Leveraged Lease

Updated on January 3, 2024
Article byMilan Jha
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Leveraged Lease?

Leveraged lease refers to a lease agreement wherein the lessor acquires an asset partially financed by the financial institutions and leases out the same to the lessee for the agreed lease payments. The lessee transfers the lease rentals directly to an escrow account maintained with the financial institution by the lessor. The financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more charges the loan installments (principal and interest) from the proceeds available in the escrow account, and the balance amount, if any, gets transferred to the lessor’s account.

Example of Leveraged Lease

  1. ABC Inc. requires a piece of new equipment for US $ 1 million for 2 years for research purposes. Since ABC Inc. needs the equipment for a relatively short period, buying it would not be the right decision for the company. Hence, the company decided to take the equipment on leaseEquipment On LeaseEquipment Lease is where the equipment owner allows another party to use it in exchange of periodic rentals with no transfer of ownership and has the right to cancel the lease right away in case of breach of the lease agreement.read more.
  2. XYZ Inc. is considering buying similar equipment and ready to lease it out to the ABC Inc. post-acquisition. However, XYZ Inc. has only US $ 200,000 in hand and thus wishes to finance the balance of US $ 800,000 from the financial institution @ 7% interest rate.
  3. This is a transaction of leveraged lease wherein XYZ Inc. is the lessor who has part-financed the equipment from the lender (financial institution) on a non-recourse basis to lease it out to ABC Inc (the lessee).
  4. In turn, ABC Inc. (the lessee) will pay the lease rentals to the escrow accountEscrow AccountThe escrow account is a temporary account held by a third party on behalf of two parties in a transaction. It reduces the risk of failing to oblige the transaction by either of the parties. It operates until a transaction is completed and all the conditions are met.read more maintained with the financial institution. After adjusting the principle and interest due on loan, the financial institution remits the excess receivable to XYZ Inc. (the lessor).

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Leveraged Lease (wallstreetmojo.com)

Accounting Treatment

Accounting Standard Codification 840 (ASC 840) deals with accounting for capital leasesCapital LeasesA capital lease is a legal agreement of any business equipment or property equivalent or sale of an asset by one party (lesser) to another (lessee). The lesser agrees to transfer the ownership rights to the lessee once the lease period is completed, and it is generally non-cancellable and long-term in nature.read more in the United States. According to ASC 840, a lease is considered a leveraged lease, if:

The lease agreement satisfies any of the following:

  • There will be transfers ownership of the asset at the end of lease term
  • The lease allows the lessee an option to buy the asset at a price lower than fair value.
  • The lease term is for a major part of (more than 75%) the asset’s remaining economic life.
  • The present value of minimum lease payments is more than 90% of the fair value of the leased asset.


The lease agreement satisfy all of the following:

Further, as per ASC 840, in case of a Leveraged Lease, the lessor would recognize the

The lessee simply recognizes the payment of lease rentals as an expense and charge against its profit.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Important Points to Consider in Case of Leveraged Lease


The leveraged lease is a type of capital lease that involves three parties: a lessorLessorA lessor is an individual or entity that leases out an asset such as land, house or machinery to another person or organization for a certain period.read more, a lesseeLesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more, and a lender. The lessor acquires the asset through partial equity funding, and the remaining balance from the debt is financed by the lending institution on a non-recourse basis. After the asset’s purchase, the lessor leases it out to the lessee in consideration of lease rentals, which directly goes to the lending institution first, and the balance receivable, if any, gets transferred to the lessor.

This has been a guide to What is Leveraged Lease & its Definition. Here we discuss the examples of the leveraged lease along with accounting treatment. You can learn more about accounting from the following articles –