leverage

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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 ?
Moreover, rapidly rising rates render derivative traders and leveraged players increasingly aggressive sellers, competing for limited and waning liquidity.
Leveraged finance activities can be conducted in a safe and sound fashion if pursued with a risk-management structure that provides for appropriate underwriting, pricing, monitoring, and controls.
But, seeing a tax-free form of borrowing, companies began to abuse the advantages of leveraged life insurance.
and foreign banks and broker-dealers, most of which were LTCM's counterparties--whose credit and clearing services are critical to the establishment of leveraged trading positions.
A recent survey by Kohlberg Kravis & Roberts, a major force in the LBO movement, indicates tax revenues are not diminished by highly leveraged companies.
The continued expansion of our leveraged finance business is a priority for Jefferies, and John's experience as an accomplished leveraged and acquisition finance banker and his broad relationships with financial sponsors will enable him to make an immediate and positive impact on our business," added Kevin Lockhart, Global Head of Leveraged Finance Origination at Jefferies.
banks, the Federal Reserve and the other banking regulators have already made considerable progress in identifying sound practices for dealing with highly leveraged firms and, more generally, in distilling the lessons learned during the recent episodes of market volatility and incorporating those lessons in supervisory standards and procedures.
In June 2009, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 09-31, entitled "Non-Traditional ETFs, FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds," declaring that leveraged ETFs and inverse leveraged ETFs "typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.
It is now much easier than it used to be to mobilize tremendous sums of debt capital for leveraged purchases of firms.
Fitch believes the leveraged loan market will likely remain attractive to investors drawn to the generally secured nature of the loans.
second-lien leveraged loan market became more firmly established as an integral component of highly leveraged capital structures, as evidenced by the following statistics: Second-lien loan issuance in 2006 is estimated at $29.
are acquiring a higher proportion of leveraged loans used for shareholder friendly-activities than the market as a whole.