Introduction to Structured Finance

CHAPTER 11

Large Ticket Leasing: Leasing Fundamentals

A lease is a contract over the term of which the owner of the equipment permits another entity to use it in exchange for a promise by the latter to make a series of payments. The owner of the equipment is referred to as the lessor. The entity that is being granted permission to use the equipment is referred to as the lessee.

Most corporate financial executives recognize that earnings are derived from the use of an asset, not its ownership, and that leasing is simply an alternative financing method. 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 one hand, to typewriters, duplicating equipment, automobiles, and dairy cattle, on the other hand.

In order to compare leasing with other methods of financing, it is necessary to understand the basics of how leasing works and the differences among the general categories of equipment leases. This will be explained in this chapter, along with the reasons often cited for leasing, the types of lessors, and tax and financial reporting requirements. Understanding leasing is also important for understanding lease securitization. In the next chapter, we discuss leveraged leases.

HOW LEASING WORKS

A typical leasing transaction works as follows: The lessee first ...