BLM71415 - 鈥橧ncome-into-capital鈥� schemes and back loaded leases: 'Income-into-capital' schemes: Purchase options: leaseback rental profile
The profile of the rent payable by the lessee to lessor (Borrower to Bank) under the lease or under-lease is usually unrelated to ordinary market rents demanded by ordinary landlords. The deal is structured as a finance lease. The lease to Borrower has the following features:
- up to the point, or points, at which Borrower can 鈥榖uy the asset back鈥� (鈥榬epay the loan鈥�) the rent is low; that is, well below the amount needed to repay the 鈥榣oan鈥� with 鈥榠nterest鈥�;
- the lease to Borrower will also provide for rentals which generally rise significantly at some point after one of the option dates. These rentals are constructed on a finance lease basis; that is, like any back-loaded finance lease rentals.
The expectation is that the Borrower will opt to get their asset (or something very similar) back when the desired 鈥榣oan鈥� period is over. The tax timing break gained by Bank from the transformation of its turn into an effectively tax-free capital sum is greater than the benefit gained from deferring the recognition of rental income.