A depreciation method, such as the Modified Accelerated Cost Recovery System, that allows write-offs more quickly than the straight-line method (which allows write-offs in equal increments as tax deductions in each tax year). This depreciation is useful for companies with tax bills that can offset taxable income.
A transaction that adds 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 the original transaction.
One (or more) of the lease payments that is required to be paid to the Lessor at the beginning of the lease term. Lease structures commonly require one payment to be made in advance.
Alternative Minimum Tax (AMT)
The Tax Reform Act of 1986 substantially modified the Alternative Minimum Tax, which must be calculated for all taxpayers. The AMT is a penalty tax of sorts, as a taxpayer must pay the higher of its regular tax or AMT liability. The corporate AMT rate will be applied to a different (typically higher) taxable income than for regular taxes. This is why the AMT liability may be higher.
A breakdown of periodic loan payments into two components: a principal portion and an interest portion. In tax parlance, amortization refers to IRC Section 197 that provides for specified intangible assets to be amortized over a fifteen (15)-year period.
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).
The item of personal property being acquired by the Lessee through payments over a period of time pursuant to the lease.
Assign / Assigning / Assigned Lease
A very common funding technique where a leasing company exchanges (or assigns) its rights to the future lease payments in a lease to a funding source in return for upfront cash. This cash represents the amount of the loan, and is equal to the present value of the future lease payments. A lease that has been assigned to a funding source is called an assigned lease. Synonymous with Discount/Discounting/Discounted Lease.
A large, lump-sum payment scheduled at the end of a series of smaller periodic payments with respect to applicable loan and financing lease transactions.
Bank-Affiliated Leasing Company
A subsidiary of a bank (or bank holding company) that is active as a Lessor, frequently acting both as Lessor, lease broker and/or underwriter.
Under current provisions of the Internal Revenue Code (IRC), commercial banks can deduct 80% of their interest costs on funds used to acquire or “carry” tax-exempt obligations (bonds and leases) of governments that borrow no more than $10,000,000 in a calendar year; otherwise, the interest cost is not deductible by the bank.
Bargain Purchase Option
A lease provision allowing the Lessee, typically at its option, to purchase the leased property at the end of the lease term for a price which is sufficiently lower than the expected fair-market value of the property; such that exercise of the option appears, at the lease inception, to be reasonably assured.
A unit of measurement equal to 1/100th of a percent. For example, 25 basis points = .25%.
A company or person who arranges (for a fee) transactions between Lessees and Lessors with respect to a particular type of an asset, such as a business jet.
A lease that includes many additional services, such as maintenance, insurance and property taxes that are paid for by the Lessor, the cost of which is built into the lease payments. Synonymous with Full-Service Lease.
Property used in business for a period of more than one year, including machinery, equipment and other significant property.
A purchase made to acquire the ownership of property, plant and/or equipment. Typically, these types of expenditures do not take place until after a lengthy capital budgeting review and approval process has occurred.
Capital Expenditure Funds
Funds that have been appropriated through the capital budgeting process to purchase property, plant and/ or equipment.
A lease accounting concept under Financial Accounting Standard No. 13 (FAS 13), and not a legal concept. In accounting parlance, a lease should be classified and accounted for by a Lessee as a purchase – and by the finance company, or 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 percent 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. When you want to manage your finances and get a secured credit, visit www.discountcreditrepaircompany.com for more information. A lease that fails all of these criteria is an operating lease for accounting purposes.
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.
Captive Leasing Subsidiary
A finance organization set up by an equipment manufacturer or dealer to finance its products to end-users, usually with the objective of increasing the sales of the manufacturer. Such an entity is usually wholly owned by the manufacturer or dealer.
A leasing company which has been set up by a manufacturer or dealer to finance its own products.
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. Many lease agreements state that the actual lease term commences once this document has been signed.
A Lessee in which the lease agreement does not contain a purchase or renewal option, thereby requiring the Lessee to return the equipment to the Lessor at the end of the initial lease term.
Assets pledged by a borrower to secure a loan. These assets can usually be seized by the lender in event of default.
A loan, deferred sale or lease which, in each case, refers to a sale in which the Lessee (conditional buyer) takes possession of the equipment, but the Lessor retains legal title to the equipment until the Lessee makes the final lease or sale payment. After the Lessee makes the last payment, the Lessor (conditional seller), without further payment, transfers title to the Lessee (conditional buyer). Hence, the sale is conditioned on payment-in-full over a time period set at the inception of the transaction.
