November 1, 1998 |
By
Keith Martin in Washington, DC
LILO’s are a form of lease financing where the owner of a power plant leases his plant to a US equity, which subleases it back. Because of differences in the rent patterns under the head lease and the sublease, the US equity ends up with net rent deductions in the early years that look like accelerated depreciation. Meanwhile, the lessee is able to pocket a net upfront cash payment of as much as 8 or 9% of the asset cost.
Most LILO’s involve assets owned by foreign governments or US municipalities. The problem with assets belonging to US private companies is the lessee cash benefit is treated as prepaid rent for US tax purposes and would be taxed immediately in the US.
This development is a huge potential break-through. However, US Treasury officials say long-anticipated final regulations under section 467 — which will require that the LILO product be retooled — will be issued by year end.
