leverage


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Related to leverage: Leverage ratio, Financial leverage

Leverage

A method of financing an investment by which an investor pays only a small percentage of the purchase price in cash, with the balance supplemented by borrowed funds, in order to generate a greater rate of return than would be produced by paying primarily cash for the investment; the economic benefit gained by such financing.

Real estate syndicates and promoters commonly use leverage financing. A leveraged investor builds up Equity or ownership in the investment by making payments on the amount of principal borrowed from a third person. The money allotted to the repayment of interest charged on the borrowed principal is treated typically as a deduction that reduces taxable income. The greater the amount of principal borrowed, the larger the interest payments and the resulting deductions. Obviously, a taxpayer who pays cash is not entitled to deductions for interest payments. In many cases, deductions for the depreciation of thecapital asset constituting the investment are also permitted.

Any investor receives an anticipated rate of return from the investment although the rate may fluctuate depending upon the economic climate and the management of the investment. Because of the favorable tax treatment enjoyed as a result of this method of financing, the leveraged investor keeps more of the income generated by the investment than an investor who financed the investment mainly through cash. There is, however, risk involved in leverage financing. If the income generated by the investment decreases, there might not be adequate funds available to meet payment of the outstanding principal and interest, leading to substantial losses for the investor.

leverage

1) n. the use of borrowed money to purchase real estate or business assets, usually involving money equaling a high percentage of the value of the purchased property. 2) v. to borrow most of the funds necessary as a loan against real estate to buy other real estate or business assets. The dangers of high leverage are over-appraisal of the property to satisfy a lender, a decline in the value of the property (which may have been purchased during a period of high inflation), high carrying costs (interest, insurance, taxes, maintenance) which exceed income, vacancies, and/or inability to finance improvements to increase profits. Too often the result is the collapse of "paper" real estate empires which have been created by risky leveraging.

leverage

noun advantage, force, influence, potency, pressure, purchase, vantage
See also: advantage, clout, influence, latitude
References in periodicals archive ?
Moody's finds that private-sector leverage does not appear to be a particularly powerful indicator of systemic banking crises, in terms of providing a strong signal about where and when crises will emerge.
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The main reason for the difference is that these other programs allow taxpayers to leverage their investment with the debt of the underlying business or project, thereby increasing the return on equity, such that the tax credit becomes the only source of return the investor requires.
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The WR must attempt to get an inside-out (I/O) leverage block on all run plays.
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NEW YORK -- According to a special report published today by Fitch Ratings, the number of taxable closed-end funds (CEFs) utilizing auction rate preferred stock (ARPS) as leverage decreased to 40 at year-end 2010, from 112 at year-end 2007.
In a consolidated return, the income of Dana's subsidiary, Leverage Leasing, was reported on the cash method of accounting, while Dana and other subsidiaries reported gross income and expenses using the accrual method.
I am pleased to appear before this committee to discuss the President's Working Group on Financial Markets' Report on Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management.