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 may not become the legal owner of the asset until all terms and conditions of the agreement have been satisfied.
Two or more leases that are linked so that both will terminate at the same time.
A clause in a contract, usually required by the finance company, that either requires the borrower to do a particular thing or refrain from doing a particular thing.
A guarantee by one person or entity to pay the lease obligations of another (often affiliated) person or entity.
The failure of the Lessee to pay payments (or other sums due) or meet obligations when due under the lease; or failure to observe a representation or warranty in the lease or violation of a covenant in the lease; and the expiration of applicable periods to cure the default. An event of non-appropriation or abatement is not normally considered an event of default, even when the remedies are substantially similar for each event.
Delivery and Acceptance Certificate
A document that evidences the delivery and acceptance of a good (such as equipment) by the customer.
Under Section 167 of the IRC, depreciation refers to the decline in value of property through its use and the passage of time, wear and tear, technological change and obsolescence. Under accounting rules, depreciation also decreases the company’s balance sheet assets and is recorded as an operating expense for each period.
Discount / Discounting / Discounted Lease
See Assign/Assigning/Assigned Lease.
A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current (or today’s) dollars. Use of a discount rate removes the time value disposition of money from future cash flows.
Disposing / Disposal / Disposition
The eventual sale or salvage of leased equipment upon its return to the Lessor.
When the Lessee returns the leased equipment to the Lessor prior to the end of the lease term, as permitted by the original lease contract or subsequent agreement. At times this may result in a penalty to the Lessee.
Effective Lease Rate
The effective rate (to the customer) of cash flows resulting from a finance transaction. To compare this rate on an after-tax basis as compared to a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.
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, and returning the equipment to the Lessor.
A document, typically incorporated by reference into the lease agreement, which describes in detail the equipment being leased. The schedule may state the lease term, the commencement date, the repayment schedule, and the location of the equipment.
A specific description of a piece of equipment that is to be acquired, which could include, but not be limited to: equipment make, model, configuration and capacity requirements, and so forth.
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.
Funds invested in a lease by the Lessor, as contrasted with any debt or borrowings.
The equity monies that are used in a lease transaction by the equity investor to partially pay for the leased equipment. The balance will be paid through some form of debt.
Equity Investor / Equity Participant
An entity that provides equity funding in a lease transaction and thereby becomes the owner of the leased equipment and ultimate Lessor.
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, for determining whether or not the lease is a Capital Lease, or to determine the method of depreciation for a capitalized leased asset. Estimated Useful Life may or may not be the same as the life used for income tax purposes.
An option to purchase leased property at the end of the lease term at its then-fair-market value.
The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm’s length, between a willing buyer and a willing seller, for equivalent property under similar terms and conditions.
Financial Accounting Standards No. 13 of the Financial Accounting Standards Board, which establishes standards for Lessees’ and Lessors’ accounting and reporting for leases. FAS 13 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 the classification of its leases based on their nature. The provisions of FAS 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). (FAS 13 is now known as Topic 840 as a result of the project to codify all FASB accounting standards.)
A finance lease, in a business sense, is typically a full-payout, non-cancellable agreement in which the customer is responsible for maintenance, taxes and insurance. However, the term “finance lease” also refers in Article 2A of the Uniform Commercial Code (UCC) to a special type of “lease” in which the Lessor, Lessee and the manufacturer have contractual relationships and the Lessor at all times, with the Lessee’s acknowledgement, remains a passive investor where the Lessee makes most equipment decisions directly with the manufacturer.
Financial Accounting Standards Board (FASB)
The rule-making body that establishes financial reporting guidelines.
First Amendment Lease
A lease that provides the Lessee with a purchase option at one or more defined points during the lease term. The customer must renew or continue the use of equipment under the lease if the purchase option is not exercised. The option price is usually either a fixed price intended to approximate fair-market value, or is defined as fair-market value, determined by the Lessee’s appraisal, and subject to a price floor that insures the finance company’s residual position will be covered if the purchase option is exercised. If the purchase option is not exercised, then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the Lessor’s end-of-term residual position. The Lessee is not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, the Lessee typically has the right either to return the equipment without penalty or to renew or purchase at fair-market value.
