n t a c q u i s i t i o ns .
5 . A company with foreign tax credits may find it difficLilt to claim tax dedLictions and any available tax credits Linder the tax formLila for cla.iming the foreign tax credit.
6 . V/here c o s t s o f p l a n t and eqL iipm ent e x p e c t e d t o be f i n a n c e d by t a x - f r e e i n d L i s t r i a l r e v en Li e bond s e x c e e d s t a t L i t o r ' y l i m i t s , e q u i p m e n t ca n o f t e n be a c q u i r e d thro ug i'i a l e a s e t o k e e p t h e r e m a i n d e r o f t h e p r o j e c t w i t h i n t h e bond l i m i t s . T h i s i s v e r y i m p o r t a n t i n p r e s e r v i n g t h e t a x - f r e e c h a r a c t e r i s t 1 c s o f t h e b o n d s .
Sa l e - a n d - Leasebacks to Lock in Deferred_T a x : Comp a n i e s c o ncerned that tax rates may rise in the fLiture may wish t o do a sale-and-
leaseback of property that is subject to a large d e f e r r e d income
tax liability resulting from prior accelerated d e p r e c i a t i o n
dedijctions, in order to "lock in" the fLitijre deferred taxes at the current rate. The lease rate may, of coijrse, reflect the l e s s o r ’s
W 0 T0 to ind0 rnnify th0 lossor for futuro tax ra.to cha.ngos, tho 0 conomics would bo loss a.ttractivo for tho lossoo.
C o ns0 rV at i o n o f o r k i ng Cap j ta 1 - Tho most f roqljont advantago ci tod
by loasing company roprosontativos and lossoos is that loasing
oonsorvos wof*^king capital. Tho roasoning is as follows: Whon a
firm borrows money to pLirchaso oqLnpmont> tho lending institution very rarely provides an amount equal to tho entire price of the
asset to. be financed. Instead, the lender reqijires the borrov^ing
firm to take an equity position in th.e asset by making a down payment (The IRS does not permit an investment by the lessee in any
event). Moreover, costs incurred to acqLiire the equipment, such
as delivery and installation charges, are not usually covered by
a loan agreement. They m.ay, however, be structured into a lease
a g r e e m e n t .
The validity of this argument for f i n ancially sound firms during
normal econo m i c conditions is questionable. Such firms can simply
obtain a loan for 100 p^ercent of the equipment or borrow the down payment from another source that provides unsec.ired credit. On the other hand, it ‘is questionable that the funds needed by a small firm for a down payment can be borrowed, p»art i cul ar 1 y during tight
m.oney periods. Also, some leases do, in fact, require a dc-wn
p a yment in the form of advance lease payments or security deposits at the beainninc c^f the lease term.
P reservation of Credit Capacity by Avoiding Capi t a l i zati o n : P r i o r
to 1973 financial reporting standards did not mandate the
d i s closure of lease obligations. Thus, leasing was commonly
referred to as "off-balance sheet financing". Current financial
reporting standards for leases repuire that lease obligations cla s s i f i e d as ca.pital leases be capitalized as a liability on the
balance sheet. Ac c o r d i n g to FASB Statement N o . 13, the principle
for classifying a lease as a cafi· i ta 1 lease for f i na.nc i a 1 reporting purposes is as follows:
A lease that transfers substantially all the benefits a n d risks incident to ownership of p r o p e r t y s h o u l d be accounted for as the acquisition of an asset and the incurrence of an obliga.tion by the lessee (Nevitt, Peter
K . and Frank J .F a b o z z i , 1988).
Manv chief financial officers are of the opifiion that avoiding capitalization of a lease will enhance the financial image of their
c o r p o r a t i o n s . In a 1 979 stLidy sponsored by the National
Assoc i a t i o n of A c c o u n t a n t s and the Society of Management
A c c o u n t a n t s of Canada, the investigators interviewed tvwo bond
raters. They asked the raters whether the FASB requirement
produ c e d lower bond ratings if a firm now had to capitalize its
lease whereas it did not prior to Statement N o . 13. The r a t e r s ’
response was that because they had alrea.dy c apitalized the leases prior to the statement, the requirement did not produce lower bond rati n g s .
Risk of Qbsoles cence and Disposal of Egu i prrient-: When a firm owns eq«jipment, it faces the possibility that at some future tim.e the asset may not be as effi c i e n t as more recently manuf acti^red equipment. The owner may then elect to sell the original equipment and purchase the n e w e r > more t e c h n o l ogically efficient version. The sale of the equipment, however, may produce only a small fraction of its book value^ By leasing, it is argued, the firm may avoid the risk of obsolescence and the problems of asset disposal. The v a lidity of this argument depends on the type of the lease and the p rovisions therein.
