Leasing Dictionary

Accelerated Depreciation: Any depreciation method that allows for greater deductions or charges in the earlier years of an asset's depreciable life, with charges becoming progressively smaller in each successive period. Examples of accelerated depreciation are the double declining balance and sum-of-the-years digits methods.

Add-On
A transaction to add related equipment to an existing lease. Typically, this term is used when the new equipment is financed using the same lease structure (i.e, Fair Market Value, $1.00 Purchase Option, Fixed Purchase Option, etc.) as was used in the underlying transaction except that the lease term for the add-on is set so that it expires coterminously with (on the same date as) the original transaction.

Advance Payments
Payments made by the lessee at the inception of a leasing transaction.
Amortization: For accounting or tax purposes, amortization refers to the distribution of the cost of an asset over its useful life. Alternatively, amortization can refer to the process of reducing a debt obligation through periodic level payments that include both an interest and principal portion.

APR
Annual Percentage Rate. The effective rate taking into account compounding and other fees. The nominal rate of interest for a specified period (usually one year).

Appreciation: The increase in value of an asset over time.

Asset: An item of value.

Assignment of Proceeds:
Under an Assignment of Proceeds agreement, the vendor agrees to allow the Lessor to fund the manufacturer's cost of the equipment directly to the manufacturer at the time of funding.

Balloon Payment: A payment on a lease that is large in comparison to the other payments. A balloon payment is usually the last payment on the lease.

Bargain Purchase Option: A lease provision allowing the lessee, at its option, to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.
Basis Points: Units of 1% with each unit equal to 0.01% (1/100%). For example, "50 basis points" is equal to .5% and "200 basis points" is equal to 2%.

Book Value: For accounting purposes, the value of an asset according to depreciation schedules which may or may not be market value.

Capital Lease
A lease that meets at least one of the criteria outlined in paragraph 7 of FASB 13 and, therefore, must be treated essentially as a loan for book accounting purposes. The four criteria are:
· Title passes automatically by the end of the lease term
· Lease contains a bargain purchase option (i.e., less than the fair market value)
· Lease term is greater than 75% of estimated economic life of the equipment
· Present value of lease payments is greater than 90% of the equipment's fair market value

A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the lessee's balance sheet as an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Capped Fair Market Value Lease
A Fair Market Value Lease with a predetermined ceiling to limit Fair Market exposure at the end of the lease term.
Certificate of Delivery and Acceptance: A document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable.

Certificate of Insurance: A statement from an insurance company or its agent that a certain policy has been written. The certificate usually summarizes the coverage of a certain policy.

Commitment Deposit
A deposit required by the Lessor at time of signing which ranges from 1-2% of the total equipment cost, or the equivalent of the first rental payment. It is generally applied to rental on a pro rata basis if the commitment is taken down or returned if the lease is declined.

Commitment Letter
The letter prepared by the Lessor to spell out terms and conditions between Lessee and Lessor for a master lease line of credit.
Conditional Sales Contract: An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes (thereby being entitled to the tax benefits of ownership such as depreciation), but does not become the legal owner of the asset until all the terms and conditions of the agreement have been satisfied.

Coterminous
Two or more leases that are linked so that both will terminate at the same time.

CSC Fair Market Value Lease
A lease which includes an option for the lessee to either renew the lease at a fair market value renewal or purchase the equipment for its fair market value at the end of the lease term. Though often referred to as tax leased, not all CSC Fair Market Value Leases qualify as tax leases. See also Fair Market Value.

Dealer Lease Referral Application and Agreement
This one page agreement provides the Lessor with valuable information about the equipment vendor. By means of this agreement, the vendor agrees to pass clear title to the equipment to the Lessor upon delivery, acceptance by the Lessee and funding by the Lessor.

Depreciation
A tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence, that is taken by the owner of the equipment and by which the cost of the equipment is allocated over time. Depreciation decreases the company's balance sheet assets and is also recorded as an operating expense for each period. Various methods of depreciation are used which alter the number of periods over which the cost is allocated and the amount expensed each period.

Discount Rate: An interest rate that is used to bring a series of cash flows to their present value in order to state them in current, or today's, dollars.

Early Termination: The termination of a lease before the end of its original term. Depending on the lease structure, an Early Termination may have consequences such as a final payoff consisting of the sum of the remaining payments discounted at a nominal rate and a penalty.

Economic Life of Leased Property: The estimated period of time, with normal repairs and maintenance, that equipment is expected to be economically usable for the purpose for which it was intended at the inception of the lease.

Electronic Funds Transfer (EFT - also known as ACH)
A wire transfer in which the Lessor pays the equipment vendor. At time of funding this amount is wired to the vendor minus any payments agreed upon in the Assignment of Proceeds.
End-of-Term Options: Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common end-of-term options include purchasing the equipment, renewing the lease or returning the equipment to the leasing company.

Estimated Useful Life
The period during which an asset is expected to be useful in trade or business.
· Used for purposes of calculating the maximum allowable term of a tax lease.
· Used for determining whether or not the lease is a Capital Lease.
· Used to determine the method of depreciation for a capitalized leased asset.
· May or may not be the same as the life used for income tax purposes.

