LEASING

Zeynep Yergün, Mehmet Nedim Rifaioğlu, Can Korkmaz, Kubilay Düzel.

Abstract

In this paper we will be explaining about leasing, types of it, how it delver finance and the history of leasing in Turkey. leasing is
important because it business to operate better, newer, and potentially more efficient with a low – or no – down payment,
making their access to the right equipment much easier.

Introduction

A lease is a contractual agreement or exchange between two or more parties in which a party controlling an asset or facilities
gives an asset to another party (the lessor) for use or transfer the right to use the asset over a fixed or negotiated period of time for
compensation in the form of an annual rent with or without the payment of a fee. At the end of the contract, the asset or equipment
is returned to the lessor. We explain financial lease, the history of how lease entered to turkey, and types/benefits.

Financial Lease

As against the temporary nature of an operating lease agreement, financial lease agreement is a long-term arrangement, which is
irrevocable during the primary lease period which is generally the full economic life of the leased asset. Under this arrangement
lessor is assured to realize the cost of purchasing the leased asset, cost of financing it and other administrative expenses as well as
his profit by way of lease rent during the initial (primary) period of leasing itself. Financial lease involves transferring almost all
the risks incidental to ownership and benefits arising therefrom except the legal title to the lessee against his irrevocable
undertaking to make unconditional payments to the lessor as per agreed schedule. This is a closed end arrangement with no option
to lessee to terminate the lease agreement subsequently. In such lease, the lessee has to bear insurance, maintenance and other
related costs. The choice of asset and its supplier is generally left to the lessee in such transactions. The variants under financial
lease are as under:

-Lease with purchase option-where the lessee has the right to purchase the leased assets after the expiry of initial lease period at
an agreed price.

-Lease with lessee having residual benefits-where the lessee has the right to share the Sale proceeds of the asset after expiry of
initial lease period and/or to renew the lease agreement at a lower rental.

In a few cases of financial lease, the lessor may not be a single individual but a group of equity participants and the group borrows
a large amount from financial institutions to purchase the leased asset. Such transaction is called ‘Leveraged lease’.
Table 1:

Figure 1: How Leasing Works?

Simple steps:

1) You complete an equipment lease application. Be sure you have financial data available for your company and its principals, as
this may be required upfront or after initially completing the application.

2) The lessor processes your application and notifies you of the result.

3) Once you receive approval, you must review and finalize the lease structure, including monthly payments and the fixed APR.
You will then sign the documents and resubmit them to the lessor, typically along with the first payment.

4) When the lessor has received and accepted the signed documents and first payment, you are notified that the lease is in effect
and that you are free to accept delivery of the equipment

5) Funds are released within 24 to 48 hours directly to you or the manufacturer you are purchasing from.

Why chose leasing and not bank loan.

A loan is ideal for collateral you want to own at the end of the term; something that holds its value past the life of the agreement.

A lease is best for something that depreciates quickly - like technology - and will not hold its value past the term.

The most important distinction between a lease and a loan is how the finance charges are paid. In a loan, the interest is amortized

throughout the term. In other words, your customer is paying more interest at the beginning and more principal at the end.

Leasing isn't free, but the finance charges are fixed throughout the term and are not paid separately from the borrowed amount.
The History of Leasing in Turkey and The Related Law in Turkey

The first regulations on financial leasing in Turkey, 70 of the banks of the decrees about issued pursuant to Article 90 of
12.16.1983 date and made in board decisions facing No. 83/7506 and "whether the supply of equipment related to the investment
firm to the administration installments sale or lease … ” has been mentioned. Thus, "Leasing" was mentioned for the first time
even if it is not explicit in our legislation. In real terms, the legal infrastructure of leasing was established by a law numbered
3226 enacted on 28/06/1985 and the first leasing company was established in 1986. In 1986, Turkey has been increasing since the
share of the investment Leasing. But enough cannot be said that the share of leasing in Turkey's economy in comparison with
other countries. Total fixed capital investment in Leasing was around 30% share in the advanced industrial countries, this rate
remains below than 10% in Turkey. Leasing in Turkey has great development potential and has not yet been evaluated. The first
Turkish financial leasing company was “Economic Leasing”, which started operations in 1986.

After the legal regulations in our country, financial leasing companies were established and started their operations. Some of these
can be listed as Yapı Kredi Leasing, Garanti Leasing, Bayındır Leasing, Koç Leasing, Finans Leasing, Halk Leasing.

In 1997, financial leasing became widespread in all areas from textiles to iron and steel, from ships to aircraft, from furniture
to electronics. In 1998, it is seen that an investment of over 2 billion dollars per year was financed by the leasing sector. Thus,
the leasing sector has become the largest sector after banks in the finance sector.

