’Income-into-capital’ schemes and back loaded leases: 'Income-into-capital' schemes: purchase option
In an income-into-capital scheme, often the Borrower group’s lessee company will not hold the option to re-acquire the asset. That option can be held by a fellow group member, and when the option is exercised at, say, Year 10 that company will hold both the property and the landlord’s interest in the lease granted by the Bank to the lessee. After the option is exercised, therefore, the group lessee company pays rents to the associate which now holds the landlord’s interest.
Thus, the lessee rents the asset for modest amounts for, say, the first ten years from the Bank and then, once the asset is back in the Borrower group, the lessee rents the asset from a fellow subsidiary but for much higher rents for the remainder of the lease (say another ten years). These are the same high rents the lessee agreed to pay the Bank in the first place except that the lessee now pays them in Years 11 to 20 to a fellow member of the Borrower group.