Handbook of Finance: Investment Management and Financial Management

Chapter 79. The Fundamentals of Equipment Leasing

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: More equipment is financed today by equipment leases than by bank loans, private placements, or any other method of equipment financing. Nearly any asset that can be purchased can also be leased: from aircraft, ships, satellites, computers, refineries, and steam-generating plants, on the one hand, to typewriters, duplicating equipment, automobiles, and dairy cattle, on the other hand. There are different types of leases and lease programs. The lessor is the owner of the equipment and is entitled to all the benefits of ownership, including the tax benefits; the lessee is the user of the equipment. Equipment leases fall into three general categories: non-tax-oriented leases, tax-oriented true leases, and tax-oriented TRAC leases. Types of tax-oriented true leases are classified as single-investor leases and leveraged leases. There are often-cited advantages of leasing. Some of the claims are valid, while others are questionable. Two important factors in leasing are the tax implications and the financial reporting implications.

Keywords: conditional sale lease, non-tax-oriented lease, tax-oriented true lease, guideline lease, residual value, purchase option, single investor lease, leveraged lease, full-payout lease, operating lease, standard lease, custom lease, master lease, vendor lease, sale-and-leaseback transactions, capital lease ...