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.

RELATED TERMS
  1. Minimum Lease Payments

    The minimum lease payment is the lowest amount that a lessee ...
  2. Capitalized Lease Method

    A capitalized lease method is an accounting approach that posts ...
  3. Operating Lease

    An operating lease is a contract that permits use of an asset ...
  4. Open-End Lease

    An open-end lease is an agreement that requires the lessee to ...
  5. Percentage Lease

    A percentage lease is a lease where the tenant pays a base rent ...
  6. Walk-Away Lease

    A walk-away lease is an auto lease which allows the lessee to ...
Related Articles
  1. Managing Wealth

    When Is Leasing a Car Your Best Bet?

    Leasing a car isn't for everyone. But it's attractive for those who want low initial payments and the ability to get a new vehicle every few years.
  2. Retirement

    Should Retirees Buy or Lease Cars?

    Here's a look at retirees' considerations to lease or buy for possibly better access to safer cars, comprehensive warranties and tax deductions.
  3. Personal Finance

    The Pros and Cons of Leasing a Car

    Consider these pros and cons before deciding whether or not to lease a car.
  4. Investing

    Uncovering Hidden Debt

    Understand how financing through operating leases, synthetic leases, and securitizations affects companies' image of performance.
  5. Managing Wealth

    4 Ways to Get the Best Deal on a Car Lease

    Car buyers typically negotiate when purchasing a vehicle, but many don't negotiate when leasing a car. There are several ways to save if you ask.
  6. Managing Wealth

    Your Lease Is Up: When Should You Buy the Car?

    Deciding whether to buy your leased car is fraught with challenges. Learn how to assess the benefits and pitfalls and how they can help you choose.
  7. Managing Wealth

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  8. Personal Finance

    3 Questions to Consider When Buying a Car

    When deciding what kind of car to buy, make sure to answer these questions first.
  9. Investing

    8 Lease Clauses You Need To Know

    If you're renting an apartment this year, beware of signing contracts with these tricky clauses.
  10. Investing

    Buying a House With Tenants: A Quick Guide

    Before buying a house with tenants, know the risks and responsibilities you're taking on.
RELATED FAQS
  1. Single, double and triple net leases

    Learn the ins and outs of net lease agreements, including the key differences between single net, double net and triple net ... Read Answer >>
Trading Center