Glossary
ADR: Asset Depreciation Range: Refers to regulation under the Internal Revenue Code Section 167 (m) which permits shorter or longer than usual life to be used for tax depreciation. Under certain circumstances, capital equipment may be depreciated over a period that may be up to 20% more or less than the applicable class life, rounded to the nearest class year.
ACRS (Modified): The Tax Reform Act of 1986 modified ACRS by prescribing depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3-year, 5-year, 7-year, 10-year, 15-year, or 20-year classes depending on ADR lives.
Alternative Minimum Tax (AMT): An alternative, separate
tax calculation based on the taxpayer’s regular taxable income,
increased by the taxpayer’s preferences for the year. The resulting
amount is called the alternative minimum taxable income (AMTI). After
certain exemption and offsets, the taxpayer determines its AMT and is
required to pay the larger of the regular tax or alternative minimum tax.
Among the preferences that can increase the taxpayer’s AMTI is the
accelerated portion of depreciation, thereby making it more likely that a
taxpayer that buys equipment may be subject to the AMT rather than to
regular tax.
Bargain Purchase Option: A lease provision allowing the
lessee, at its option, to purchase the leased asset for a price which is
sufficiently lower than the expected fair market value of the equipment at
the time such option becomes exercisable. The exercise of the option
appears, at the inception of the lease, to be reasonably assured.
Bargain Renewal Option: A lease provision allowing the
lessee, at his option, to renew the lease for a rental sufficiently lower
than the expected fair rental for the property at the time the option
becomes exercisable. The exercise of the option appears at the inception
of the lease, to be reasonably assured.
Big-Ticket: A market segment represented by lease
financings over $3 million dominated by leveraged leases.
Bonds: Certificates evidencing indebtedness or loan
certificates issued by the owner trustee.
Broker: A company or person who arranges, for a fee,
transactions between lessees and lessors of an asset.
Burdensome Buyout: A provision in a lease allowing the
lessee to purchase the leased equipment at a value to be determined in
some fashion when the buyout is exercised, in the event that payments
under the tax or general indemnity clauses are deemed by the lessee to be
unduly burdensome. Care must be taken if the existence of such a provision
is not to invalidate the true lease nature of the transaction and thus, by
its existence, make the lessee liable under the tax indemnity clause.
Burn Up Contract: Another name for a nuclear fuel lease.
Call: An option to purchase an asset at a set price at
some particular time in the future. Care must be used in negotiating a
purchase option or call in a lease agreement. If this is done improperly,
the Internal Revenue Service might disallow many of the advantages of a
true lease, such as tax savings.
Capital Lease: Type of lease, classified and accounted
for by a lessee as a purchase and by the lessor as a sale or financing, if
it meets any one of the following criteria: (a) the lessor transfers
ownership to the lessee at the end of the lease term; (b) the lease
contains an option to purchase the asset 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); or (d) the present value of minimum lease rental payments is equal
to 90 percent or more of the fair market value of the leased asset less
related investment tax credits retained by the lessor. (Also see Finance
Lease.)
Certificate of Acceptance: (Delivery and Acceptance) A
document whereby the lessee acknowledges that the equipment to be leased
has been delivered, is acceptable, and has been manufactured or
constructed according to specifications.
Closed-End Lease: A
true lease in which the lessor assumes the depreciation risk. The lessee
bears no obligation at the end of the lease. This term is used to
distinguish the lease from an open-end lease. This term is used in auto
leasing.
Collateral: Collateral under
a lease is the equipment which is leased.
Conditional Sale: 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.
Conditional Sale Lease:
A lease that in substance is a conditional sale (sometimes called a
hire-purchase agreement).
Contingent Rentals:
Rentals in which the amounts are dependent upon some factor other than the
passage of time.
Conventional True Lease:
(See True Lease.)
Depreciation:
Depreciation is the amount that the equipment (asset) value has been
reduced during the course of an accounting period.
Direct Financing Lease
(Direct Lease): A non-leveraged lease by a lessor (not a
manufacturer or dealer) in which the lease meets any of the definitional
criteria of a capital lease, plus two additional criteria, as follows:
Collectibility of minimum lease payments must be reasonably predictable.
No uncertainties surround the amount of unreimbursable costs to be
incurred by the lessor under the lease.
Direct Investor: Refers to the lessor in a direct financing lease.
