Glossary
- Addendum (also called Addenda) -
- A legal term. The instrument used to modify an original agreement or contract.
- Alternative Minimum Tax -
- A separate tax calculation in which a taxpayer must pay the higher of its regular tax or AMT liability. The corporate AMT rate, although lower than the regular tax rate, is applied to a different, typically higher, taxable income than for regular taxes. This form of tax makes it more difficult to avoid paying a fair share of tax through the use of certain regular tax benefits, which are known as tax preference items or adjustment items.
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Bargain Purchase Option -
- A provision allowing the lessee, at his option, to purchase the leased asset for a price which is sufficiently lower than the expected fair market value (at the date such option becomes exercisable), that exercise of the options appears, at the inception of the lease, to be reasonably assured.
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Bargain Renewal Option -
- A lease provision allowing the lessee to extend the lease for an additional term with payments substantially lower than the fair value of the asset, such that exercise of the option appears, at the inception of the lease, to be reasonably assured.
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Bonds -
- Certificates evidencing indebtedness or loan certificates issued by the owner Trustee.
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Broker -
- A company or person who arranges lease transactions between lessees and lessors for a fee
C-Corp,
Public or private corporation. A legal entity that pays income taxes separately from shareholders.
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Capital Lease -
- This is sometimes called Financial Lease or Non-Tax lease. A capital lease must be shown as an asset and a related obligation on the balance sheet of the lessee. A lease is classified and accounted for the lessee, as a capital lease, if it meets any of the following criteria:
- (a.) The lease transfers ownership to the lessee at the end of the lease term:
- (b.) The lease contains an option to purchase property at a bargain price:
- (c.) The lease term is equal to 75% or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life
- (d.) The present value of minimum lease rental payments is equal to 90% or more of the fair market value of the leased property.
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Casualty Value (See insured value) -
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Certificate of Acceptance (D&A / Delivery and Acceptance) -
- A document whereby the lessee acknowledges that the equipment to be leased has been delivered to him, is acceptable to him, and has been manufactured or constructed in accordance with specifications. In most cases, the lease term commences once this document has been signed.
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Close-End Lease -
- A true lease in which the lessor assumes the risk of depreciation and residual value. Usually a net lease, in which the lessee maintains, insures and pays property taxes on the equipment. The term is used to distinguish a lease from an open-end lease, particularly in automobile leasing.
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Collateral -
- A term used to define what is securing the debt obligation. This is generally the equipment, which is leased.
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Conditional Sales Contract -
- A transaction for purchase of an asset, in which the user, for federal income tax purposes, is treated as the owner of the equipment at the outset of the transaction.
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Conditional Sale Lease -
- A lease which, in substance, is a conditional sale.
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Debt Rate -
- Cost of funds from debt participants/lenders.
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Debt Service -
- Payments of principal and interest due to the lender.
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Deposit -
- Advance payment or fee towards a lease schedule.
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Deposit to Last -
- Advance payment that is applied to the last billing period.
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Direct Financing Lease -
- A lessor capital lease that does not give rise to manufacturer's or dealer's profit (or loss) to the lessor.
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Division -
- Typically a company, which does not operate independently from its parent company. Its ownership is usually with the parent and it reports directly to the parent.
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Economic Life of Leased Property -
- The estimated period during which the property is expected to be economically useful by one or more users, with normal repair and maintenance, or the purpose intended at the inception of the lease.
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Effective Lease Rate -
- The effective rate to the lessee of cash flows resulting from a lease transaction. The rate includes the compounding effect of interest during the year.
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End-of term Options -
- Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased asset at the end of the lease. Common end-of-term options include purchasing the asset, renewing the lease or returning the property to the lessor.
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Equipment Schedule -
- A document that describes, in detail, the equipment being leased
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Equity Participant -
- The owner participant, grantor owner or trustor owner.
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Estimated Residual Value -
- The forecasted fair market value; of the leased asset, used for purposes of calculating the maximum allowable term of a tax-oriented lease. And calculated in constant dollars (excluding inflation and deflation)
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Estimated Useful Life -
- The period, during which an asset is expected to be useful in a trade or business, used for calculation the maximum allowable term of a tax-oriented lease.
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Fair Market Value (FMV) -
- The value of an asset if it were to be sold in an arms-length transaction, between a willing buyer and a willing seller. FMV is determined by either agreement or appraisal.
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Fair Market Value (FMV) Purchase Option -
- A lessee option to purchase the leased equipment at the end of the term from the lessor at fair market value.
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FASB 13 -
- Financial Accounting Standards Board Statement No. 13, Accounting for Leases. FASB 13 contains specific guidelines for proper classification, accounting and reporting of lease transactions.
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Finance Lease -
- This is typically a full-payout, non-cancellable agreement. The lessee is responsible for all maintenance, taxes and insurance.
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Financing Statement -
- A notice of a security interest filed under the Uniform Commercial Code (UCC).
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Fixed Price Purchase Option -
- A lessee option to purchase the leased asset at the end of the leasing term at a predetermined price.
