In many cases the operating lessor will make an asset
available for a relatively short period of the asset’s useful
life and it will hope to do better than make a finance lessor's
banker's interest return. The operating lessor takes an equity risk
and hopes the market for its asset will reward it accordingly at
the end of the lease period. But nothing is certain. The operating
lessor's risk is that no-one will want to hire its asset, or they
won't be prepared to pay the price it expects, or the asset is
defective or wears out faster than expected. But the operating
lessor could make a lot more money than a banker if it is
successful and there is a big demand for its asset at good prices,
the asset is durable and so on.
With some assets this may not involve much risk; for example,
a fleet of cars tends to have, in the aggregate, a relatively
predictable minimum residual value in two years' time.
Alternatively, risk can be reduced by insurance arrangements but
the lessor needs to take care that such arrangements do not convert
the lease into a finance lease, see
BLM11000 onwards.
Broadly, an operating lessor needs to manage its leased
assets actively and needs expertise in the potential market for
their use, choosing them, and maintaining them. For example, a
plant hire firm needs to understand the market for the short-term
hire of trucks, bulldozers, compressors etc. They need to have the
right selection of plant to meet the demand without being left with
a surplus. They need to pick plant which is reliable, easy to
service and will have a good resale value. They have to understand
the hardware as well as the market.
This is in contrast to typical finance lessors who generally
don't need to know anything more about the plant or machinery or
the market for it. They generally simply make a lender's financial
judgment about the ability of the lessee to pay the rentals. Any
value in the asset is returned to the lessee if the asset is sold.
In some cases, particularly where the lease has a substantial
final rental, a finance lessor may need to have some knowledge of
the asset’s market value. This is because the lease will be
structured so that the asset is sold at the end of the lease term,
with the sales proceeds being used to pay all or part of the final
rental. If the asset’s value is well below the final rental
it leaves the lessor exposed to default by the lessee.
