Introduction to Structured Finance

CHAPTER 12

Leveraged Lease Fundamentals

The leveraged form of a true lease of equipment is the ultimate form of lease financing. It allows a company, as lessee, to harness the lessor's capital, leveraged by institutional debt, as a source of funding somewhat like subordinated debt. The most attractive feature of a leveraged lease, from the standpoint of a lessee unable to use tax benefits of MACRS (Modified Accelerated Cost Recovery System), is its low cost as compared to that of alternative methods of financing. Leveraged leasing also satisfies a need for lease financing of especially large capital equipment projects with economic lives of up to 25 or more years, although leveraged leases are also used where the life of the equipment is considerably shorter. The leveraged lease can be a most advantageous financing device when used for the right kinds of projects and structured correctly.

Single-investor nonleveraged leases of equipment are simple two-party transactions involving a lessee and a lessor. In single-investor leases (sometimes called nonleveraged leases or direct leases), the lessor provides all of the funds necessary to purchase the leased asset from its own resources. While the lessor may borrow some or all of these funds, it does so on a full-recourse basis to its lenders, and it is at risk for all of the capital employed.¹

A leveraged lease of equipment is conceptually similar to a single-investor lease. The lessee selects the equipment and negotiates the lease ...