As of 2005, Turkey is a member of the Leasing Association has 39 joint stock company. This association identifies and tries to
solve problems related to financial leasing in its charter. It follows the legal regulations regarding financial leasing at home and
abroad. To communicate with relevant financing institutions, to make an investigation about leasing, etc. activities are included.

Lessor: Participation banks, development and investment banks and financial leasing companies,

Tenant: A natural or legal person who accepts financial leasing,

Operational leasing: Lease other than financial leasing,

Board: Banking Regulation and Supervision Board,

Association: Association of Financial Leasing, Factoring and Financing Companies,

refers to (Article 3 of the Financial Leasing, Factoring and Financing Companies Law No.6361).

In addition, according to Article 2/3 of the Law; the provisions regulated for the finance lease transactions under this Law shall
not be applied for the operating lease transactions performed by finance lease companies. In this respect, the operating lease
transactions which are performed by the finance lease companies will not be considered as a finance lease transaction and the
provisions of Law No.6361 will not be applicable for the operating lease transactions. Therefore, the operating lease
transactions in Turkey will be subject to the general leasing provisions of the Turkish Law of Obligations (Law No.6098)
(published in the Official Gazette dated January 11, 2011 and No.27836).

According to Article 19 of the Law; movables and immovables may be subject to a financial leasing contract in Turkey.
Intellectual and industrial rights such as patents cannot be subject to this contract, except for duplicated copies of computer
software. Furthermore; par. 2 of Article 19 indicates that all kind of good preserving its essential nature may be solely subject to a
financial leasing contract, regardless of its integral parts or attachment qualifications.

Turkish Law also allows a cross-border financial leasing contract on a condition that it is registered at the special registry of
Union of Financial Leasing, Factoring and Financing Companies (hereinafter referred as to 'Union' or 'FKB'). The contract
registration process must be done before the subject matter products enters into Turkey. There are also some limits on the cross-
border contract in terms of its features. Circular on Registration from Abroad clearly defines the nature of cross border contract
that can be registered. Article 4 of the Circular states that ''contracts for air transport vehicles, vessels, medical devices and high
technology products that were certified such features by the relevant authority and whose annual average lease payment is more
than USD 100,000 will be registered.''

Consequently, foreign licensed financial leasing companies can be party to a financial leasing contract in Turkey without being
authorized before Turkish Banking Regulation and Supervision Agency provided that the aforesaid conditions are met.
Why You Need Leasing

1. Conservation of capital. With leasing, there is little or no down payment required which provides you with more cash to invest
in revenue-generating activities or other profitable opportunities.

2. Preservation of credit lines. Leasing allows you to preserve the available credit from your bank for working capital, operations,
expansion, and acquisitions. When financing equipment through your bank, you exhaust credit available for other uses.

3. Total financing. All the cost of acquiring a piece of equipment can be financed through a lease program, including freight,
installation, and other similar charges.

4. Flexibility. As your business grows and your needs change, you can add or upgrade at any point during the lease term through
add-ons or master leases. If the nature of your industry demands that you have the latest technology, leasing can help you acquire
needed equipment and maintain cash balances.

5. Customized solutions. A variety of leasing products are available, allowing you to tailor a program to fit your month-to-month
or year-to-year cash flow needs. We are able to customize a program to address your needs such as cash flow, budget, transition
structure, or seasonal fluctuations.

6. Asset management. A lease provides the use of equipment for specified periods of time at fixed payments. At your option,
disposing of the equipment at the end of the lease can be our responsibility. You never have to worry about selling outdated
equipment.

7. Greater budget flexibility. Often decision-makers are limited by capital budget constraints and are unable to replace aging
equipment. Most leasing plans can be structured to accommodate available funds, helping you acquire more than capital
expenditure ceilings might otherwise allow.

8. Convenience. Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape. Your
application can be approved within days and you can have your equipment shortly thereafter.

9. Flexibility with loan covenants. Depending on the language and intent of covenants in your existing loan agreements, leasing
may provide financing not available through conventional means.

10. Hedge against inflation. When you purchase equipment, you must rely on the depreciation to recover some of your cost. This
will be done with tomorrow’s inflated, less valuable dollars. In addition, many credit lines are often tied to variable rates. Lease
payments are fixed for the term of the lease, allowing you to continually decrease the real cost of your financing because you are
paying with tomorrow’s eroded dollars.

The Types and The Benefits

There are more than one leasing type. These are mostly financial leasing and Operating leasing.

The operating lease: In cases where the tenant uses the equipment, but the risk of ownership belongs to the lessor with all related
rights and responsibilities, he also purchases insurance and undertakes maintenance responsibility. In addition, the term of an
operating lease is generally much shorter than the useful life of the equipment and therefore the present value of all lease
payments is significantly less than the full equipment value. In most respects, operating lease is equivalent to leasing, and in most
jurisdictions, as a result, the equipment remains on the lessor's books.

