JOL Economics
During the lease term, the Japanese equity investor enjoys the tax benefits but limited lease free cash. This limited cash return during the lease term and the ensuing residual value risk at lease maturity is the basis for the lease tax treatment by the Japanese Tax Authorities (NTA). As previously noted, this treatment allows the Japanese equity investor to offer a competitive lease rate factor to the airline. Upon lease expiry, the Japanese equity investor sells the aircraft. The proceeds are applied under the lease waterfall to first satisfy the senior debt balloon, and the balance is applied to the equity investor’s residual. In some cases, the aircraft may be re-leased at the end of the term with the resulting rental payments used to repay the loan amount over the term of the ensuing lease. Any proceeds over and above the sale proceeds (or if an ensuing lease, from the free cash portion of the lease rentals) are for the benefit of the Japanese equity investor. To facilitate the sale of the aircraft and to ensure the proceeds are sufficient to satisfy the senior debt balloon payment, the Japanese equity investor may purchase a Residual Value Guaranty (RVG) and enter into a remarketing agreement with a third party.
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