Single-Investor Leases versus Leveraged Leases There are two categories of true leases: single-investor leases (or direct

Single-Investor Leases versus Leveraged Leases There are two categories of true leases: single-investor leases (or direct

leases) and leveraged leases. Single-investor leases are essentially two- party transactions, with the lessor purchasing the leased equipment with its own funds and being at risk for 100% of the funds used to purchase the equipment.

The leveraged form of a true lease of equipment is the ultimate form of lease financing. The most attractive feature of a leveraged lease, from the standpoint of a lessee unable to use tax benefits of depreciation, 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.

A leveraged lease of equipment is conceptually similar to a single- investor lease. The lessee selects the equipment and negotiates the lease in much the same manner. Also, the terms for rentals, options, and responsibility for taxes, insurance, and maintenance are similar. How- ever, a leveraged lease is appreciably more complex in size, documenta- tion, legal involvement, and, most importantly, the number of parties involved and the unique advantages that each party gains.

Leveraged leases of equipment are generally offered only by corpo- rations acting as lessors. This is because in a leveraged lease the tax ben- efits available to individual lessors are much more limited than those available to a corporation.

The lessor in a leveraged lease of equipment becomes the owner of the leased equipment by providing only a percentage (20%–30%) of the capital necessary to purchase the equipment. The remainder of the capi- tal (70%–80%) is borrowed from institutional investors on a nonre- course basis to the lessor. This loan is secured by a first lien on the equipment, an assignment of the lease, and an assignment of the lease payments. The cost of the nonrecourse borrowing is a function of the credit standing of the lessee. The lease rate varies with the prevailing interest rates and with the risk of the transaction.

Equipment Leasing

A “leveraged lease” is always a true lease. The lessor in a leveraged lease can claim all of the tax benefits incidental to ownership of the equipment even though the lessor provides only 20% to 30% of the capital needed to purchase the equipment. This ability to claim the tax benefits attributable to the entire cost of the leased equipment and the right to 100% of the residual value provided by the lease, while provid- ing and being at risk for only a portion of the cost of the equipment, is the “leverage” in a leveraged lease. This leverage enables the lessor in a leveraged lease to offer the lessee much lower lease rates than the lessor could provide under a single-investor nonleveraged lease.

Single-investor nonleveraged leases are basically two-party transac- tions with a lessee and a lessor. However, leveraged leases by their nature involve a minimum of three parties with diverse interests: a les- see, a lessor, and a nonrecourse lender. Indeed, leveraged leases are sometimes called three-party transactions.