Energy Project Financing : Resources and Strategies for Success

28 Energy Project Financing: Resources and Strategies for Success

The Capital Lease

The capital lease has a much broader definition than a true lease.

A capital lease fulfills any one of the following criteria:

1. The lease term ≥75% of the equipment’s life.


2. The present value of the lease payments ≥ 90% of the initial value
   of the equipment.


3. The lease transfers ownership.


4. The lease contains a “bargain purchase option” that is negotiated
   at the inception of the lease.

Most capital leases are basically extended payment plans, except

ownership is usually not transferred until the end of the contract. This

arrangement is common for large EMPs, because the equipment (such

as a chilled water system) is usually difficult to reuse at another facility.

With this arrangement, the lessee eventually pays for the entire asset

(plus interest). In most capital leases, the lessee pays the maintenance

and insurance costs.

The capital lease has some interesting tax implications, because the

lessee must list the asset on its balance sheet from the beginning of the

contract. Thus, like a loan, the lessee gets to depreciate the asset, and

only the interest portion of the lease payment is tax deductible.

Application to the Case Study

Figure 2-12 shows the basic third-party financing relationship

between the equipment manufacturer, lessor, and lessee in a capital

lease. The finance company (lessor) is shown as a third party, al-

though it also could be a division of the equipment manufacturer.

Figure 2-11. Resource Flow Diagram for a True Lease.

Lease Payments

Leased Equipment

Chilled Water

System Manufacturer

(Lessor) PizzaCo

(Lessee)