A leveraged lease is when a lessor buys property with their own money and loans the rest from a financial institution. The lease and loan are separate contracts, and the lessee pays for the use of the property. The landlord has ownership rights and tax benefits, while the lender gets high interest payments. The most common type is with rental homes.
A lease is a contract in which someone, the lessee, pays for the right to own the property of another person, the lessor. That lease is considered a leveraged lease when the lessor has bought that property with some of his own money and has loaned the rest from a financial institution. The amount a landlord must pay as a down payment on the initial cost is generally at least 20%, but can be as high as 40%. Then, when the lessee makes the payment for the use of the property, the landlord uses those payments to repay the loan on the property.
A leveraged lease is a two-part financial process. The lease and the loan are separate contracts. This means that even though the money to repay the loan to the bank comes from the lessee, the lessor is responsible if the loan defaults. In contrast, once the loan is repaid, the landlord owns the property outright, however the lease may still be in place. The lessee will continue to make those lease payments to the lessor for as long as the lease is in force.
In most leveraged lease cases, the loan will be made without recourse to the lessor ranging from 60% to 80%. This means that if the landlord defaults on the loan, the bank can only recover the property and future payments from the tenant. If this does not cover the loan balance, the difference must be taken as a loss to the lender. This means that non-recourse loans are only made to creditworthy borrowers, and the property in question must be of high value. +
Under a leveraged lease, all parties involved have their own set of benefits. The tenant has the right to use the property in question, but is not responsible for the maintenance of the property. The landlord has ownership rights to that property, including substantial tax benefits. He also has the right to terminate the lease and repossess the property, subject to certain termination clauses in the lease. The lender gets high interest payments over the life of the loan, along with the ownership interest in the property and all subsequent lease payments if the landlord defaults on the loan.
Although there are many other types, the most common type of leveraged lease is with a rental home. One party pays a down payment and obtains a loan to cover the remainder of the home’s purchase prices. That person then leases the house to another party who will live in it. Using the second party’s rent payments, the first party pays the mortgage on the house. If the loan is in default, the bank will seize the house and take the rights to the rent payments.
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