- lease arrangement of property financed by someone other than the lessee or lessor. A long-term creditor finances the lease, and recourse in the event of default is generally not available to the creditor via the lessor.
- special lease arrangement involving a creditor, lessor, and lessee. A creditor finances most of the cost to acquire an asset, while the lessor puts in a small amount of cash and acquires the asset, using it as security. The asset is then leased to the lessee on a noncancellable basis, and periodic payments to the lessor service the debt. The lessor, having borrowed most of the funds to acquire the asset, has "leveraged" himself, while having both the rewards and the risks of the lease.
long-term lease in which the lessor borrows most of the funds needed to acquire the asset financed from a third party, usually a bank or insurance company. The lessor makes an equity investment equal to, say, 20% of the equipment's original cost, and borrows the remaining 80% by issuing nonrecourse notes to the lenders, and writes a noncancellable lease for the equipment.
The lessor makes an assignment of the lease and lease rental payments to the lender, who is entitled to repossess the asset if the lessee happens to default. A leveraged lease is a true lease for tax purposes, because the lessor, as owner of the asset, is entitled to all of the tax benefits of ownership, including accelerated depreciation write-offs, deduction of interest payments on the bank loan, and the investment credit, if any, for purchase of the asset. Banks write leveraged leases for their own customers through the leasing subsidiary of a bank holding company.
lease that involves a lender in addition to the lessor and lessee. The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, generally more than half. The balance is put up by the lessor, who is both the equity participant and the borrower.
lease that involves a lender in addition to the lessor and lessee. The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, usually more than half. The balance is put up by the lessor, who is both the equity participant and the borrower. With the cash the lessor acquires the asset, giving the lender (1) a mortgage on the asset and (2) an assignment of the lease and lease payments. The lessee then makes periodic payments to the lessor, who in turn pays the lender. As owner of the asset, the lessor is entitled to tax deductions for depreciation on the asset and interest on the loan.
