The New World Order: Lessors Must Refocus

In the 70s, 80s and early 90s, the large-ticket equipment leasing business consisted mainly of investments in equipment transactions wherein lessors bought and then leased equipment to corporate lessees. This business was fairly basic wherein corporations, which for one reason or another could not use tax benefits, would sell a piece of equipment to a lessor and lease it back, in essence trading tax benefits for a lower after-tax cost of financing. As companies became profitable in the mid- to late-90s, corporate users of equipment required less of the aforementioned financings. Companies discovered that they could make more efficient use of the tax benefits themselves than by trading them through leases. This led to lessors looking for new types of transactions where they could still generate tax benefits from equipment financings, and lessors found a new market in tax-exempt entities. While the corporate transactions of the earlier era relied on the credit of the lessee directly, transactions to the tax-exempt entities generally involved some form of credit enhancement in addition to the credit of the lessee. Although the lessee was always primarily liable, credit committees of investors required support for the credit of the lessee.

Some leasing companies at this time also took an interest in other forms of tax credits such as Section 29 and Section 42 Affordable Housing Credits. Certain of the Section 42 credits were also sold in a credit enhanced basis so that the lessor was looking not at the project itself, but to a guarantor to provide the investors' return should anything go wrong. Each of the Section 29 and Section 42 transactions involved the lessor owning a piece of property.