US Industrial Outlook

Equipment leasing

Equipment leasing – Industry Overview

Elmora Uzzelle

In 1993, equipment leasing grew about 3 percent, a little better than 1992’s growth, but still modest by historic standards. Expansion was hindered by the economy’s sluggish performance (see Trends and Forecasts for Equipment Leasing table).

Leasing is a financial mechanism involved in about 32 percent of private, nonresidential purchases of producers’ durable equipment; the percentage has been relatively constant for the last several years. In 1992, according to an industry survey, growth in leasing was led by containers, with a 150 percent increase over the previous year. Furniture, fixtures, and equipment was second with a 100 percent increase, while materials handling increased 60 percent.

Computers replaced aircraft as the largest leasing sector in 1992, following a 33 percent plunge in aircraft leasing because of commercial airlines’ economic difficulties (Table 1).

Table 1: Total Annual Leasing Volume(*)

(in percent)

Equipment Types 1991 1992

Agriculture 0.9 0.9

Aircraft 22.9 15.3


Mainframes 8.9 9.8

Peripherals 5.8 6.4

Small systems 5.7 5.9

Software 0.7 0.8

Construction 4.4 5.0

Containers 1.2 3.0

Electrical power 0.7 1.1

Fresh and salt water transportation 0.7 1.1

Office furnishings 1.9 3.8

Industrial and manufacturing 11.1 8.9

Materials handling 1.0 1.6

Medical 3.5 5.1

Office machines 6.8 7.6

Turnkey plants 1.8 1.2

Railroad 2.4 3.6

Telecommunications 5.8 6.2

Trucks and trailers 6.0 7.4

Other 7.8 5.2

Total 100.0 100.0

(*) Percent distribution by type of equipment, based on dollar

value. Brokered business

is not included. Inventory includes only acquisitions during

each year. Original

cost of equipment added through leasing was estimated at $121.5

billion and $125.1

billion for 1991 and 1992, respectively.

NOTE: Detail may not add to total due to rounding.

SOURCE: U.S. Department of Commerce: International Trade


Equipment Leasing Association of America.

Before continuing this chapter, please see “Getting the Most Out of Outlook ’94” on page 1. It will answer questions you may have concerning data collection procedures, forecasting methodology, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapters 5 (Construction), 18 (Electrical and Renewal Energy Equipment), 20 (Aerospace), 26 (Computer Equipment), 35 (Motor Vehicles), and 44 (Medical and Dental Instruments and Supplies).

The Leasing Industry

Leasing companies lease property directly – or arrange the lease – and provide all or part of customers’ financing. Leasing becomes attractive when benefits accruing from using the equipment exceed those of ownership. The terms of lease contracts can be tailored to the lessee’s specific needs.

Equipment leasing is usually long-term. The leasing industry as discussed here excludes companies engaged primarily in real estate leasing or in short-term equipment rentals.

There are four types of lessor: Banks and their affiliates; “captives” (typically manufacturers’ subsidiaries); independents (non-affiliated lessors for whom leasing is the major source of revenue); and diversified financial-services organizations, such as insurance companies, pension trusts, or other entities for which leasing is an additional revenue source. Lessors provide investment capital and pass on tax benefits, if any, to lessees. Many lessors specialize in particular types of equipment or markets.

The two basic types of lease products are finance leases, which accounted for 84 percent of total original cost of equipment added under lease in 1992, and operating leases. These are defined in the glossary in this chapter.

Aggregate data on leasing is limited because leasing companies are classified in many different industries. In the past few years, the U.S. Department of Commerce has included some questions on leasing activity in certain economic censuses and investment surveys. From the responses to these questions, data on the volume and type of leasing and its role in capital investment should become available in a few years.

New Strategies

As the market has settled into a single-digit growth rate, lessors are developing new strategies to maintain an acceptable rate of return on their equity. Some have begun to offer value-added services such as insurance and equipment maintenance. They have also taken positive steps to become more market-driven and responsive to the needs of customers. Many lessors stress the expertise they can offer to customers in addition to selling products.

Lessors are also sharing more information with competitors. In 1992, the Equipment Leasing Association of America (ELA), a nonprofit trade association representing equipment lessors, and Dun and Bradstreet established a data base that includes lessees’ credit histories. This exchange network of credit information is designed to help lessors make better credit decisions.