Fixed Price Purchase Option
An option given to the Lessee to purchase leased equipment from the Lessor on the option date for a certain price. Both the date and price must be determined at the inception of the lease. A fixed- price purchase option could equal as little as 10-15 percent of the original cost of the equipment.
A lease in which the Lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon a future residual value.
An entity that provides any part of the funds used to pay for the cost of the leased equipment. Funds can come from either an equity-funding source, such as the ultimate Lessor in a lease transaction, or debt-funding source, such as a bank or other lending institution.
When the Lessee or an unrelated third party (i.e. equipment manufacturer, insurance company) guarantees to the Lessor that the leased equipment will be worth a certain fixed amount at the end of the lease term. The guarantor agrees to reimburse the Lessor for any deficiency realized if the leased equipment is subsequently salvaged at an amount below the guaranteed residual value.
An agreement by one party (the guarantor) to accept responsibility for a financial obligation of another person. The guarantor’s obligation is generally triggered when the primary person or entity does not satisfy the guaranteed obligation.
A clause that assures a Lessor that it will be paid rent, no matter what the circumstances. That remains true even if the Lessor allegedly breaches its obligations. The Lessor’s wrongful act is treated as a separate and independent event, and does not affect the Lessee’s obligation to perform under the lease. This extremely important clause turns leases into financial assets that Lessors can assign to other financial institutions.
The beginning of the lease term.
Incremental Borrowing Rate
The rate that, at the inception of the lease, the Lessee would incur to borrow over a similar term the funds necessary to purchase the leased asset. In other words, the interest rate a Lessee would have to pay if, instead of leasing, the Lessee finances the purchase of the same asset.
A clause in which a Lessee or borrower (and sometimes the financier) agrees in favor of the other party, to hold the other party harmless and free of liability for specified losses or damages incurred in the underlying transaction. As passive investors and lenders only, financiers typically obtain very broad indemnities from their customers to protect them against any loss, damage or liability associated with lending in respect of, or leasing, equipment or other capital asset. In Ethyl Corporation v. Daniel Construction Co., 725 S.W.2d 705 at 709 (Texas Sup. Ct. 1987), the court defined an indemnity agreement as a “collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from the legal consequences of an act or forbearance on the part of one of the parties or of some third person.” In other words, an indemnity agreement is a promise by one party, called the indemnitor, to safeguard or hold the protected party, called the indemnitee, harmless against existing and/or future loss, damage, and expense or injury liability.
Independent Leasing Company / Independent Lessor
A type of leasing company which is independent of any one bank, credit corporation or manufacturer and, as such, may purchase equipment from various unrelated manufacturers. The equipment is then leased to the end-user, or Lessee. The independent Lessor may be an investor using its own funds or it may be a lease broker using funds received from other investors. Also termed Third-Party Lessor.
The party that provides the funds to pay for the leased asset.
Revenue Rulings, Revenue Procedures, case law and other miscellaneous documents which contain the Internal Revenue Service’s interpretation and comment on federal income tax law as contained in the Internal Revenue Code, as set forth by Congress.
A market segment represented by financing over $5 million.
An agreement in which one party, the Lessor or owner of the equipment, permits another party, the Lessee, to use the equipment for a specified period of time, in exchange for a series of payments.
The process whereby a leasing company purchases or acquires a lease from a lease originator, such as a lease broker or another leasing company.
An important step of the lease process occurring throughout the duration of the lease, in which the Lessor, or subcontractor, provides for lease tracking, billing, collections, financial reporting, UCC filings and so forth.
The contractual agreement between Lessor and Lessee which sets forth all of the terms and conditions of the lease.
The transfer of a lease by a Lessee to a third party. Many leases contain clauses that restrict or prohibit lease assignment. Certain restrictions on assignments may not be enforceable under the UCC.
An entity which provides one or more services in the lease transaction, but which does not retain the lease transaction for its own portfolio. Such services could include finding the Lessee, working with the equipment manufacturer, securing debt financing for the Lessor to use in purchasing the equipment, and locating the ultimate Lessor, or equity participant, in the lease transaction. Also referred to as a Packager.
The many written forms which evidence the lease transaction, including but not limited to the lease agreement, purchase order assignment, and equipment schedule(s).
A specific amount of funding arrangement designated by the Lessor for a Lessee to use over a fixed commitment period, typically arranged under a master lease.
