Certain
types of equipment and machinery such as heating, ventilation,
and air conditioning systems, boilers, and even LED traffic
signals create structural challenges from a lease-financing
standpoint due to the manner in which they are installed:
firmly attached to real property, rendered largely immobile,
and part of a larger, integrated system consisting of a variety
of secondary assets ranging from ducts and fans, to electronic
components and switch boxes.
Additionally, there are typically sizeable capital outlays
for items which are collectively described as “soft
costs” such as wiring, installation, labor, etc. – items
which can be included in a project’s financing, but
which hold no recoverable value in the event a lease contract
is terminated.
In order for a Lessor to preserve its’ security interest
in the equipment and machinery being financed, a fundamental
principle of equipment leasing is for all leased assets to
be held as personal property, separate and apart from real
property, for as long as the lease contract is outstanding.
Moreover, in order to maintain adequate value in collateral
assets and to prevent a funding imbalance between hard assets
and soft costs, Lessors usually limit the amounts allocated
for soft costs including expenditures for permits, designs,
and any applicable sales tax to equal no more than 25 percent
of the total amount financed. These provisions, coupled with
the proven durability of equipment with the aforementioned
characteristics enable lease-financing to be provided for
periods ranging from 60 months to 12 years.
The lease-financing product most commonly utilized is the
capital lease, either the lease-purchase agreement or the
finance lease. The periodic payment arrangement is usually
structured as a straight line amortization of the asset’s
purchase price over a given period, but can also be structured
in a manner that accelerates the build up of equity in the
project during periods when the project can support an elevated
periodic payment amount.
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