Equipment Schedule/Lease Schedule: A document incorporated by reference into a lease agreement, which describes in detail the equipment being leased. The schedule may state the lease term, commencement date, repayment schedule and location of the equipment.

Fair Market Value
The price for which property can be sold in an "arms length" transaction; that is, between informed, unrelated, and willing parties, each of which is acting rationally and in its own best interest. See also CSC Fair Market Value Lease.

Fair Market Value (FMV)
The open market value of the asset at the termination of the lease. A Purchase Option under a True Lease is generally the Fair Market Value at the end of the lease.

Fair Market Renewal Value
The rental payment paid monthly for a period of up to one year if the Lessee elects to renew the lease once it has initially terminated. The value is determined by negotiation between Lessee and Lessor and represents the Fair Market Rental/Renewal Value.

Finance Lease
A lease used to finance the purchase of equipment; not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective and non-tax leases from a tax perspective.

FASB 13: Statement number 13 of the Financial Accounting Standards Board that establishes standards for lessees' and leasing companies' accounting and reporting requirements. The provisions of FASB 13 state that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset by the lessee and as a sale or financing by the leasing company (a Capital Lease). Other leases should be accounted for as the rental of property (Operating Leases).

Financial Accounting Standards Board 13
Statement number 13 of the Financial Accounting Standards Board (FASB) which establishes standards for lessees' and lessors' accounting and reporting for leases in the U.S. This includes the characterization of a lease as an operating lease or capital lease for the lessee's purposes.

A company's assets, liabilities and net income will differ depending on how it chooses to structure its leases. The provisions of FASB 13 derive from the view that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee (a capital lease) and as a sale or financing by the lessor. Other leases should be accounted for as the rental of property (operating leases).

Fixed Purchase Option
An option given to the lessee to purchase the leased equipment from the lessor on the option date for a guaranteed price. Both the date and the price must be determined at the inception of the lease. A typical fixed purchase option is 10% of the original cost of the equipment.

Full Payout Lease
A lease in which the total of the lease payments pays back to the lessor the entire cost of the equipment including financing, overhead, and a reasonable rate of return, with little or no dependence on a residual value.

Incremental Borrowing Rate
The rate that, at the inception of the lease, the lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.

Lease
A contract through which an owner of equipment (the lessor) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic payments.

Lease Agreement: A contract through which an owner of equipment (the leasing company) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic rental payments.

Lease Line: A lease line of credit allows a leasing customer to obtain additional leased equipment under the same basic lease terms and conditions originally agreed to without having to renegotiate and execute a new lease contract with the leasing company. Each new piece of equipment is listed on a separate schedule, and the specific lease rate for that schedule is dependent upon the policies of the leasing company, the terms and conditions of the Master Lease, and the cost of the equipment.

Lease Purchase
Full payout, net leases structured with a term equal to the equipment's estimated useful life. Because many Lease Purchases include a bargain purchase option for the lessee to purchase the equipment for one dollar at the expiration of the lease, these leases are often referred to as dollar buyout or buck-out leases. Lease Purchases are generally considered to be Capital Leases from an accounting perspective and non-tax leases from a tax perspective due to their bargain purchase option and length of lease term.

Lease Rate
The simple equivalent interest rate excluding depreciation and residual, if any.

Lease Schedule
A schedule to a Master Lease agreement describing the leased equipment, rentals and other terms applicable to the equipment.

Lease Term: The length of a lease, usually stated in number of months.

Lessee
The party to a lease agreement who is obligated to pay the rentals to the lessor and is entitled to use and possess the leased equipment during the lease term.

Lessee
A party who makes use of property owned by another party (the Lessor) and pays the Lessor, usually in the form of rentals, for that use.

Lessor
Company or leasing entity that is legal owner of the leased equipment.

Lessor
The party to a lease agreement who has legal or tax title to the equipment (in the case of a true tax lease), grants the lessee the right to use the equipment for the lease term and is entitled to receive the rental payments.

Level Payments
Equal payments over the term of the Lease.

Leveraged Lease: A lease wherein the stream of payments have a debt participant. The ownership of the leased equipment remains with the leasing company. Leveraged Leases can be either recourse or non-recourse leases.

Lien: A security interest or an encumbrance upon property.

Long Term Debt: Loans and obligations with a maturity of longer than one year; usually accompanied by

Master Lease: A continuing lease arrangement whereby additional equipment can be added from time to time merely by describing that equipment in a new lease schedule executed by the parties. The original lease contract terms and conditions apply to all subsequent schedules. Eliminates signing new leases as additional equipment is leased.

Municipal Lease
A lease designed to meet the special needs of U.S. state and local governments. The lease contains a non- appropriation clause which states that the only condition under which the entity may be released from its payment obligation is when the legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. For this reason, the IRS does not charge the lessor income taxes on leases to these customers.
Net Cash From Financing: Cash flows generated through debt and equity financing.

Net Lease
With a Net Lease, the rentals are payable to the Lessor. All costs in connection with the use of the equipment are to be paid by the Lessee and are not a part of the rental. For example, taxes, insurance, and maintenance are paid directly by the Lessee.

