What is a Leveraged Lease
A leveraged lease is a lease agreement that is partially financed by the lessor through a third-party financial institution. In a leveraged lease, the lending company holds the title to the leased asset, while the lessor creates the agreement with the lessee and collects the payment. The payments are then passed on to the lender.
BREAKING DOWN Leveraged Lease
In a leveraged lease, if the lessee stops making payments to the lessor, then the lessor stops making payments to the financial institution (lender). This allows the lender to repossess the property. The lessor may also have the right to retain the property upon lessee default, as long as the lessor continues making payments to the lender.
Example of a Leveraged Lease
For example, if Bert wants to buy a new tractor for his machinery leasing business but doesn't have the cash to pay for the tractor up front, he could get a loan to pay for the tractor. Since Bert is in the business of leasing tractors and other machinery, he may then lease that same tractor to Ernie who needs to use the tractor for his farm. Ernie would pay Bert the lease payments for the tractor, then Bert would turn around and use those collected lease payments to pay for the loan payments on the tractor. If Ernie stopped making the lease payments to Bert for the tractor, Bert could take the tractor away from Ernie and lease it to somebody else. The lender on the tractor loan doesn't care as long as they keep getting the loan payments.