Leveraged lease definition
/What is a Leveraged Lease?
A leveraged lease is a tax-advantaged lease arrangement in which a lessor borrows funds to acquire an asset that is then leased to a lessee. In this situation, the lender holds title to the leased asset, while all lessee payments are collected by the lessor and passed to the lender. Alternatively, the lessee may be directed to send all payments straight to an escrow account that is maintained by the lender, so that the lender has a higher probability of being paid. The lender can repossess the asset in the event of a lessee payment default. In this arrangement, the lessor can recognize depreciation expense on the asset for tax purposes, while the lessee can deduct its lease payments from taxable income.
The name of this lease refers to the financing position of the lessor, which has used debt (leverage) to pay for most of the cost of the asset that is being leased. Leveraged leases are most commonly used to acquire assets that are expected to be used for a relatively short period of time, such as vehicles and business equipment.