Economic Life of Leased Property (Useful Life): The
estimated period of time during which an asset will be economically usable
by one or more users, with normal repairs and maintenance, for the purpose
for which it was intended at the inception of the lease.
Effective Lease Rate:
The effective lease Rate (for the Lessee) of the cash flows resulting from
a lease transaction. To compare this rate with a loan interest rate, a
company must include in the cash flows any effect the transactions have on
federal tax liabilities.
Equipment Leasing Association:
An Arlington, VA-based trade group of more than 100 equipment leasing
companies.
Equipment Schedule: A
document that describes in detail the equipment being lease. It may also
state the lease term, commencement date, repayment schedule and location
of the equipment.
Equipment Upgrade:
This option allows the customer to add equipment to equipment that is
under lease to increase capacity or improve efficiency
Equity Participant:
The lessor or one of a group of lessors in a leveraged lease. Equity
participants hold trust certificates evidencing their beneficial interest
as owners under the owner trust. An equity participant is the same as an
owner participant, trustor owner, or grantor owner.
Estimated Residual Value of Leased
Property: The estimated fair value of the property at
the end of the lease term.
Extended Term Agreement:
An agreement to renew a lease, commonly used to describe a guaranteed
renewal of a lease by a third party.
Fair Market Purchase Option:
An option to purchase leased property at the end of the lease term at its
then fair market value. The lessor does not have the ability to retain
title to the equipment if the lessee chooses to exercise the purchase
option.
Fair Rental: The
expected rental for equivalent property under similar terms and
conditions.
FASB 13: Statement
issued by the Financial Accounting Standards Board establishing financial
accounting standards for lessees and lessors.
Financial Lease: A
financing device whereby a user can acquire use of an asset for most of
its useful life. Rentals are net to the lessor, and the user is
responsible for maintenance, taxes and insurance. Rent payments over the
life of the lease are sufficient to enable the lessor to recover the cost
of the equipment plus a return on its investment. A finance lease may be
either a true lease or a conditional sale.
Financing Agreement:
An agreement between the owner trustee, the lenders, the equity
participants, the manufacturer, and the lessee, which spells out the
obligations of the parties under a leveraged lease. Also called a
participation agreement.
Financing Statement: A
notice of a security interest filed under the Uniform Commercial Code.
Floating Rental Rate:
Rental, which is subject to upward or downward adjustments during the
lease term. Floating rents sometimes are adjusted in proportion to prime
interest rate or commercial paper rate changes during the term of the
lease.
Foreign Source Income:
Income earned overseas (net of depreciation and other expenses allocable
to such income) as reported to the United States for federal income tax
purposes.
Full Payout Lease: A
lease in which the lessor recovers, through the lease payments, all costs
incurred in the lease plus and acceptable rate of return, without any
reliance upon the leased equipment’s future residual value.
Funding Source: The
company or institutions that provides any of the funds used to pay for
leased equipment. Funds can be provided from an equity source or from a
debit source.
Grantor Trust: A trust
used as the owner trust in a leveraged lease transaction, usually with
only one equity participant. The Internal Revenue Code refers to such a
trust as a grantor trust. With more than one equity participant the
grantor trust is usually treated as a partnership.
Guideline Lease: A
lease written under criteria or guidelines established by the IRS to
determine the availability of tax benefits to the lessor.
Heat Supply Contracts:
A nuclear fuel lease.
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 affecting the equipment or any change in the circumstances of the
lessee.
Hire-Purchase Agreement:
A conditional Sale Lease
Inception of a Lease: The date of the lease agreement or commitment, if
earlier. (For technical application, consult FAS 13 and subsequent
amendments.)
Income Funds: A
limited partnership, investing in a portfolio of short-term leases, with
moderate or zero leverage, emphasizing cash distribution other than tax
shelter.
Incremental Borrowing Rate:
The interest rate, which a person would expect to pay for an additional,
borrowing at rates prevailing at the time.
Indemnity Agreement:
An agreement whereby the owner participants and the lessee indemnify the
trustees from liability as a result of ownership of the leased equipment.
Indemnity Clause:
A clause in which the lessee indemnifies the lessor from loss of tax
benefits.
Indenture Of Trust (Indenture):
An agreement between the owner trustee and the indenture trustee: The
owner trustee mortgages the equipment and assigns the lease and rental
payments under the lease as security for amounts due to the lenders. Same
as a security agreement or mortgage.
