Cross-border Leasing - History

History

Leasing techniques have been used for financing purposes for several decades in the United States. The practice developed as a method of financing aircraft. Several airlines in the early 1970s were notoriously unprofitable and very capital intensive. These airlines had no need for the depreciation deductions generated by their aircraft and were significantly more interested in reducing their operating expenses. A very prominent bank would purchase aircraft and lease them to the airlines. Because the bank was able to claim depreciation deductions for the aircraft, the bank was able to offer lease rates significantly lower than the interest payments that airlines would otherwise pay on an aircraft purchase loan (and most commercial aircraft flying today are operated under a lease). In the United States, this spread into leasing the assets of U.S. cities and governmental entities and eventually evolved into cross-border leasing.

One significant evolution of the leasing industry involved the collateralization of lease obligations in sale leaseback transactions. For example, a city would sell an asset to a bank. The bank would require lease payments and give the city an option to repurchase the asset. The lease obligations were low enough (due to the depreciation deductions the banks were now claiming) that the city could pay for the lease obligations and fund the repurchase of the asset by depositing most but not all of the sale proceeds in an interest-bearing account. This resulted in the city having pre-funded all of its lease obligations as well as its option to repurchase the asset from the bank for less than the amount received in the initial sale of the asset, in which case the city would be left with additional cash after having pre-funded all of its lease obligations.

This gave the appearance of cities entering into leasing transactions with banks for a fee. By the late 1990s many of the leasing transactions were with cities in Europe, and in 1999 cross border leasing in the United States was "chilled" by the effective shutdown of LILOs (lease-in/lease outs). (LILOs were significantly more complicated than the typical lease where a municipality (for example) would lease an asset to a bank and then lease it back from the bank for a shorter period of time; LILOs relied on arcane rules of tax accounting to yield significant returns and are currently on a list of transaction types that the U.S. tax authority considers abusive.) Since 2004 cross border leasing has been effectively eliminated by the passage of the JOBS ACT of 2004, which made the vast majority of cross border leases unprofitable for the parties to the leasing transaction.