The process of uncovering (through a sales force), developing and consummating new lease transactions. Steps in the process could include (but are not limited to) prospecting for new lease business, pricing potential transactions, credit review and documentation.
Periodic payments paid by the Lessee to the Lessor in a lease transaction.
An arrangement whereby a number of unrelated tax-exempt leases are grouped together for purposes of a single public offering. The governments are usually similar in nature (i.e. school districts) and are brought together through some common interest association. The lease pool is different than a master lease, which groups the leasing needs of several departments or agencies in a single issuer/Lessee, such as a state or county.
Lease Purchase Contract
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 dollar-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 (Rental Payment)
A percentage rate equivalent to the periodic rental payment to be paid in dollars (often computed by applying the rate to the lease balance).
Lease Renewal Option
An option in the lease agreement that allows the Lessee to extend the lease term for an additional period of time beyond the expiration of the initial lease term, in exchange for lease renewal payments.
Lease Revenue Bond
A bond having as its repayment source a lease to which project revenues have been pledged for making regular payments, although the source of lease payments may also include General Fund revenues. Also referred to as lease-backed revenue bond.
The process of involving several different funding sources in providing various percentages of a particular lease’s debt and equity components.
The fixed, non-cancellable term of the lease during which time the Lessee has an obligation to make rental payments. The lease term should coincide with, or be shorter than, the useful life of the asset being leased.
Lease Versus Buy
A comparison of the costs incurred in obtaining the use of an asset for a specific period of time through either leasing or purchasing. Costs are typically compared on an after-tax, present value basis.
A financing method used to acquire the use of an asset for a specified period of time, in exchange for periodic rental payments.
The end-user of the leased equipment, who remits periodic payments to the Lessor in exchange for the use of the leased equipment over a specified period of time.
The amount of the future residual value that has been guaranteed by the Lessee.
The party to a true lease agreement that has legal, beneficial or tax title to the equipment, grants the Lessee the right to use and possess the equipment for the lease term, and is entitled to the rentals.
Letter of Credit
A “commercial letter of credit” is a credit document used by a buyer to pay for goods. The buyer arranges with a bank to issue a letter for the benefit of a third party who can draw funds from the commercial letter of credit to pay for goods it sells in a domestic or international trade deal. A “standby letter of credit” is a financial accommodation independently issued by financial institutions to and for the benefit of third parties for the account of a debtor. The issuer agrees to allow a third party (which is the beneficiary) to draw funds under the standby letter of credit when some contingency occurs, such as a default under a lease or an insurance premium or deductible payment becomes due.
Letters of credit support business transactions in over 160 countries. Lessors may rely on them to enhance the creditworthiness of a Lessee in a transaction. Lenders may issue or rely on them to enable companies to fund business worldwide. For more than 70 years, letters of credit have provided the basis for buying and selling goods and financing transactions around the globe in part under rules established by the International Chamber of Commerce (ICC).
See Equal Payments.
Indebted. Refers to the amount of debt in a transaction or lease company. A firm becomes more leveraged as it uses more borrowed funds, relative to equity infusions, to finance its operations.
A specific form of lease involving at least three parties: Lessor, Lessee and funding source. The Lessor borrows a significant portion of the equipment cost, typically on a non-recourse basis, by assigning the future lease payment stream to the lender in return for up-front funds. The Lessor puts up a minimal amount of its own equity funds (the difference between the equipment cost and the present value of the assigned lease payments) and is generally entitled to the full tax benefits of equipment ownership.
An agreement by a person or entity to pay the obligation of another up to a cap or limit on the total payment. A guarantor is a surety, a back-up person or entity who pays should the original obligor, such as a Lessee, borrower or buyer, fail to perform.
A financing agreement that allows a business to acquire, use and eventually own equipment after investing in a down payment. A loan may require the borrower to pledge other assets for collateral. But loans also can provide tax and accounting advantages that may best serve a company’s financial structure.
The life of equipment depreciated via the Modified Acceleration Cost Recovery System.
An agreement whereby the Lessee contracts with another party to maintain and/or repair the leased property during the lease term, in exchange for a payment or series of payments.
A lease contract in which the customer leases currently needed assets and is able to acquire other equipment under the same basic terms and conditions without negotiating a new lease contract. Typically, the customer signs a schedule and related documents to add the new equipment.
