Sale-Leaseback

An equipment leasing program structures a lease so that, over the term of a single lease with one lessee, the contracted payments are designed to return substantially all of the lessor's cost of the equipment plus a profit, without relying on the equipment's value at the end of the term. Which type of lease is this?

1. A.A sale-leaseback arrangementWrong. A sale-leaseback describes a transaction where an existing owner sells equipment and leases it back; it does not describe how a single lease's payments are structured to recover cost.
2. B.A full-payout leaseCorrect. A full-payout lease is designed so a single lessee's payments recover substantially all of the lessor's cost plus profit within that one lease term.
3. C.An operating leaseWrong. An operating lease is the opposite structure, recovering the lessor's investment across multiple leases and residual value rather than from a single lessee's payments.
4. D.A participating mortgageWrong. A participating mortgage is an unrelated real estate lending concept and has nothing to do with how equipment lease payments are structured.

Why: This is the defining feature of a full-payout lease: a single lessee's payments are sized to recover the lessor's full investment plus profit within that one lease term, so the lessor does not need to count on residual value or a subsequent lessee to come out ahead. An operating lease is the opposite structure, where the lessor recovers its investment only across multiple, typically shorter leases and residual sale proceeds. A sale-leaseback is a distinct transaction in which an owner sells equipment it already holds and immediately leases it back, not a description of how a single lease's payments are sized. A participating mortgage is an unrelated real estate debt instrument and has no bearing on equipment leasing structure.

A sponsor is deciding how to structure a lease for a piece of general-purpose equipment, such as standard computer hardware, that has an active secondhand rental market and is commonly re-leased to a series of different users over its useful life. Which lease structure best fits this kind of equipment?

1. A.A full-payout lease, because it produces the highest total contracted revenue from a single lesseeWrong. Total contracted revenue from one lessee is not the deciding factor; the equipment's suitability for repeated re-leasing is what makes an operating structure the better fit.
2. B.A sale-leaseback arrangement, because the sponsor should sell the equipment immediately after acquiring itWrong. A sale-leaseback answers a different question, whether an existing owner monetizes equipment it already holds, and has nothing to do with matching lease term to re-leasing demand.
3. C.A participating lease, so the lessor shares in the lessee's operating profitsWrong. This is not a recognized equipment leasing structure being tested here and does not address the re-leasing demand described.
4. D.An operating lease, because the equipment's recurring re-leasing demand lets the lessor recover its investment across multiple shorter leasesCorrect. Equipment with active re-leasing and resale demand is the classic fit for an operating lease structure.

Why: General-purpose equipment with an active secondhand and re-leasing market is well suited to an operating lease, where the lessor plans to lease the same equipment to a series of lessees over shorter terms and relies on that recurring demand, along with eventual resale, to recover its investment. A full-payout lease fits assets suited to a single long-term commitment with one lessee, which is a poor match for equipment specifically valued for its ability to be re-leased repeatedly. Neither a sale-leaseback nor a participating structure describes how to match equipment type to lease term; they answer different questions entirely.

A real estate program purchases an office building from an operating company and simultaneously leases the building back to that same company under a long-term lease, with that one company as the building's only tenant. What risk does this structure carry that a program owning a similarly valued building leased to a diverse mix of many smaller tenants does not?

1. A.Construction risk, since sale-leaseback transactions always involve new constructionWrong. A sale-leaseback involves an already-existing building being sold and leased back, not new construction.
2. B.Depreciation recapture risk, since only single-tenant buildings generate a taxable gain on eventual saleWrong. Depreciation recapture can arise on the sale of any depreciated property, regardless of how many tenants it has.
3. C.Zoning risk, since a single-tenant building is more likely to require rezoning than a multi-tenant buildingWrong. Zoning requirements are unrelated to how many tenants occupy a building, and nothing in the facts suggests a rezoning need.
4. D.Concentration risk, since the program's entire rental income depends on a single tenant's continued performanceCorrect. A single-tenant sale-leaseback ties the program's entire rental income to that one tenant's ongoing performance.

Why: A sale-leaseback to a single tenant concentrates the program's entire rental income in that one company's ongoing ability and willingness to pay; if that tenant runs into financial trouble, the program has no other tenant's rent to fall back on. A building leased to a diverse mix of many smaller tenants spreads that exposure, so that one tenant's financial trouble affects only a fraction of the property's income. This is the same concentration risk that arises whenever a program's income depends on a single counterparty rather than a diversified base of tenants, applied here to a sale-leaseback structure specifically.