Operating leases, like finance leases, may have primary and
secondary (and even tertiary etc) periods.
Unlike finance leases, the rentals payable in the secondary
period are likely to be based on market rate for the asset
concerned. For example, an airline might lease an aircraft for 5
years at $1m a month. At the end of the 5 year primary period, the
lessee may have an option to extend the lease into a secondary
period. The rents for this period might be fixed at (say) $800,000
a month to reflect the age of the aircraft. There would be no
expectation, let alone compulsion, for the lessee to enter into the
secondary period.
The structure of an operating lease designed to perform a
financing function may also contain primary and secondary (or more)
periods. If the option to extend the lease into the secondary (or
later) periods is exercised the rentals payable in each period will
be designed (broadly speaking) to give the lessor a financial
return. There are, however, likely to be complex arrangements which
ensure that, in the event the lessee does not exercise the option
to extend the lease term, the lessor faces minimal risks consistent
with the lease being correctly classified as an operating
lease.