Indenture Trustee: In
a leveraged lease, the indenture trustee holds the security interest in
the leased equipment for the benefit of the lenders. In the event of
default.
Independent Lessor:
Any leasing company investing in leases; also, brokers without funds to
invest in leases sometimes prefer to call themselves "independent
lessors" rather than "brokers".
Initial Direct Costs:
Costs incurred by a lessor directly associated with negotiating and
completing a transaction. These include commissions, legal fees, costs of
credit checking, documentation costs, allocable sales expenses (including
salaries other than commissions), and so forth; but specifically exclude
supervisory, administrative, or other indirect or overhead expenses.
Institutional Investors:
Investors such as banks, insurance companies, trusts, pension funds,
foundations, and educational, charitable, and religious institutions.
Insured Value: A
schedule included in a lease which states the agreed value of equipment at
various times during the term of the lease, and establishes the liability
of the lessee tot he lessor in the event the leased equipment is lost or
rendered usable during the lease term, due to a casualty.
Interest Rate:
The discount rate which, when applied to minimum lease payments (excluding
executory costs paid by the lessor) and ungauranteed residual value,
causes the aggregate present value at the beginning of the lease term to
be equal to the fair value of the leased property at the inception of the
lease, minus any investment tax credit retained by the lessor and expected
to be realized by him.
Lease: A
contract in which one party conveys the use of an asset to another party
for a specific period for time at a predetermined rate.
Lease Documents:
The different forms that make up lease transactions, including the lease
agreement, purchase order assignment, equipment schedule or schedules
and/or other-related documents.
Lease Origination: The
development and processing of new lease transactions by a sales force.
Includes prospecting, networking, pricing, credit checking and all the
related documentation.
Lease Payments:
Scheduled payments from the lessee to the lessor in a lease agreement.
Lease Rate (Rental Payment):
The periodic rental payment to a lessor for the use of assets. Others may
define lease rate as the implicit interest rate in minimum lease payments.
Lease Renewal: A lease
agreement option that allows the lessee to extend the term of the lease in
exchange for lease renewal payments.
Lease Term: The length of
time of the lease. This is a non-cancelable term.
Lease Versus Buy: A
cost comparison of leasing or purchasing an asset. Costs are usually
compared on an after-tax, present value basis.
Lessee: The
organization or person entering into the lease agreement who will lease
from the lessor for a specified period of time.
Lessor: The
organization or person who owns the asset which is leased and who receives
the payments for the lease.
Leveraged Lease:
In this type of lease, the lessor provides an equity portion (usually 20
to 40 percent) of the equipment cost and lenders provide the balance on a
nonrecourse debt basis. The lessor receives the tax benefits of ownership.
Maintenance Contract:
The agreement in which the lessee contracts and pays a third party to
maintain and/or repair the asset during the term of the lease.
Master Lease: Allows a
lessee to have a line of credit so that they can lease additional
equipment under the same lease terms and conditions as the original
agreement without having to renegotiate new lease agreement.
Master Lease Agreement:
An agreement that defines the Master Lease between the lessee and lessor.
It establishes the terms and conditions, the time period of the agreement,
a maximum dollar amount and the lease rate(s).
Maturity: The defined
end of the term of the lease agreement in which all the terms and
conditions of the agreement have been met.
Middle Market: A market
segment generally represented by financings under $3 million and dominated
by single investor leases.
Municipal Lease: An
agreement solely for municipalities that is essentially a conditional
sales contract, which enables municipalities to take advantage of lease
terms. The interest earnings are usually tax exempt to the lessor.
Net Lease: A lease
where payments to the lessor do not include insurance and maintenance,
which are paid separately by the lessee.
Non Full Payout Lease:
A lease in which the cash flows will not be sufficient to cover the full
costs of the equipment, the costs of financing, the costs of
administration and provide a satisfactory return. The lessor looks to the
residual to realize profit.
Nonrecourse Loan: The
lender bases the credit decision on the creditworthiness of the lessee and
on the potential the asset. The vendor is not at risk for the funds.
Off Balance Sheet Financing:
Forms of financing that are not required to be reported on an
organization's balance sheet.
Open-end Lease: A
conditional sale lease in which the lessee guarantees that the lessor will
realize a minimum value from the sale of the asset at the end of the
lease.
