7889 / What is a “wrap lease”?

An equipment leasing company may enter into a “wrap lease.” After entering into the basic arrangement between manufacturer and user, and having arranged financing, the equipment leasing company sells the equipment (subject to the user lease and lender’s rights) to an unrelated third party who in turn sells the equipment (still subject to the user lease and lender’s rights) to a partnership or trust. The partnership or trust then leases the equipment (still subject to the user lease and lender’s interest) back to the equipment leasing company. This second lease to the equipment leasing company is generally for a longer term than the leasing company’s underlying lease to the user. This lease from the investors to the leasing company is termed a “wrap lease.” (In effect, the second, longer lease to the leasing company is wrapped around the original lease to the user.) In this arrangement, the leasing company both leases from the partnership, trust, or directly from the investors, and in turn leases to the user. (In other words, the leasing company is a lessor with respect to the user and lessee with respect to the partnership or trust.)