Overview of Different Types of Leases
Medical institutions often own certain assets, such as buildings or equipment, which can be provided to others for use. Other companies are looking for such assets to be able to operate with their help. Leasing is a financial service involving two parties’ agreements, where one side is the property’s owner, the lessor, who transfers control over the property to the other party, called the lessee (Pink & Song, 2019). Managers of organizations can consider multiple lease types and select the most suitable ones for their institution based on an analysis of the operational circumstances and the benefits that an agreement can bring.
Differences in types of leases assume various conditions for the contract. Sussman and Jordahl (2010) note two significant types of leases: capital and operating (finance). Pink and Song (2019) also identify the third type – a combination lease that contains features of the first two types. Leasing benefits managers of organizations that are not using their assets to bring income by transferring operating rights to another company to receive payment (Sussman & Jordahl, 2010).
In contrast, companies that obtain assets to expand their operational opportunities can consider them investments (Sussman & Jordahl, 2010). Often, the motives for managers to use leasing are tax differentials, maintenance costs, bearing obsolescence and utilization risks, and similar aspects (Pink & Song, 2019). Depending on the organization’s needs and resources, managers can face other advantages and shortcomings of various leases.
Advantages and Disadvantages of the Operating Lease Option
Considering the operating type of leases, one can identify several advantages and drawbacks when the organization acts as a lessor or lessee. In particular, such an agreement does not imply a complete transfer of ownership rights, which benefits the lessor but can bring additional expenses for the lessee. The operational lease assigns the owner responsibility for service and maintenance (Pink & Song, 2019). This characteristic benefits the lessee, and leasing companies can provide appropriate services. However, if the purpose of the lessor is not leasing directly, then the deal will be unprofitable.
Finally, an essential feature of this agreement type is the cancellation clause – the opportunity to refuse the asset before the end of the deal (Pink & Song, 2019). It is convenient for the lessee, but it can bring additional burdens for the owner to find new customers. Consequently, managers must consider their features and potential implications before deciding on a lease type.
References
Pink, G. H., & Song, P. H. (2019). Gapenski’s understanding healthcare financial management (8th ed.). Health Administration Press.
Sussman, J. H., & Jordahl, E. A. (2010). A guide to financing strategies for hospitals: With special consideration for smaller hospitals. Kaufman, Hall & Associates, Inc. Web.