Some companies have seen in real estate leasing a way to access their fixed assets in an affordable way. This financing model is also being increasingly valued by private investors, who see greater flexibility and better conditions to acquire a home.
However, despite having numerous advantages, not all banks or real estate companies including Sky Marketing offer this type of product, nor do all clients have access to them. In fact, as a general rule, hiring a real estate leasing is associated with requirements linked to article 106 of Law 27/2014, of November 27, on Corporation Tax.
What is real estate leasing?
The concept “leasing” refers to a system of leasing equipment goods through a contract that contemplates a future purchase option by the lessee. This formula can be applied to different types of goods, including machinery and equipment, vehicles, tourism (for hotels, restaurants, etc.), or real estate, as is the case at hand.
More specifically, real estate leasing is a financial modality that allows the acquisition of fixed assets. With this form of financing, companies and businesses can access the lease of homes, premises, warehouses or industrial buildings for a long period of time. During the duration of said contract, it is the bank that finances the acquisition of the property, giving the tenant its use and enjoyment in exchange for a monthly fee. Although less common, this formula can also be used to finance private homes.
The installments of real estate leasing can be, as in mortgages, fixed or variable, and include the payment of interest and taxes, as it happens with a rental. However, they tend to be more flexible, since in leasing for private homes they also depend on whether the apartment or house is new or second-hand. Also, many banks give the option of paying monthly, quarterly or annually.
In any case, once the leasing contract is completed, the lessor will offer the tenant the option of leaving or buying the property. If the purchase is chosen, the money paid to date will be deducted from the total amount, and a new form of financing will be studied for the rest, normally a mortgage.
How a lease works: types and examples
Imagine that you want to acquire a home or a premise in the center of your city and for this you contact a financial lessor (usually a bank), which in turn is the one that deals with the provider (who sells and / or supplies the property that you want, and that can be an individual or a bank). That is, a financial company (the bank) acquires an asset to be used by you (lessee) in exchange for the payment of monthly installments. This is what is called Financial Leasing, the lessee being the one who assumes the repair or maintenance expenses, while the bank would assume all the taxes.
There is another option, Operational Leasing, which consists of a leasing contract for an asset, similar to the previous one, although maintenance and repair is the responsibility of the lessee.
Finally, there is a last type of leasing, called Lease-Back, where the property belongs to the client himself. The Lease-Back basically consists of the sale, by a company, of its property to a leasing company with the aim that the latter later assign it to them as a lease. Thus, the company enters the money from the sale and, at the same time, can continue to use it by paying a monthly fee and maintaining the purchase option.
Difference between real estate leasing and rent-to-own
Analyzing this concept, it is easy that you have related it to others that we have already discussed in our blog: rent with option to buy. But what is the difference?
Fundamentally, the difference between the two contracts is the accounting treatment they receive, since real estate leasing is similar to the purchase of an asset with a loan, with said asset (that is, the property) acting as collateral for the loan. In fact, the property will appear in the financial statements of the lessee within its asset (that is, its property), while in the lessor it will be treated as a sale from the signing of the contract.
The only controversy regarding real estate leasing is its rating, since the leased asset may appear as a finance lease or as an operating lease. In the first case, the asset and the debt associated with it will appear on the company’s balance sheet. If it is an operating lease, only the rent will appear as one more expense in the company’s accounts.
What are the advantages of real estate leasing?
Real estate leasing offers many advantages to companies and freelancers. One of the most important is that with this formula you can finance 100% of the investment. In addition, when you decide to make the purchase, part of the amount of the property is already paid, so you should not make any extra initial payment. In addition, thanks to leasing, you can obtain more benefits than with a mortgage loan at the tax level, both for the possibility of deferring the payment of taxes and for the VAT deduction.
In summary, the advantages of real estate leasing are:
- 100% of the property can be financed, while mortgages only finance 80%.
- The customer’s debt capacity is kept free (although the leasing will appear as part of the financial commercial risk).
- It allows you to preserve the initial purchase conditions for a long period of time.
- The leasing operation is usually processed faster than a conventional sale.
- It allows the maintenance of the property of the company.
- Some banks offer the ability to tailor payments.
- It allows an accelerated tax depreciation. That is, we can amortize the asset fiscally in less time.
- It is compatible with other subsidized lines of financing such as ICO credits or loans from the European Investment Bank (EIB).
Conditions for real estate leasing:
Although they may vary, the basic conditions for obtaining a real estate lease are that the lessee is a legal person, entrepreneur or professional, and that the leased asset is intended for business or mixed (business / personal) uses.
Other conditions of the leasing are:
- The contract must have a duration of -at least- two years for movable property, or 10 years for real estate or industrial establishments.
- The cost recovery quotas for the asset must be constant or increasing throughout the entire contract.
- The financial burden and the installments will be considered a deductible expense, with the limit of double the linear amortization coefficient agreed with the lessee company. This surplus may be deducted in the tax periods after this limit (for example, in the annual declaration of companies).
Real estate leasing simulator: do they exist?
Many banks offer a leasing simulator on their website, a tool with which you can observe the type of payments that you must assume if you decide to bet on this form of financing. We have used, as an example, the Bankinter real estate leasing simulator.
Amount to be financed: 30,000.00 EUR
Interest rate: 6.00%
Periodicity of installments: Monthly
No. of grace fees: 3
Term: 60 months (5 years)
Residual value: EUR 500.00
Thus, during the first two months we would pay only interest and VAT, that is, € 160.50. Once the grace installments have passed, the amount of the monthly leasing installments would be € 640.51. Total interest would amount to € 4,920.77, while VAT would be € 2,409.30.
Other banks that offer a leasing simulator are Banco Popular or Banco Sabadell, for example.
Are you looking for the best way to finance your home? Contact Tajarat properties, we are your trusted online real estate agency.