The growth of captive leasing companies is expected to remain stable. These lessors’ primary advantages are the consistent availability and terms of funding. They must, however, remain focused on their parent company’s overall business strategy.

Independents, in contrast, must work to maintain relationships with funding sources and to show prospects for continued profitability. New independent entries in this industry are expected to encounter difficulty acquiring funding.

Direct finance leases, where lessors provide 100 percent of the financing, accounted for 67 percent of the total cost of equipment added through leasing in 1992, up from 58 percent in 1991, according to an industry survey.

Leverage leases, where third-party investors provide debt financing in combination with lessors’ equity, declined to 16 percent in 1992 from 25 percent in 1991, reflecting a drop in large leverage-lease transactions. A principal reason was the sharp decrease in aircraft leases, due largely to airline bankruptcies and to declines in airline traffic. Airlines accounted for 58 percent of the dollar value of all leverage leases in 1991. However, the decline in leverage leases to airlines was offset by a 187 percent increase in leverage leases to railroads. Leasing of electrical power generation equipment, another strong area for leverage-lease activity, more than doubled its volume in 1992 from 1991.

Capital-intensive airlines are a major source of revenue for equipment lessors; 58 percent of aircraft operated by domestic airlines are leased, as is 42 percent of the world’s commercial jet aircraft.

Securitization in Leasing

Securitization, where payment obligations are pooled and sold by investment bankers on secondary markets as securities, has become an alternate source of liquidity for mainstream leasing companies. The practice offers large and small lessors ways to tap lower-cost funds, reduce the cost of capital, and keep these costs off their balance sheets.

However, not all assets lend themselves to securitization. Costs related to the pooling of assets require that a minimum of $15 million to $30 million be bundled together to render the transaction cost-effective. Another complication is the set of contingencies inherent in some contractual obligations. For example, leases of high-technology equipment may oblige the lessor to upgrade the equipment if technological improvements are introduced during the lease’s life.


In 1992, the Environmental Protection Agency issued an important clarification of the Superfund law, absolving lender-lessors from liability for environmental damage on their borrowers’ property. The law, however, is narrow in scope, with no effect on other federal or on state environmental laws. The law will expire in October 1994, but is expected to be extended in strengthened form.


While captives that clearly support sales of the parent’s products will remain global in scope, international expansion of mainstream leasing companies will remain limited in the immediate future. The pending North American Free Trade Agreement has the potential to open new business opportunities for U.S. companies in Canada and Mexico, according to the Equipment Leasing Association of America.

Leasing companies most likely to expand globally will be those tied to a parent’s products, those that have a major international customer, and those that can provide a special niche or skill that is absent from the international marketplace. Except for some large European and Asian banks that have significant leasing businesses in the United States, few foreign companies are likely to be interested in coming into an already saturated market.

Legislation and Litigation

Legislation at federal, state and local levels could affect the leasing industry. To avoid conflicts among states in taxing interstate transactions, as often occur in leasing, a Uniform Interstate Sales and Use Tax Act has been proposed by the Multistate Tax Commission. This proposed revision becomes increasingly important as some states, hard-pressed to replace declining revenues, begin to aggressively enforce existing tax laws.

The association has historically supported an investment tax credit, but it withheld support from the version considered by Congress in the 1994 budget. The association considered this version too complicated and restrictive. A tax credit is generally believed to lead to infusion of new equity into the leasing industry.

The computer leasing industry is changing as a result of litigation filed by international Business Machines and IBM Credit Corp. against several lessors in 1991 and 1992. This suit is an attempt to limit movement and modification of EBM equipment. While the litigation drags on, IBM has placed strict limitations on the use of its equipment. In a related move, the Computer Leasing and Remarketing Association, an international IBM association that represents companies that buy, sell and lease computers, has adopted a standard of ethical conduct whereby its members will not misrepresent the source of any hardware or part. Under this standard, a leased machine bearing an EBM label may not contain a substituted part from another manufacturer.

Outlook for 1994

Equipment leasing is expected to increase about 3 percent in 1994, to $128.7 billion of equipment value. Overall volume should continue to represent about 32 percent of all investment in equipment. While additional consolidation may be necessary for a while, principal stimuli for growth in 1994 will be the availability of funds, public policy decisions, and how well companies adapt services to customer needs.

Expansion of equipment leasing depends largely on growth of the economy. The industry is expected to benefit slightly this year as banks continue to recover from their slump and look more aggressively for loan outlets.

