(AG Real Estate) What is - real estate leasing ?

Real estate leasing represents a modern form of financing of investment projects. Real estate leasing offers economic, balance and other advantages:

A) Economic advantages:

· cash saving through tax exemptions;

· 100% balance neutral financing;

· capital reserves stay at disposal;

· no exhausting of credit possibilities and capacities;

· maintenance of liquidity;

B) Balance advantages:

· improvement of balance indices, e.g. ROI, ROE etc.,

· improvement of rating (Basel II);

C) Other advantages:

· individual solutions, designed for each client according to his abilities;

· experience and know-how of international IMMORENT network;

· lease instead of ownership,

· possibility of sublease,

· acquirement of ownership following the expiration of leasing contract,

Leasing and Rental

Leasing contracts are similar to rental agreements. The difference between leasing and rental lies in the fact that, according to the leasing contract, all maintenance and servicing costs are covered by the lessee. Leasing contracts are “atypical“ rental agreements. Therefore, the usual synonym for leasing is “procurement through rental“, although in case of procurement through rental the buyer becomes the owner of the property.

Following the expiration of the leasing contract, the leased object can become the property of the lessee or it can be sold to the third person. Users of leasing are juristic persons.

Advantages

For the users of leasing, leasing has the following advantages:

· Liquidity is maintained (instead of one-time payment of large amount of money, small amounts are paid over longer period of time);

· Off-balance financing: the real estate is not entered onto the balance sheet of the lessee. Instead, there are only expenses, that is, leasing costs that are included in the balance of success of the lessee. Lessor activates the leased object as an investment, that is, as an investment property and writes it off in accordance with the appropriate amortization rate;

· Leasing costs include periodic payments, which mature with use of the leased object. In time, the facility becomes self-financing property - “Pay as you grow“;

· Periodic payments provide for a stable calculation basis for the planning inside the company;

· Advantages of leasing can be seen in the opportunities for business innovations and improvement of economy;

· Following the expiration of the leasing contract, the facility is returned to the lessor. Opposite case is also possible because the leasing contract includes the possibility of acquirement of ownership through procurement of the leased object;

Disadvantages

In addition to the aforementioned advantages, there are also following disadvantages:

· The lessee does not acquire the ownership of the leased object, which means that he can not sold it if he doesn’t use the facility or if he urgently needs money;

· Total leasing costs, which depend on the period of use, are higher than the costs of procurement of the facility, because the lessor must take certain risks and his profit into account;

· If the company does not use the facility, it still needs to pay leasing installments;

Products of Real Estate Leasing

Real Estate Leasing is realized in two ways: operative leasing and “sale &lease back model“!

A) Operative leasing:

· Models brought in accord with IFRS-/US GAAP: the lessee and lessor share both risk and profit,

B) Sale & lease back:

· financing of existing properties;

· disclosing of hidden reserves;

Operative Leasing

Partial amortization (residual value): The lessee pays part of total investment costs through leasing installments. Following the expiration of the contract, the lessee can choose one of the following options:

· Extension of the leasing contract;

· Procurement of the leased object for the residual value;

· Returning of the leased object to the lessor;

Sale-Lease-Back

According to “Sale-Lease-Back“ of “Sale-and-Lease-Back“ model, the company sells the property to a leasing company and then leases it back through leasing arrangement. In that way, the lessee increases liquidity.

The advantage of sale-and-lease-back model for the companies is that it enables showing of hidden reserves. With the price achieved through sale, the company frees its capital and increases liquidity while still using the facility. The company is not the property owner any more and, therefore, it does not participate in future growth of value of the facility, unless it agreed in advance on procurement of the property at the end of the leasing period.

author :

Alexander Petritz,

CEO of Immorent Beograd

ealexander.petritz@immorent.co.yu

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