In a direct lease, the landlord purchases a property and rents it directly to the lessee, also known as a lessee.
A direct lease is a financing arrangement whereby the landlord purchases the property and rents it directly to the tenant. In such cases, the owner of the property never actually intends to directly use it for its intended purpose. Rather, it is simply a mechanism for investing and earning future profits.
A direct lease can be used when two criteria are met. The first condition that must be met is that the collection of the minimum rental fees is guaranteed. The second factor is that there can be great uncertainty as to the amount of non-reimbursable costs that may be incurred. In other words, both parties must know all the costs associated with the rental in advance.
Also, a direct lease differs from a traditional lease in that the lessor is not a manufacturer or dealer, but rather a third-party owner who purchases the property. It could be a bank or some other type of investment company. Any lease that does not involve a third party owner cannot be considered direct.
In some ways, direct leasing can be very attractive to a company that needs to get a job done. This is especially true for construction and heavy manufacturing companies. In these cases, the equipment may not be very economical. Instead of using it once in a while and paying for it even when it’s idle, it might make sense to use it only when you need it through a direct rental.
That is why heavy machinery can be a good candidate for this type of lease. Very few general contractors, for example, own their own cranes when working on taller construction projects. Instead, they specifically rent a crane from an owner who can provide them with what they need. Since the crane is usually not owned by a manufacturer or dealer, a direct lease can be considered.
Direct leases offer a number of advantages. For example, one thing that companies must deal with constantly is depreciation in the value of equipment: as the company does not directly own equipment, this is not a concern. Also, this type of lease requires a lower initial cash outlay than an outright purchase. This frees up valuable capital for other projects.
Also, while a direct lease is a business expense, it is not accounted for in the business’s debt. Because the company did not go into debt to use the equipment, it may be more attractive to investors. At a minimum, a lower debt load will help earn more favorable bond ratings. So in a way, this type of lease is a way to incur debt without that debt actually counting against the business in other ways.