Overview

There are two categories of financial products available today in the private placement market. They are tax and non tax motivated products. Financial products that are tax motivated offer economic benefit to investors through preference items like depreciation and interest. These benefits are shared through the extension of a financial transaction and are reflected in the terms of repayment, such as the interest rate, dollar amount of rents, etc.                                       

Financial products that are non tax motivated offer only a cash on cash benefit to the investor equal to the net spread on the investors cost of funds or difference between the investors cost of funds and the rate of interest charged the borrower.  Following are some of the most frequently used tax and non tax motivated financial products available in the marketplace today.

True Leasing 

A True Lease transfers the value of an owner's/lessor’s tax benefits to the user/lessee in the form of reduced rental payments. The sum of these payments discounted at the user's incremental borrowing rate, present value, is generally less than the user’s alternatives to purchase outright or mortgage the equipment. A True Lease is especially attractive to a user/lessee who cannot efficiently utilize the tax benefits available through direct ownership of the equipment. Today, True Leasing is used to finance a variety of capital equipment purchases from chemical tankers to the ownership of fractional shares of corporate jet aircraft.

Structured Debt

Generally, non tax effected leases refer to secured loans or leases that may qualify for off  balance accounting under   FASB, but do not qualify as a true lease for tax purposes. In most cases the lease structure is similar to a loan. The use  of structured debt products like "synthetic" leases and subordinate loans (2nd priority interest) in combination with  senior loans (first priority interest) are practiced methods of obtaining 100% financing for equipment acquisition. Structured debt products are used to purchase both new and used equipment but tend work best for assets with a  limited remaining useful life and/or which are trading.