A leveraged lease is a financing arrangement often used to acquire high-cost assets such as real estate, aircraft, or heavy machinery. This structure involves three primary parties: the lessor, the lessee, and the lender. The lessor acquires the asset through a combination of equity and borrowed funds, leases it to the lessee, and manages ownership responsibilities. The lessee uses the asset and makes lease payments, while the lender provides nonrecourse financing to support the acquisition.

Nonrecourse financing is a defining feature of leveraged leases. In this arrangement, the loan is secured by the lease payments and the leased asset. If the lessee defaults, the lender’s claim is limited to the leased asset, mitigating the lessor’s direct financial liability. The lease payments are typically prioritized for loan repayment, with any surplus contributing to the lessor’s returns after debt obligations are satisfied.

The lessor benefits from tax shields, including depreciation, interest deductions, and the asset's residual value. These tax advantages improve the lessor’s after-tax returns, enabling them to offer favorable lease terms. For lessees, leveraged leases provide access to expensive assets while conserving capital, as the initial investment requirements are significantly reduced.

Leveraged leases are particularly effective for financing high-value assets with long, useful lives. They offer an efficient mechanism for lessees to manage financial resources while allowing lessors and lenders to take advantage of tax benefits and secure predictable returns.