Leveraged lease

A lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased.

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The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the debtor has rights to the asset and the lease payments if the lessor defaults.

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 theInvestment 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. See also Asset-Based Lending; Finance Lease; Operating Lease; Regulation Y.

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A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor, who makes payments to the lender.

The term may also refer to a lease agreement wherein the lessor, by borrowing funds from a lending institution, finances the purchase of the asset being leased.

The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the lessor defaults.

In this type of lease, the lessor provides an equity portion (often 20% to 50%) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.

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