Leveraged Leasing

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...