Lease Finance Flashcards
what is a sale leaseback?
a business selling its real estate to a third party and immediately leasing it back from the buyer
what is a capitalization rate?
used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.
in a sale leaseback, what influences a cap rate?
The cap rate will vary depending on the lessee’s credit, property location, and lease terms being
offered. Better credit and longer lease terms equate to a lower cap rate and therefore lower cost of
capital to the business owner
what are the advantages to a sale leaseback
- ) Unlike mortgages, the business owner can pull out 100% of the property’s value
- ) off balance sheet treatment if the leases are structured correctly
- ) better option than raising more equity due the dilution of the owner’s interest in their business that occurs in that case
Why do firms prefer operating leases to capital leases?
- ) keeps leases off the books (in a capital lease the PV of the lease expenses is treated as debt and interest is imputed on this amount)
- ) alllows a firm to defer expenses
A lease will be treated as a capital lease if it meets any of these 4 conditions:
(a) if the lease life exceeds 75% of the life of the asset
(b) if there is a transfer of ownership to the lessee at the end of the lease term
(c) if there is an option to purchase the asset at a “bargain price” at the end of the lease term.
(d) if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset
How does a lessor record a capital lease?
The lessor records the present value of future cash flows as revenue and recognizes expenses. The lease receivable is also shown as an asset on the balance sheet, and the interest revenue is recognized over the term of the lease, as paid.
What do you call the difference between the monthly equivalent yield and bond equivalent yield?
The lanyap
What are the 4 primary components of a leveraged lease?
- Asset sold to a passive equity investor
- Asset leased back to a creditworthy lessee
- Asset purchase price financed through debt and equity
- Debt repayment primarily reliant upon lease stream and secondarily on the security interest in the asset
How is debt repaid in a CTL?
primarily through the lease stream and secondarily on the security interest in the asset
Who is the borrower in a typical CTL transaction structure?
- a special purpose, bankruptcy remote entity established to own and leaseback the asset
- acts as lessor and landlord
What are the four parties in a typical CTL transaction and what do they give/receive?
1- Borrower (Receives rent and lease obligations; Gives mortgage and assignment / P&I to noteholders and passes through FCF and tax benefits to equity investor)
2- Owner participant/ equity investor (receives FCF in excess of debt service and tax benefits and gives equity $ to borrower)
3- Lessee/ tenant (receives $ from sale of asset and gives lease payments)
4- Noteholders (receives P&I on notes and gives debt)
What are the 3 primary benefits of a CTL to the Lessee?
1- operating lease treatment
2- control of the asset
3- optimization of capital
How does operating lease treatment benefit a lessee?
- will be treated as off-balance sheet financing, which will improve ROA and leverage metrics
- tax benefits from rent being fully deductible
What are the primary benefits of a CTL to the equity investor?
- tax benefits from depreciation and 1031 exchange
- potential equity appreciation
