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Consider leasing something.

Typical examples are a three-year car lease or renting an apartment.

Although there is no "down payment" per se, typically, a lessee does put some sort of security deposit or enter into a contractual agreement that limits an overuse.

For example, a three-year car lease might limit per annum mileage the vehicle can put on.

An apartment landlord might stipulate the right to examine any damages and request compensation or the right to restore the unit to a clean condition in a leasing agreement.

My question is:

In either case or in any leasing situation, can a leased asset be collateralized?

My immediate response would be "no", because you cannot collateralize something you don't even own. In the car-lease example, the lessee does not own the car until it is fully paid for ownership at the end of the three-year lease. In the case of renting an apartment, this is also not possible unless it is some sort of leasehold property in Maui.

Any thoughts?

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In either case or in any leasing situation, can a leased asset be collateralized?

You cannot put something that you don't own as a collateral. Collateral means giving something up in return for the debt relief you'd be getting when in default. You can't give something up if you don't own it.

The lease contract itself, on the other hand, most definitely can be (at least conceptually) collateralized, since the lease contract is an asset. Depending on the lease terms, you can potentially put the lease as a collateral. This doesn't usually happen in personal finances, but consider a leased airplane - an airline has a right to use an airplane it doesn't own, and it can collateralize that right for a loan.

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  • Just a point of clarification. In your example of a leased aircraft. You view the lease contract to use the aircraft as a sum of future cash flows, correct? For instance, if Delta has a lease contract on an aircraft, this lease contract itself is a sum of discounted cash flows Delta would make by operating the aircraft from Boston to Vegas. But, isn't there a problem? Why would a creditor give Delta a loan solely based on the lease contract?
    – Frank Swanton
    Commented May 31, 2022 at 6:53
  • For example, consider Goldman Sachs has an entire floor of a high-rise building in Manhattan that it doesn't own but leases. If its chief brings the lease contract to a bank and asks for a loan, the creditor would say the lease contract only means some sort of space for GS to operate and perform its daily business. In other words, if something goes wrong, GS can switch to a different building or a different floor and easily enter a new lease contract. So the lease contract itself wouldn't worth "much" as a firm's business operations might not crucially depend on the space.
    – Frank Swanton
    Commented May 31, 2022 at 6:56
  • @FrankSwanton a lease on an aircraft gives a right to use an aircraft. How banks and airlines value that right is irrelevant, the point is that airlines can collateralize it in order to get credit based on that valuation, and if they default the banks can sell that right to some other airline instead. So if, say, Delta doesn't pay up as promised, that Boeing 787 will, instead of flying BOS to LAS for Delta, fly CDG to DEL for Air France. Because Air France will purchase the lease from the bank.
    – littleadv
    Commented May 31, 2022 at 7:26
  • It is more clear now. Your valuation of the contract is "the right" to operate the aircraft. Thanks!
    – Frank Swanton
    Commented Jun 1, 2022 at 0:05

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