Long-Term Prospects

The development of a global presence is an incentive for leasing companies looking to expand their markets. Brightest prospects for foreign expansion appear to be in Canada and Mexico under the North American Free Trade Agreement, if approved, and in the countries of Central and Eastern Europe as the business climate there stabilizes.

Computer lessors, whose products continue to become more powerful and versatile, will move toward leasing larger numbers of lower-cost equipment. Lessors that have established high levels of customer service in niche markets should be well positioned for this. They will also find new ways to adjust to the quickening pace of technology that shortens equipment-life cycles.

Leasing of big-ticket items will continue to concentrate in transportation, energy, and some industrial equipment. Many lease-transaction portfolios are heavily concentrated in commercial aircraft, where growth will be modest. Stronger growth is likely in railroad equipment, ships, satellites, and electric generating equipment. Financing is likely to remain tight. Low-price leasing is expected to decline, because of the rising cost of the sophisticated administrative systems that leasing requires; it costs about as much to administer a low-price lease as one for high-price equipment. Despite these pressures, continued growth is expected in the leasing industry.


Capital Lease – Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing. A capital lease meets one of the following criteria: (1) the lessor transfers ownership to the lessee at the end of the lease term; (2) the lease contains the option to purchase the asset at a bargain price; (3) the lease term is equal to 75 percent or more of the estimated economic life of the property, except when used property is leased toward the end of its useful life; or (4) the present value of minimum lease rental payments equals 90 percent or more of the fair market value less a lessor’s investment tax credits.

Direct Financing Lease – Generally, a non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any criteria of the capital lease.

Economic Life (useful life) – The period of time during which an asset will have economic value and be usable.

Finance Lease – Typically, a finance lease is a full-payout, non-cancellable agreement in which the lessee is responsible for maintenance, taxes, and insurance.

Full Payout Lease – A lease in which the lessor recovers, through lease payments, all costs incurred in the lease, plus an acceptable rate of return, without reliance upon the equipment’s “residual value.”

Lease – A contract in which one party conveys the use of an asset for a specified time at a predetermined rate.

Leveraged Lease – In this type of lease, lessors provide an equity portion (usually from 20 to 40 percent) of the equipment cost, and lenders provide the balance on a nonrecourse debt basis. An important feature of this package is that lessors receive tax benefits from ownership.

Operating Lease – Any lease that is not a capital lease is defined as an operating lease. These are generally used for short-term leases of equipment. Lessees can acquire use of equipment for a fraction of the asset’s useful life.

Residual Value – The value of an asset at the conclusion of a lease.

Sale-Leaseback – An arrangement whereby equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner, and leases it back to the original owner, who continues to use the equipment.

Single Investor Lease – (See also Full Payout Lease or Finance Lease.) A tax-oriented lease whereby the lessor achieves its desired rate of return via a combination of rental payments, depreciation, and fair market value of the equipment at the end of the original lease term. Because of the value of the tax benefit, rental payments will be lower than would he the case under the finance lease.

Additional References

Equipment Leasing Association of America (ELA). 1300 17th St., North Arlington, VA 22209. Telephone (703) 527-8655. Asset Finance & Leasing Digest, Euromoney Inc., 145 Hudson St., 7th Floor, New York, NY 10012. Telephone (212) 941-5880. The Computer Leasing & Remarketing Association, 1212 Potomac St., NW, Washington, DC 20007. Telephone (202) 333-0102. World Leasing Yearbook 1993, Euromoney Inc., 145 Hudson St., 7th Floor, New York, NY 10012. Telephone (212) 941-5880. American Car Rental Association, 927 15th St., NW, Suite 1000, Washington, DC 20005. Telephone (202) 789-2240. Truck Renting and Leasing Association, 2011 Pennsylvania Ave., NW, Fifth Floor, Washington, DC 20006. Telephone (202) 775-4859. 1992 Survey of Industry Activity, published June 1993, Equipment Leasing Association of America, 1300 17th St., North Arlington, VA 22209. (703) 527-8655. National Vehicle Leasing Association, 3710 South Robertson Blvd., Suite 220, P.O. Box 34579, Los Angeles, CA 90034. Telephone (310) 938-3170.

COPYRIGHT 1994 U.S. Department of Commerce

COPYRIGHT 2004 Gale Group