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Fixed Rental Renewal Option -
- A lessee option to renew or extend the lease term at a fixed rental during the renewal period.
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Hell-or-High-Water Clause -
- A clause in a lease, that reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease, regardless of any event that affects the equipment or any change in the circumstances of the lessee.
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Implicit Rate -
- The discount rate that, when applied to the minimum lease payments together with any guaranteed residual, causes the aggregate present value at the inception of the lease to be equal to the fair market value of the leased property.
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Indemnity Clause -
- A clause in a master lease agreement that requires lessees to indemnify lessors against any and all claims, suits, actions, damages, liabilities, expenses, costs, including attorney fees, whether or not suit is instituted or incurred in connection with the equipment.
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Lease Line -
- A lease line of credit that allows the lessee to add equipment without having to re-negotiate a new lease each time.
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Lessor -
- The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right of “quiet enjoyment’ to use the equipment for the lease term and is entitled to the rentals.
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Leveraged Lease -
- A specific lease involving at least three parties: a lessor, a lessee and a funding source, which allows the lessor/ owner to purchase the equipment by making a specific equity investment and to finance the remaining balance by issuing non-recourse note(s) to the lender(s).
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MACRS (Modified Accelerated Cost Recovery System) -
- The current method of tax depreciation introduced by the Tax Reform Act of 1986 and effective for equipment placed in service after 1986.
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MACRS Deductions -
- Tax depreciation deductions calculated under the MACRS introduced by the Tax Reform Act of 1986.
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Master Lease -
- A lease agreement that allows a lessee to obtain additional equipment under the same basic lease terms and conditions as originally agreed, without having to re-negotiate a new lease contract.
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Municipal Lease -
- A conditional sales contract disguised in the form of a lease available only to state and local governments, in which the interest earnings are tax-exempt to the lessor.
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Net Lease -
- A lease in which the lessee assumes all the costs and expenses related to use and maintenance of the leased asset.
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Non-tax-oriented Lease -
- A lease that is treated as a loan for tax purposes, preventing the lessor from claiming tax benefits on the equipment. The lessee would be treated as the owner for federal income tax purposes.
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Off Balance Sheet Financing -
- Any form of financing, such as an operating lease, that, for financial purposes, is not required to be reported on a firm's balance sheet.
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Open-end Lease -
- A lease in which the lessee guarantees the amount of the future residual value to be realized by the lessor at the end of the term. If the equipment is sold for less than the guaranteed value, the lessee must pay the amount of any deficiency to the lessor. The lease is referred to as open-end because the lessee does not know its actual value until the equipment is sold at the end of the lease.
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Operating Lease (also called an off balance-sheet lease) -
- A lease that has the characteristics of a usage agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee.
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Purchase Option -
- A lessee option to purchase the leased asset from the lessor at the end of the lease term for either a fixed amount or at the future fair market value of it.
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Put Option (Purchase Upon Termination) -
- A requirement to purchase equipment or other assets at a particular time and at a predetermined price. To exercise this option is at the lessor's, not the lessee's, discretion.
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Quasi-lease -
- A slang term for a non-tax oriented lease, also called a lease-purchase.
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Rentals -
- Payments required under a lease to be made by a lessee to a lessor for the use of the leased equipment.
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Renewal Option -
- An option given to the lessee to renew or extend the term of a lease at the expiration of the base term.
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Residual Value -
- The value of an asset at the conclusion of a lease.
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Sale leaseback -
- A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.
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Sales type Lease -
- A lease in which the lessor is also the vendor (manufacturer or distributor) of the equipment.
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Salvage Value (Orderly Liquidation Value/OLV or Fire-sale Value) -
- The expected or realized value from selling a piece of equipment after a reasonable allowance for the exhaustion, tear and wear, and obsolescence of a depreciable asset.
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Securitization -
- The process of selling lease receivables to a separate legal entity that issues stocks and bonds to investors. The investors' proceeds flow through to the company that sold the receivables and the investors receive their returns from collecting lessee receivables.
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Sublease -
- A transaction in which leased property is released by the original lessee to a third party, and the lease agreement between the two original parties remains in effect.
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TRAC Lease -
- A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of a guideline lease.
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True Lease / Tax Lease -
- A tax-oriented lease, in which, for IRS purposes, the lessor qualifies for the tax benefits of ownership and the lessee is allowed to claim the entire amount of the lease rental as a tax deduction.
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Turnaround time -
- The time it takes to make a credit decision and inform the lessee after receiving the lease application.
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Upgrade -
- An option that allows the lessee to add equipment to an existing piece of leased equipment in order to increase its capacity or improve its efficiency.
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Vendor Lease -
- A lease offered by a manufacturer or dealer to its customers for financing its products.
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Warehousing -
- The short-term funding of leases before permanent funding is finalized.
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Wintergreen Lease -
- A lease that requires the lessee to give notice to the lessor in order to renew for another term. Otherwise, the lease terminates on the already established termination date.
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Wrap Lease -
- A lease in which the lessor sells the equipment to an investor for equity and a note payable over the lease term. This method effectively transfers tax benefits to an investor.
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