The financial lease: where all practical ownership risks are borne by the tenant who uses the equipment for most of its
economic life, whether or not for its final purpose, agreed at the end of the lease and usually at a nominal cost. The lessor
expects from the outset to collect the capital cost of the investment along with interest and profit (often referred to as 'full
payment lease') during the lease term and in most cases from the lessee.

SALE AND LEASEBACK

This transaction used by companies as a financing method is the re-lease of the depreciable assets
registered on the company after they are sold to the Leasing company.
At the end of the lease term, the properties are transferred to the tenant again
Leasing has many advantages. The main ones are.

Full Financing for Your Projects:

You can finance 100% of the project with the opportunities provided by financial leasing, so you do not touch your equity.

Flexible Payment Plan:

You can plan your cash flow with flexible lease payments suitable for fund flow.

You Can Benefit from Government Incentives:

The financial leasing company benefits from the incentive for your Incentive Investment, so you can use your incentive.

If You Want, You Can Buy the Leased Property:

You can purchase the leased property for a representative price at the end of the term.

Risk Management:

If you add items such as fixed lease and risk management against fluctuations in money values and interest rates, you will avoid
risk to your agreement.

There are many debt instruments as alternatives to leasing. There are many options inside or outside the country. Some of the
products that can be considered as an alternative to leasing are BPO, Reverse factoring, Forfaiting and Factoring.

The Difference Between Operational Leasing and Financial Leasing

Organizations often decide to lease long-term resources instead of buying them. The choice to lease is principally founded
on specific variables like need, better monetary terms, keep the resources off the accounting report, or the absence of
accessible subsidizing. Operating lease and Finance lease are the two kinds of accounting methods for leases. Both kinds of
leases are utilized for various purposes and results in varying treatment in accounting.

Finance lease and operating lease are the different accounting methods. For the finance lease all the danger and prizes identified
with the resource viable gets moved to renter though if there should be an occurrence of Operating lease all the danger and prizes
identified with the resource viable remains with the lessor.

Financial Lease and Operating Lease – Key Differences

There are several differences between a financial lease vs. operating lease. Here's the critical differences between them.

- A financial lease is a sort of rent where the lessor permits the renter to utilize the previous' resource rather than a periodical
installment for an extended period. Operating lease, then again, is a kind of rent where the lessor permits the renter to utilize the
previous' resource in return for a periodical installment for a short period.

- A financial lease is a lease that necessities recording under the accounting system. Operating lease, then again, is the idea that
does not need bother with recording under any accounting system; that is the reason the operating lease is likewise called "off
the balance sheet lease."

- Under the financial lease, the proprietorship moves to the tenant. Under a operating lease, the proprietorship does not move to
the tenant.
- The agreement under a financial lease is called a loan agreement/contract. The contract under an operating lease is called a
rent agreement/contract.

- Once both the gatherings consent to the arrangement, typically, financial lease can not be dropped. Even after the understanding
between two gatherings, the operating lease can be repudiated during the underlying time frame as it were.

- Financial lease offers an expense derivation for deterioration, account charges. The operating lease gives an expense derivation
to lease installments.

- In a financial lease, there is a resource buy choice given toward the finish of the authoritative period. Under a operating
lease, there is no such offer.

- Operating lease are treated as costs whereas a finance lease is included as an asset for the lessee.

Which one is better, finance or operating lease?

The answer to this question often depends on your situation.

Operating lease arrangement lessens administration for the end client and permits them to just hand the vehicle back toward
the end while paying one straightforward month to month reimbursement. On the other hand, financial lease will have more
administration necessities and will have some extra resale risk for the lessee.

As a result, as both financial and operating leases are ordinarily utilized by organizations, it is helpful to increase a comprehension
of the accounting and commensurate tax treatment for every one of these kinds of leases for both the lessor and the lessee. Each
types of lease accompanies its own preferences. Depending upon the organization's requirement and tax situation, they may select
either, or potentially even a blend of both for various sorts of resources.

If you want to use an asset which you can't afford to purchase at the present time, you should go for financial lease where you
can utilize it for a more extended period, and simultaneously, you would likewise have the option to get a choice to get it toward
the finish of the authoritative period.

Conclusion

To sum up, lease funding is suitable for a person or a company who cannot collect capital by other forms of finance, such as a
mortgage or a term loan due to lack of funds. The company or the lessor cannot even plan down payment money to increase the
loan. The lease is best for him. In the other hand, the lessor, who wishes to spend his capital effectively, becomes the lessor's
financier and gains interest.
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