With a cancellable lease, the lessee can avoid the risk of
o b s o l e s c e n c e by terminating the contract. However, the avoidance
of risk is not vnthout a cost since the rental under such a lease a r r a n g e m e n t reflects this risk perceived by the lessor.
The risk of disposal faced by some lessors, however, may not be as
great as the risk that would be e n countered by the lessee. A
m a n u f a c t u r e r - 1 essor has less investment exposure since its
m a n u f a c t u r i n g costs will be signif i c a n t ly less than the retail
price. Also, it is often equipped to handle reconditioning and
redesigning due to technological improvements. M o r e o v e r , the
m a n u f a c t u r e r - 1 essor will be more active in the resale market for the e q u i p m e n t and thus be in a better position to find users for equi p m e n t that may be obsolete to one firm but still satisfactory
faced by the lessee, is presumably passed along to the lessee in the form of redLiced lease
cost·-Res t r i c t i o n s o n M a n a. o e me n t : When a lender provides funds to a firm for an extended period of time, provisions to protect the lender
are included in the debt contract. The purpose of protective
provisions, or p r o t ective covenants, is to ensure that borrower >remains credi tv^orthy d'jring the period over Vi'hich the funds are
borrowed. Prote c t i v e provisions impose restrictions on the
bor r o w e r .
An advantage of leasing is that leases typically do not im.pose financial cove n a n t s and restrictions on management as does a loan
aareement. Leases may contain restrictions as to location of the
property and additional i nvestrrients by the lessee in the leased equipment in order to ensure com.pl iance with tax laws.
F 1 ex i bi 1 i t.y and Conven i ence :
1. Tailor-Made Lease Payments Lease pay.ment schedules can sometimes be designed to meet the specific needs of the lessee. For example, lease payments can be reduced or not s cheduled during the period when thé firm has its greatest needs for working capital. Payments can be set higher during the later years of the lease and lower in the earlier years w here the l e s s e e ’s o bjective is a low present
i n t h e same wa y , i t i s g e n e r a l l y d i f f i c u l t t o d o s o .
2. Speed in Obtaining Financing A lease for small-ticket item can generally be arranged more quickly than financing with other
sources of intermediate term debt. Dociumentati on is usually
simpler for closing leasing deals than for other a r r a n g e m e n t s . However, when 1 arge-ticket items are financed using a leveraged lease, it may take just as much time, or possibly longer, to put- together an acceptable package for all parties as it would take to structure a term loan or arrange a private placement of bonds.
, G e tting around Budget Limitations Acquisition of equipm.ent not contem.pO ?-t^d by a capital e x p enditure budget can sometimes be accorrip 1 i shed through use of a lease, with lease payments structured to be classified as an operating expense. This is a common reason for leasing where a company (or a division of a company) has its capital budget in place and desires to acquire equipm.ent to take
advantage of a profit opportunity. Rather than go back to the
board, the chairman, and so forth, to reopen the budget, the company leases the e q u ipment and reflects it as an expense.
4. Eliminates M a i n t e n a n c e Problems Of course, for a lease
s t r uctured as a net lease, mainte n a n c e problems are not eliminated
but are the responsibility of the lessee. Although an operating
lease in which the lessor agrees to maintain the eqinpment
rpci i nt enance is reflected in the lessor ts pricing of the lease. If
t.hp lessor ijnder an operating lease is the nianuf acturer and
provides a service contract when the e q u ipment is purchased^ the relative línbLnndled maintenance cost implied in the lease must be compared with the same cost if the equipment is purchased in conjunction with a service contract in order to determine the least- expensive operating lease a r r a n g e m e n t .
I m n a c t on C ash Flow a nd Book Earn i n n s : I n a p r o p e r 1 y s t r ljc t u r e d true lease a r r a n g e m e n t , the lower lease payment from leasing rather th^n borrowing can provide a lessee w'ith a superior· cash flc^w* L<^ase payments under a true lease will usually have less impact on book earnings during the early years of the lease than will depreciation and interest payments a s s o c i a t e d witii the purchase of the sam.e e q u i pment ( Nevitt, Peter K. and Frank J. Fabozzi > 1 988).
5 .1 .2 .LESSOR BENEFITS
Individual Tax S he l t e r s :. Since i n d i v iduals can operate leasing companies and, in doing so, p r ovide further tax shelters for themselves, they are also active in the leasing area even if they e^^sentially engaged in other businesses: thus more capital is madiği i=^v^ilable to the lessees wfiicii makes leasing a more favorable soijrce for them stimulating the business of lessors.
