Leveraged Lease Law and Legal Definition

Leveraged lease refers to a lease that is collateral for the loan through which the lessor acquired the asset. Under a leveraged lease, a lessee makes payment to a lessor, who makes payment to the lender. Leveraged lease is also known as third- party equity lease or tax lease.

In Paul Revere Protective Life Ins. Co. v. Weis, 535 F. Supp. 379, 381 (E.D. Pa. 1981, it was held that a leveraged lease is an agreement whereby the lessee selects the type and cost of equipment to be leased. The equipment is then purchased by the lessor from the manufacturer and leased by the lessor to the lessee. The lessor pays part of the cost of the equipment with its own funds and finances the balance by the issuance of a note in favor of an institutional lender. The note is typically secured by a security interest in the equipment and by an assignment of the lease.

A leveraged lease transaction is mainly designed to provide maximum tax benefits to the owner-lessor. If the owner-lessor is a partnership, the benefits accrue to the general and limited partners.