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Presto Change-Oops: Unexpected Challenges in Converting a Lease into an Equipment Finance Agreement

By Barry Marks and Patricia T. Reid

The rise of the Equipment Finance Agreement or EFA has been nothing short of meteoric. Fueled by concerns about lessor liability, confusion among state revenue agents regarding application of sales taxes and concerns regarding the reputation of equipment leasing, the EFA may soon eclipse the familiar “buck-out” lease intended as security.

On its face, using an existing equipment lease form to document an EFA transaction would seem fairly simple. The economics of an EFA should be similar to those of a lease intended as security: full payout with implicit interest and either a mandatory balloon payment or no additional payment at the end, with the borrower/lessee owning the equipment subject to a security interest for the lender/lessor. As many practitioners have found, however, taking a client's standard-form equipment lease and creating an equipment finance agreement is more complicated than it appears.

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