V0 rti c 0.1 , Horizont·?. 1 t cind C o n n 1 orno rg.t-o In t o Q i o n P os-sibi 1 itios:
T h r o u 9 .h leasing > i ntegrati ori possibilities are open for
m a n u f a c t u r e r s and/or lessors:
Vertical integration : Manufa c t u r i ng company uses a captive company to lease its finished p r o d uct-s ,
Horizontal Integration : Other finished products of different m a n u f a c t u r e r s are leased as well by the company.
C o n g l o m e r a t e Integratiofi : Totally unrela.ted business opportunities for the firm com.pared to its normal operations such as leasing of completely different e p u i p m e n t in other fields than t!ie c o m p a n y ’s original field of activity.
Economies of Scale i n Lessor Pi!rchasi ng a n d S e r vicing: Lessors (which may or may not be m.anufacturers) have certain advantages of p n o n omies of scale some of which can be passed onto lessees such as in the following:
Volume purchasing : Savings through quantity discounts for the lessors which might partially passed onto the lessees as well, F u ll-service leasing : Cost of maintaining the assets may be lower, through the use of specialized m.aintenance personnel, equipment,
if similar equipment are leased to several lessees.
Lessor Specialization: Lessors may be specialized in a limited set of B s s e t s , which permit them to know more about the market for the
assets tha.n most 1 essee/Lasers. Economies of scale exist in
cisset and lowt^rs his cost· of bear inn these risks.
Lessor B a n k Ady ajntanes : Banks have tv/o d i st i nct advant·a9es f r0fti
being a lessor: First > enijipment leasing^ answering a need of sonie bank clients, is a necessary part of the banks' full servir-e p a C· k a g e . S 0 c o n d > i t a s s i s t s in rri a i n t a i n i n 9 an e x c 1 u s i e relationship with the client by preve n t i n g other banks or fin a.n c i a 1 i n s t i t u t i on s (t h at lease e ci u i pmc' n t ) f r om 9 a i n i r* 9 a foothold vii th the c 1 i e n t .
5.1 . 3 .ADVANTAGES OF LEASING FOR TÜRKİYE
Some of the advantages cited above mo s t l v related to US lesising
com.panies whs· re leasing is very e x t e n s i v e l y irsed i îi eouipoient
acquisitions. Therefore they are included in the text to give sl
better unders t a n d i ng of the theory of leasing. In Türk·* ye > leasing
is so new that some of the advantages are not c\pparent. Hov/ever,
we can easily e n ijTie r· a t e foil ov^ i n g o e s for T ü r k. i y e a I s o .
L e a s i n. П en 1 a g e s f i nanc i ng a 1 te r n a. t i v e s c>_f comp an i es : Th rough leasing companies can acquire assets witTiout any debt. It provides m e d ium-term capital to companies iiaving troub l e s in finding medium- to-long term bank loan to finance the a c q u i sition of machi[:es> equipment and building necessary for their operations. Thieref o^'e» it increases c o m p a n i e s ’ source of funds at the establ i s!'iment stage.
L Θ ct s i π π p rovides flexibility: Today technolony oh an 90 s very fast.
This creates problems in owning assets that are open to
techno 109 i ca 1 obsolescence i a very shiort period. H o w e v e r »
leasing provides an opportunity to renew an asset that became
obsolete both econorrii cal 1 y and technologically^ and allows
companies to irse newest* technologically most efficient ecjLi i p m e n t s .
Leas i n Π a 11 o s i v e s t ors t o ijse funds i n rnore jr· rof i tab 1 e
investments: By leasing cc''mpanies can invest their equity capital in current assets having higher turnover ratio than fixed assets.' jh 0 r0 fnre c»jrrent asset turnover of cofrpanies increases a.nd their· prc^f i tab i 1 i ty i mpr eaves .
IΓΊ V e s t m e n t incentives _an^__customs tax ex e m p t i o n : W h e n a n i n / e s t m e n t having an incentive certificate is financed through leasing, the lP5 !Qor will use the incentives and passes these advantages to the
lessee in the form of lower rental payments. In other words,
investors do not lose incentives v^hen they prefer lease alternative over purchase. Moreover, for an asset that is subject to a cross- border leasing investors do not pay any customs tax, Af the asset
will not be purchased at the eiid of lease term. Only a guarantee
is required. In fact, customs tax is delayed. If the asset is
purchased at the end of the term, then the customs tax that is calculated on the basis of the foreign exchange rate at the time of the receipt of t!ie a.sset from customs will be paio.