Master Lease Agreement
The contractual agreement between Lessor and Lessee in a master lease transaction. The agreement would typically set forth basic lease terms and conditions, the period of time that the agreement is in force, the maximum dollar amount that can be used during this timeframe, and provide for when and how the lease rate(s) will be fixed.
The end of the lease term, assuming that all of the obligations contained in the lease agreement have been met.
A market segment generally represented by financing under $5 million and dominated by single investor leases.
Modified Accelerated Cost Recovery System (MACRS)
The Tax Reform Act of 1986 (Tax Act) established a modified accelerated cost recovery system, called MACRS. MACRS is a tax depreciation system that allows a business to recover the cost of income-producing property over a specific recovery period. The Tax Act established an accelerated system of allowing a business to take deductions faster than in equal amounts (straight line) over a period of years. Equipment cost is recovered over periods based on class lives of 3, 5, 7, 10, 15 or 20 years.
A conditional sales contract in the guise of a lease, in which the Lessee is or will become the owner of the leased equipment by the end of the lease term and, therefore, is entitled to the tax benefits of ownership such as depreciation.
Generally, a conditional sales contract disguised in the form of a lease, available only to municipalities, in which the interest earnings are usually tax-exempt to the Lessor.
A lease in which all costs in connection with the use of the equipment, such as maintenance, insurance and property taxes are separately paid for by the Lessee, and are not included in the lease rental paid to the Lessor.
A type of borrowing in which the borrower (or Lessor in our context) is not at-risk for the borrowed funds. The lender expects repayment from the Lessee and/or the salvage value of the leased equipment; hence, the lender’s credit decision will be based upon the creditworthiness of the Lessee, as well as the expected salvage value of the leased equipment.
A type of lease in which the Lessee is (or will become) the owner of the leased equipment and is therefore entitled to all the risks and benefits (including tax benefits) of equipment ownership. Also referred to as a Money-Over-Money Lease.
Any form of financing, such as an operating lease, which for financial reporting purposes is not required to be reported on a firm’s balance sheet.
A conditional-sale lease in which the customer guarantees that the finance company will realize a minimum value from the sale of the asset at the end of the lease. (See TRAC Lease.)
A budget that lists the amount of goods and services the firm is authorized by management to expend during the operating period.
From a financial reporting perspective, 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. The term is also occasionally used to refer to certain leases in which the Lessor has taken a significant residual position in the lease pricing, and as such, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return.
Originate / Origination / Originator
To uncover and consummate new lease transactions. A firm engaged in origination activities would be termed an Originator.
A payment stream in which each lease payment is due at the beginning of each period during the lease.
Payments in Arrears
A payment stream in which each lease payment is due at the end of each period during the lease.
When the Lessee purchases the leased asset from the Lessor prior to the end of the lease term.
The entire group of leases in which a Lessor has invested.
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. Represents a series of future cash flows expressed in today’s dollars.
Structuring a lease transaction to arrive at the periodic rental amount to charge a Lessee. A Lessor must factor in many pricing variables, which may include lease term, Lessor targeted yield, security deposits, residual value and tax benefits.
A transaction in which capital is provided to the customer to finance a specific project. Usually a complex transaction, the project often involves non-recourse debt to the project company that owns the capital asset. The project company’s cash flow from the project and project capital assets provide most, if not all, of the security to financiers advancing funds to pay for the project’s assets. The sponsor typically makes an equity investment and is paid its return after the debt service has been paid as negotiated by the parties. A project financing may be composed of one or more loans, including subordinated debt, and/or a lease of real estate, equipment or other capital assets.
A Lessor’s indication to a Lessee as to the approximate terms and conditions of a proposed lease financing, which typically includes the lease payment amount, lease term, fees, deposits, and so forth. A proposal is not binding on Lessor or Lessee, as it is typically subject to Lessor credit approval.
An option in the lease agreement which allows the Lessee to purchase the leased equipment at the end of the lease term, and which is stated at either a fixed amount or at the future fair-market value of the leased equipment.
Purchase Order Assignment
A document which transfers all rights contained in a purchase order for equipment (i.e., to purchase the equipment at a certain price, with certain terms) from the Lessee to the Lessor, enabling the Lessor to purchase the equipment from the manufacturer and lease it to the Lessee.
The requirement of a Lessee 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.
