Lenders in Leveraged Leasing Transactions: Insurance Considerations

Summary

This practice note discusses insurance issues facing lenders in leveraged leasing transactions and the steps that a lender should take to protect its interests. A leveraged lease transaction is one where a lessor leases an asset (such as real estate, automobile, or equipment) to a lessee. It is frequently used when the entity that wants an asset does not have sufficient money to buy it nor do they want it lease it for a long time. A remedy is a leveraged lease wherein the lessee can borrow money for the asset's value. The loan lasts and is repaid over the life of the lease. In a leveraged leasing transaction, the lessor owns the asset after borrowing some or all its purchase price from a lender. The asset is collateral for repayment of the lender's loan, and the lessee's lease payments are used to cover the lessor's payment obligations to the lender.