L 0 8. s i п п provides 1 Q
о
p в г с 0 п t- finance: Lend i n g in s t i t li t i o n s sonnetimes e.re reluctant to provide a loan that is ecjual to theentire purch a s e price of the asset» They may require the lender
to ma.ke a down payment. However, leasing provides 100 percent
finance, lessor purchases the equi p m e n t by paying full price c'^f
t!')0 asset. In practice some leasing firms, especially in cross
border leases, acd·. the lessee to pay the custorns tax and some expenses that are made to acquire the asset as a down payment.
S^eed in о b t a i n i n q f i n a fic e : Financing equipment acquisitions
through leasing takes less time than getting a loan from a bank. 11с;мя1 1 у there is more bureaucracy in banks in the evaluation of loan applications. Leasing companies said that it takes 10-15 days to evaligate a lea.sing application.
P avrnent schedule a cco »"dinq to cash fl ow: Lease p a у me n t schedule s
r.an be desig n e d according to the cash flows of the companies. So,
a monthly or quarterly payment sche d u l e s can be designed and no payments are scheduled to initial periods of the lease term when
the firm needs working capital. Also, unequal rentals, designed
to allow lessor pay more when he earns more and less when he earns less, provi d e s further flexibility to the lessees which is usually not present in bank 'loans.
Uti 1 i 7 яt■inn of muslirn countries^ f u n ds: In Musi im countr i es
leasing a r r a n g e m e n t s , these funds may be obtained.
Lease p a yments are fully tax deductible: In case of borrowing only interest on loan is deducted from tax base, but full lease payment!^
can be deducted from tax base. By leasing the equipment that th^y
need co.mpa.nies can reduce their tax liabilities.
.Prov i des 1 o n g - t e rm f i nance : S i nee the noncance liable period of
lease agree.ment is fo'jr years, it is - a relatively long-term
financi.ng alternative. On the other hand, rental payments can be
spread over a m'jch shorter period. In this case lessee pays t.h<=^
full cost of the equipment within 18 to 24 months and after that there vn! 1 1 be symbolic payments at the end of the ne.xt two year^.
V . .A . T . a d v a n t a g e : Leas i ng compan i es pay 1 percent V . A . T . on t .he i r p Г c h a. s e s and c l i a г g e 1 p e r c e .n t V . ,A . T . for their 1 e a. s i n о
transactions. There is an exception to this general rule. The
V . .A. T . on leased cars for non com.mercial purposes is 20 percent and on othier t r a n s p o r t â t io.n vePiicles is 6 perce.nt.
S OF
le.
asinq for theThe financial leasing offers benefits to the countries. The
e q u i p m e n t brought to the country through financial leasing improves the produc t i o n possibilities of the economy and increase the
production of goods and services. It is generally believed that if the share of the leasing in total investments is 3 percent this will increase grov>:'th rate of the country by 1 percent.
When we look these be?'iefits from T ü r k i y e ’s perspective we see tha-t leasing was taken into c o n s i d e r a t i on as a new way of eciuipment finance in early 1 985 when there was a lipuidity bottle n e c k in
indListry. The low capital accLimul at i o n , less developed ca.pital
markets and inflationary a t m osphere were main factors of low levels
of investment. Leasing was seen as a solution to these problems.
Through leasing» medium— to·“ 1 arge c o m p a n i e s ’ finance needs will be
m.et and national prod'jction poss i b i l i t i es will be increa.sed
(Açıkoğlu» Riza, 1985).
There are disadvantages from a l e s s e e ’s standpoint in f inancing equi p m e n t through a lease from a third pcirty leasing company.
Res i d ij.a 1 s : Loss of residua.1 value in a lease agreement may be a serious disadvantage of leasing, esp e c i a l l y if the particula.r a.sset
invc'>lved has considerable useful life when the lease expires.
Tax Tim.inqx^ The tax deductions available from depr e c i a t i o n (or any available investment tax credit) may be valuable only if the lessee
borrowing rather than leasing. On the other hand, if the lessee or the project cannot use tax benefits, that may turn the scale to
1 eas i n g .
Prestige of O w n e rsh i p: Some companies prefer to own their property.
F 1 e X i b i 1 i t- y : Certainty of ownership giv'es the user complete
flexibility in the irse of the epu i pment , i t s se r v icing,
maintenance, i ns'J ranсe cind disposition. In the ca.se of leasing
lessee is repuired to get a permission from lessor in servicing the asset, changing its place.
Fi.xed 0 b 1 i g a. t i o n : A lorig-“term lease creates a senior fixed
obligation against the project. If a project leases, it must be
concerned with its cash and financial· planning to pay off that
debt. It must design other financing eiround that senior debt
obii gati o n .
Rati n.q Serv i ce s : The rating services will capitalize long-term 1 p 0 opc^ lender FASB No. 1-3) for purposes of ratio and interest coverage analysis ( Nevitt, Peter K . , 1989).