Non-recourse Loan: In a leveraged lease, the lenders cannot look to the leasing company that sold them the lease for repayment if the lessee fails to meet its payment obligations. The lender's only recourse is to the lessee and, therefore, the lessee's credit rating is of prime importance.

Off Balance Sheet Financing
A lease that qualifies as an Operating Lease for the lessee's financial accounting purposes. Such leases are referred to as off-balance sheet financing due to their exclusion from the balance sheet asset and debt presentation, except for that portion of the payments that is due in the current fiscal period. Full disclosure of such transactions is typically made in the auditor's notes to the financial statements. Periodic payments are recorded as expense items on the lessee's income statement.

Operating Lease
A lease which is treated as a true lease (as opposed to a loan) for book accounting purposes. An operating lease must have all of the following characteristics:
· Lease term is less than 75% of estimated economic life of the equipment.
· Present value of lease payments is less than 90% of the equipment's fair market value.
· Lease cannot contain a bargain purchase option (i.e., less than the fair market value).
· Ownership is retained by the lessor during and after the lease term.

An operating lease is accounted for by the lessee without showing an asset (for the equipment) or a liability (for the lease payment obligations) on his balance sheet. Periodic payments are accounted for by the lessee as operating expenses of the period.

Payment in Advance
Periodic payments are due at the beginning of each period.

Payment in Arrears
Periodic payments are due at the end of each period.

Point: One percentage point (1.00%). Five points represents 5.00%. A point also represents 100 basis points.

Pre-Funding
Many vendors require that they be paid at least 50% of the invoice amount once the lease is funded. This is called prefunding. It must be approved by the funding source. For Pre-Funding to be accepted, both the vendor and lessee must be stable for acceptance.

Present Value
The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today's dollars.

Purchase Option: An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term for either a fixed amount or at the future fair market value of the lease equipment.

Purchase Order: An offer for the purchase of equipment. The leasing company usually sends the Purchase Order to the specified vendor after approval and upon receipt of all documents from the lessee.

Put: The requirement to purchase equipment at a particular time and at a predetermined amount. In a lease transaction, this is a leasing company's right to force the lessee to purchase the equipment at the end of the lease term for that predetermined amount. A lease agreement containing a Put is a Capital lease and not an Operating lease.

Recourse: A condition of borrowing money that arises when a leasing company borrows money from another lender to fund a lease and is fully at risk to the lender for repayment of the obligation. The recourse borrower (leasing company) is required to make payments to the lender whether or not the lessee fulfills its obligation under the lease agreement.

Residual: The value of the leased property at the end of the lease term as estimated at the time the lease was executed.

Residual Value
The book value that the lessor depreciates a piece of equipment down to during the lease term, typically based on an estimate of the future value, less a safety margin.

Sale Leaseback: A transaction where the owner sells the equipment it already owns to a leasing company which then leases it back to the same original owner who now becomes the lessee in the transaction. This structure is often used to raise cash or to take the transaction off balance sheet.

Security Deposit
A Security Deposit is an advance payment that is usually equal to two lease payments,. This deposit is retained by the Lessor for the term of the Lease. If the lease is never finalized for reasons that are not the fault of the Lessor, the deposit will be kept by the Lessor for administrative costs. If any part of the deposit is remaining at the end of the Lease term and the Lessee has completed all of his / her obligations, the Deposit is returned to the Lessee or can be applied to the Purchase Option, if any, or to any remaining payments.

Skip-payment Lease
A lease that contains a payment stream requiring the lessee to make payments only during certain periods of the year.

Step-up or Step-down
A feature of a lease that contains a payment stream that either increases (step-up) or decreases (step-down) in amount over the term of the lease.

Tax-Exempt Entity
Tax-Exempt Entities, for U.S. federal income tax purposes, generally include: any federal, state or local government (including their agencies and instrumentalities); any organization that is exempt from federal income taxes, such as non-profit charitable organizations; and most foreign persons or entities, unless a significant portion of their gross income is subject to federal income tax.

Tax Lease
A generic term for a lease in which the lessor takes the risk of ownership (as determined by various U.S. Internal Revenue Service pronouncements) and, as the owner, is entitled to the benefits of ownership, including tax benefits.

Terminal Rental Adjustment Clause (TRAC): A special type of lease where the lessee guarantees the residual value to the leasing company and the lease is treated as a true lease for tax purposes. TRAC leases can only be used for motor vehicles, such as trucks or trailers.

True Lease: Also known as an operating lease, where the leasing company 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.

Uniform Commercial Code (UCC) Financing Statement: A document, under the UCC, filed with a county (and sometimes the Secretary of State) to provide public notice of a security interest in personal property.

Useful Life
The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called the economic life of the asset. To qualify as an operating lease, the property must have a remaining useful life of 25 percent of the original estimated useful life of the leased property at the end of the lease term, and at least a life of one year.

Upgrade
To trade in leased equipment for a newer, more advanced model during the lease term.

Vendor: The party that provides the equipment in a lease transaction.

Yield: The rate of return to the leasing company in a lease transaction.