Earnings of an investment, typically stated on an annualized basis as a percent of investment.
A type of borrowing in which the borrower, or Lessor, is fully at-risk to the lender for repayment of the obligation. The recourse borrower, or Lessor, is required to make payments to the lender whether or not the Lessee is fulfilling its obligation under the lease agreement.
To pay off an existing loan with a new one while using the same property as collateral.
Refundable Security Deposit
An amount paid by the Lessee to the Lessor as security for fulfillment of all obligations outlined in the lease agreement, which is subsequently returned to the Lessee once all obligations have been satisfied. Security deposits are typically refunded at the end of the lease term, but according to mutual agreement, can be refunded at any point during the lease.
The process of selling or leasing the leased equipment to another party at the end of the lease term. The Lessor can remarket the equipment or contract with another party, such as the manufacturer, to remarket the equipment in exchange for a remarketing fee.
The fee received by an entity for selling, or leasing, a piece of leased equipment at the end of the lease term.
See Lease Renewal Option.
Request for Proposal (RFP)
A document outlining the Lessee’s general and specific lease financing needs which is sent to various Lessors requesting that they prepare and submit a lease proposal. The request may include equipment specifications, length of term, and end-of-term options.
The amount of residual value built into the lease pricing. In other words, the residual value amount for which the Lessor is at-risk, and must receive at lease termination in order to earn its pre-targeted rate of return.
The value, either actual or expected, of leased equipment at the end (or termination) of the lease.
Residual Value Guarantee
A guarantee, obtained by the Lessor from another party, that the residual value will be worth a certain preset amount at the end of the lease term.
To keep a lease transaction or investment for one’s own portfolio, and not sell it off to another Lessor or investor.
An arrangement wherein a finance company purchases equipment from the business using the equipment. The finance company then becomes the equipment owner, and leases the equipment back to the original owner, which continues to use the equipment without disruption.
States impose sales taxes on retail sale transactions. States impose use taxes for tangible personal property that is used, consumed or stored in the state.
The expected or realized value from selling a piece of equipment at a specific point in time.
See Equipment Schedule.
See Refundable Security Deposit.
A lease in which the Lessor is fully at-risk for all funds (both equity and pooled funds) used to purchase the leased equipment. Pooled funds consist of borrowings from a variety of sources, normally on a recourse basis.
A lease that contains a payment stream calling for payments only during certain periods of the year.
That portion of the overall leasing marketplace which concentrates on leasing lower-, priced equipment. The cut-off point between the small ticket and middle markets ranges from $25,000 to $100,000, depending upon individual firms’ interpretation.
The difference between the funding cost and the rate of return to the Lessor in a lease. The spread should be sufficient to cover all costs plus a return to the investor.
A financial contract in which the rent may change during the term of the lease contract. The rent change is known at inception, and is agreed upon by the financing company and Lessee. Often a step-up lease allows the Lessee to pay less initially and more later in the term. A step-down lease works in the reverse manner, allowing the Lessee to pay more initially and less later as the payment amount decreases over the term of the lease contract. These contracts are sometimes referred to as a “low-high” and a “high-low” lease structure, respectively.
Stipulated Loss Value
A schedule included in a lease that states the agreed value of equipment at various times during the term of the lease and establishes the liability of the Lessee to the Lessor in the event that the leased equipment is lost or rendered unusable during the lease term due to a casualty loss.
To consider the many components of a potential lease transaction, such as lease term, Lessor yield, end-of-term option(s), security deposits, repayment structure, and so forth, in order to arrive at a periodic payment to charge a Lessee.
Participation of financial institutions in a sale and/or assignment of all or part of an underlying lease or loan transaction. For example, the lease rentals from a transaction originated by a Lessor may be assigned to another financier as collateral for a loan to the assigning Lessor or as an outright sale of lease rental stream.
A financing agreement structured to be treated as a lease for accounting purposes, but as a loan for tax purposes. Synthetic leases may be used by corporations seeking off-balance sheet reporting of the asset-based financing, and which take the tax benefits of owning the financed equipment.
A flexible lease option in which the Lessor replaces existing leased equipment with either different or newer equipment.
Not subject to taxation.
A business or group that is not subject to taxation, such as a philanthropic organization, state college, governmental subdivision (i.e., city or county) or other government organization.
