Leveraged lease definition
/What is a Leveraged Lease?
A leveraged lease is a financing arrangement in which an asset is leased using a combination of equity from the lessor and nonrecourse debt provided by third-party lenders. The lessor typically supplies a relatively small equity investment, while lenders fund most of the asset cost and rely primarily on lease payments for repayment. The lessee makes rental payments that service both debt principal and interest, as well as provide a return to the lessor. From an accounting perspective, leveraged leases historically involved specialized recognition and disclosure rules due to their complex risk and cash flow structure. Although modern lease accounting standards have eliminated most special leveraged lease accounting, existing arrangements continue to affect balance sheets and disclosures.
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Example of a Leveraged Lease
A transportation company enters into a leveraged lease to acquire a $10 million commercial aircraft. In this arrangement, the lessor contributes $1 million of equity and borrows the remaining $9 million from a lender to purchase the asset. The lender holds a security interest in the aircraft, while the lessor retains title and leases the aircraft to the transportation company for a 10-year term. The lessee makes regular lease payments to the lessor, who then uses those payments to service the debt with the lender. This structure allows the lessor to claim tax benefits such as depreciation, while the lessee gains access to the asset without a large upfront investment. It is an efficient method for financing high-cost equipment.