Operating Lease: An
operating lease in any lease which is not a capital lease. These are
generally used for short-term leases of equipment. The lessee can acquire
the use of equipment for just fraction of the useful life of the asset.
The lessor may provide additional services such as maintenance and
insurance.
Packager: The leasing
company, investment banker, or broker who arranges a leverage lease.
Payment in Advance: A
type of lease payment plan in which the lease payment is due in advance of
the period.
Payments in Arrears: A
type of lease payment plan in which the lease payment is due at the end of
the period.
Present Value: The
current equivalent of payments or a stream of payment to be received at
various times in the future. The present value will vary with the discount
interest factor applied to future payments.
Purchase Option: A
provision by which a lessee has the right to purchase the equipment at the
end of the lease. The purchase option may be stated at a specified dollar
amount or at fair market value.
Purchase Order Assignment:
This document transfers the rights from the purchase order, such as
purchasing the equipment at a certain price, with certain terms front the
lessee to the lessor, so that the lessor can purchase the equipment from
the manufacturer and lease it to the lessee.
Put Option: The
requirement to purchase equipment at a particular time and at a
predetermined price. In a lease transaction, this is a lessor’s right to
force the lessee (or some third party) to purchase the equipment at the
end of the lease term. IRS guidelines prohibit put options in tax-oriented
leases.
Recourse: The lessor
is totally at risk to the lender for repayment of the lease amount. The
borrower must make payments to the lender whether or not the lessee is
fulfilling its obligation under the lease agreement.
Renewal Option: The
option to renew a lease contract when it ends.
Residual Value: The
value of an asset at the conclusion of a lease.
Sale-Leaseback: An
arrangement whereby a lessor purchases equipment from the company owning
and using it. The lessor then becomes the owner and leases it back to the
original owner, who continues to use the equipment.
Sales Type Lease: A
lease by a lessor who is the manufacturer or dealer, in which the lessee
meets the definitional criteria of a capital lease or direct financing
lease.
Short-term Lease:
Generally referring to operating leases. (See also Operating Leases.)
Single Investor Lease- (See Full Payout
or Finance Lease for comparison.): A tax-oriented lease
whereby the lessor achieves its desired rate of return via a combination
of the rental payments, depreciation, and the fair market value of the
equipment at the end of the original lease term. Because of the value of
the tax benefit, the rental payments will be lower than for a finance
lease.
Stipulated Loss Value (Insured Value):
A schedule included in the lease that states the value of the equipment at
various times during the lease, plus its residual value and associated tax
benefits, and which establishes the liability of the lessee if the
equipment is lost, suffers damage, or becomes unusable during the lease
term
Tax Lease: A lease
where the lessor recognizes the tax incentives provided by the tax laws
for investment and ownership of equipment. Generally, the lease rate
factor on tax leases is reduced to reflect the lessor's recognition of
this tax incentive.
Termination: The point
at which the lease is completed and it ends.
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
the tax laws.
True Lease (for Tax Purposes):
A true lease is a term for defining types of transactions which qualify as
leases under the Internal Revenue Code so the lessor can claim tax
incentives of ownership, and the lessee can claim rental payments as tax
deductions.
UCC Financing Statement:
A public notice of a security interest in personal property. This document
falls under the Uniform Commercial Code (UCC), filed with the county (and
sometimes the Secretary of State), to provide public notice of a security
interest in personal property.
Useful Life (Economic Life):
The period of time during which an asset will have economic value and be
usable. Useful life of an asset is sometimes called the economic life of
the asset.
Vendor Lease: A
lease wherein an equipment manufacturer or distributor has its own leasing
company or an agreement with a leasing company to offer lease financing as
a sales aid. A vendor lease may be either a conventional true lease or a
conditional sale.
Vendor Leasing:
A working relationship between a financing source and a vendor to provide
financing to stimulate the vendor's sales. The financing source offers
leases or conditional sales contracts through the vendor's sales
representatives to the vendor's customers. In essence, the vendor leasing
firm substitutes as the captive finance company of a manufacturer or
distributor through the extension of leasing to customers, provisions for
credit checking, and performance of collections and operational
administration. Also known as lease asset servicing or vendor programs.
Yield: The rate of
return in a lease investment for the lessor.
Services Menu
