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Date Submitted: 04/06/2013 03:33 PM
Chapter 6
THE ECONOMICS OF LEVERAGED LEASING
By James C. Ahlstrom, Iris C. Engelson and Victor Sirelson
James C. Ahlstrom received his Ph.D from Cornell University in 1972. Interested
in the use of mathematics in finance and business, he is the co-author (with Iris C.
Engelson and Ladislav V. Belcsak) of a widely used lease analysis computer
program.
Iris C. Engelson received her B.S.E. in chemical engineering from Princeton
University in 1983. Until joining Interet in 1987, she worked for Haverly Systems
in the development of linear programming computer codes.
Victor Sirelson received his M.Phil in operations research from Columbia
University in 1982 and his M.S. in mathematics from the University of California
at Los Angeles in 1969. Prior to joining Interet in December 1997, he was a
founding partner of Optimark Corporation specializing in automated dated entry
systems in healthcare.
§ 6:1 Introduction
A leveraged lease generally involves the acquisition of an item of capital equipment for a period
equal to most, but not all, of the equipment’s anticipated economic life and the sale of the
residual value and the tax benefits of ownership to another party in exchange for a lease rate that
is lower than the debt rate that would have applied to a purchase of the equipment. Although a
leveraged lease is a rather complex form of financing with documents that are measured in inches
rather than pages, its particular economics arise from only three of its features: (a) the
involvement of three parties: a lessor, a lessee, and a lender who provides (b) non-recourse debt
at a (c) substantial degree of leverage. Firstly we will consider leveraged leasing from the point
of view of the lessor (owner) to find out why it chooses to own equipment that will spend most
of its life in someone else's employ, how it analyzes its return, and how it chooses the leverage
and debt amortization schedule. Next, we will look at the transaction from the lessee's...