Tax Lease or Guidelines Lease
Revenue Procedure 2001-28 (Rev. Proc. 2001-28) establishes criteria for classifying a lease as a true lease for federal income tax purposes. It is the successor to Revenue Procedure 75-21, 1975-1 C.B. 715 and other related revenue procedures. Technically, Rev. Proc. 2001-28 establishes criteria for obtaining an advance ruling from the Internal Revenue Service (IRS) that a lease is a “true lease” as contrasted with a conditional sale. It is also used to determine whether a simple lease between a Lessor and a Lessee is a “true lease” for tax purposes, which entitles the Lessor to take tax benefits arising from the purchase and lease of equipment to the Lessee.
Terminal Rental Adjustment Clause (TRAC)
Essentially a Lessee-guaranteed residual value for vehicle leases.
The end of the lease term and completion of the lease.
An independent leasing company, or Lessor, with the three parties being: 1) the unrelated manufacturer; 2) the independent Lessor; and 3) the Lessee.
A lease that contains a special provision called a Terminal Rental Adjustment Clause. TRAC leases apply to motor vehicles (including trailers) used more than 50 percent of the time in the trade or business of the Lessee, is important to mention that having One Sure Insurance is also extremely important for every vehicle. Sometimes called an “open-end lease,” a TRAC lease requires the Lessee to make an unknown (open-ended) payment to the Lessor at the end of the lease term. This “terminal rent” payment makes up any shortfall due to the Lessor if the Lessor does not receive proceeds of a sale or other disposition of the vehicle sufficient to recover its investment plus its return on the investment. The transaction looks and works like a balloon loan, because the Lessor transfers all residual value risk to the Lessee. The Lessor realizes residual value either when the Lessee exercises an option to purchase the asset at the end of the lease at a stipulated amount, or when the Lessor sells the asset to a third party. If the disposition of the vehicle results in excess proceeds, the Lessee generally retains the excess.
A lease is generally described in state law as a lease of property as described in UCC Article 2A-103(1)(j). However, a true lease involves other considerations. Section 1-201(37) of the UCC (1-201(37)) includes a “per se” or “bright-line” test to determine whether a transaction should be treated as a true lease or disguised security agreement. This test requires an objective analysis and is supposed to disregard the documents’ labels and the parties’ intent. Current law also includes an “economic realities” test designed to evaluate the facts of each transaction to determine whether the transaction is a lease or disguised financing. The bright-line and economic realities together have created confusing and inconsistent law affecting the leasing industry in determining whether a transaction constitutes a true lease.
A bank or trust company that holds title to, or a security interest in, leased property for the benefit of the Lessee, Lessor, and/or creditors of the Lessor, as appropriate. A leveraged lease often has two trustees: an owner trustee and an indenture trustee. An owner trust owns the assets or interests therein, and the indenture trustee represents the lenders that lend funds to the Lessor on a non-recourse basis to purchase the equipment or other capital asset for lease to the Lessee.
A captive Lessor, with the two parties being: 1) the consolidated parent and captive leasing subsidiary; and 2) the Lessee or end-user of the equipment.
The portion of residual value for which the Lessor is “at-risk”. The Lessor takes on the risk that the equipment may or may not be worth this expected value at the end of the lease term.
Uniform Commercial Code (UCC)
A statute which prescribes very similar rules in almost every state in the U.S. for secured transactions, leasing and other commercial and financial transactions. The UCC is intended to represent the best practices in commercial transactions and, in certain parts of the UCC, consumer transactions.
A loan that is not secured by assets, but is based solely on the creditworthiness of the customer.
Fees collected from the Lessee by the Lessor at the inception or commencement of the lease.
See Equipment Upgrade.
A contract or agreement that conveys the intent of usage (versus purchase) by one party of another party’s equipment.
Many states charge a “use” tax in lieu of a sales tax when equipment is leased. In practice, instead of paying a sales tax for purchase of the leased equipment, the Lessor collects (or Lessees directly pay) use taxes with respect to each rent period as a percentage of the rentals over the lease term.
The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called its economic life.
See Equipment Upgrade.
An entity that sells goods and may provide services to customers.
A working relationship between a financing source and a vendor to provide financing to stimulate the vendor’s sales. The financing source typically offers leases or conditional sales and, in some cases, service contracts to the vendor’s customers.
Lessor’s rate of return in a lease investment.