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Glossary of Terms
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ACCELERATED COST
RECOVERY SYSTEM (ACRS) (Modified)
The Tax Reform Act of 1986
established the modified ACRS tax appreciation system prescribing
depreciation methods for each ACRS class in lieu of statutory tables.
Equipment is assigned among 3, 5, 7, 10,15, 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
exemptions 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.
ARREARS RENTAL
A rental that is due at the end of each period. Compare to
advance rental.
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BALLOON PAYMENT
A large payment at the end of the loan allowing smaller payments to
be made during the term.
BARGAIN PURCHASE
OPTION
A lease provision allowing the
lessee, at its option, to purchase the equipment for a price
predetermined at lease inception, that is substantially lower than the
expected fair market value at the date the option can be exercised.
BARGAIN RENEWAL OPTION
A lease provision allowing the lessee, at its option, to extend the
lease for an additional term in exchange for periodic rental payments
sufficiently less than fair value rentals for the property, such that
exercise of the option appears, at the inception of the lease, to be
reasonably assured.
BASE TERM
The initial, noncancellable term of the lease used by the lessor in
computing the payment. The base term is the minimum time period
during which the lessee has the use and custody of the equipment.
BASIS
The original cost of an asset plus other capitalized acquisition
costs such as installation charges and sales tax. Basis reflects
the amount upon which depreciation charges are computed.
BIG-TICKET
A market segment, generally
dominated by leveraged leases, represented by lease financing over $2
million.
BROKER
A company or person who arranges,
for a fee, transactions between lessees and lessors of an asset.
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CALL OPTION
An option in a lease, such as a
purchase or a renewal option, that is exercised at the discretion of the
lessee, not the lessor.
CAPITAL LEASE
From a financial reporting
perspective, a lease that has the characteristics of a purchase
agreement, and also meets certain criteria established by Financial
Accounting Standards Board Statement No. 13 (FASB 13). such a
lease is required to be shown as an asset and a related obligation on
the balance sheet of the lessee.
CAPITALIZE
To record an expenditure that may
benefit future periods as an asset rather than as an expense to be
charged off in the period of its occurrence.
CAPTIVE LESSOR
A leasing company that has been set up
by a manufacturer or equipment dealer to finance the sale or lease of
its own products to end-users or lessees.
CASH FLOW
A measure on an organization's
liquidity that compares cash inflows and outflows. Often shown by
adding noncash expenses to net income.
C ERTIFICATE 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 lease that 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. also refers to a vehicle lease in
which the lessor absorbs the entire risk of the residual.
COLLATERAL
Equipment or other tangible assets such as a house, car or
securities pledged by the lessee to the lessor to minimize the risk of
default.
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 (and is entitled to the tax benefits of
ownership, such as depreciation). The lessee does not become the
legal owner of the asset until all terms and conditions of the
agreement have been satisfied.
CORPORATE RESOLUTION
A document signed by a registered corporate officer, designating
company representatives who may sign leases.
CREDIT ENHANCEMENT
A technique to reduce historical loss
risk and concentration risk of a lease portfolio in order to achieve a
better credit rating and lower borrowing costs.
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DEPRECIATION
A means for a firm to recover the cost of a purchased asset, over
time, through periodic deductions or offsets to income.
Depreciation is used in both a financial reporting and tax context, and
is considered a tax benefit because the depreciation deductions cause a
reduction in taxable income, thereby lowering a firm's tax liability.
D IRECT 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 certain additional
criteria.
DISCOUNTED LEASE
A lease in which the lease payments are assigned to a funding
source in exchange for up-front cash to the lessor.
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EARLY
TERMINATION
Occurs 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.
ECONOMIC LIFE
(Useful Life)
The period of time during which an
asset will have economic value and be usable.
EFFECTIVE LEASE RATE
The effective rate (to the lessee)
of 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.
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 lessor.
EQUITY PARTICIPANT
The owner participant, trustor
owner, or grantor owner.
EQUIPMENT SCHEDULE
A document that describes in detail
the equipment being leased. It may also state the lease term,
commencement date, repayment schedule and location of the equipment.
EVERGREEN LEASE
A lease that self-renews each year
unless the lessee gives notice of its termination within a specified
period of time.
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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 MARKET VALUE (FMV)
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 and under similar terms and conditions.
FASB 13
Financial Accounting Standards Board
Statement No. 13, "Accounting for Leases." FASB 13, along with its
various amendments and interpretations, specifies the proper
classification, accounting and reporting of leases by lessors and
lessees.
FINANCIAL LEASE
An expression oftentimes used in the
industry to refer to a capital lease or a nontax lease. It is
also a type of tax-oriented lease that was introduced by the Tax
Equity and Fiscal Responsibility Act of 1982, to be effective in 1984,
but later repealed by the Tax Reform Act of 1986.
FULL-PAYOUT LEASE
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 the
leased equipment's future residual value.
FUNDING SOURCE
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 a debt funding source, such
as a bank or other lending institution.
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HELL-OR-HIGH-WATER
CLAUSE
A clause in a lease that states
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.
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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.
INTERIM RENT
A charge for the use of a piece of
equipment from its in-service date, or delivery date, until the date
on which the base term of the lease commences. the daily interim
rent charge typically is equal to the daily equivalent of the base
rental payment. the use of interim rent allows the lessor to
have one common base term commencement date for a lease agreement
having multiple deliveries of equipment.
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LANDLORD
WAIVER
A document required by a lessor when a
lessee is placing the leased equipment on a property leased from another
party, to secure lessor's rights.
LEASE
A contract in which one party
conveys the use of an asset to another party for a specific period of
time.
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, computed by dividing
the monthly payment by the cost basis of the lease.
LEASE TERM
The fixed, noncancellable term of
the lease. Includes, for accounting purposes, all periods
covered by fixed-rate renewal options, which for economic reasons
appear likely to be exercised at the inception of the lease.
Includes, for tax purposes, all periods covered by fixed-rate renewal
options.
LESSEE
The user of the equipment being
leased.
LESSOR
The party to a lease agreement who
has legal or tax title to the equipment, grants the lessee the right
to use the equipment for the lease term, and is entitled to the
rentals.
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MASTER
LEASE
A lease agreement containing boiler
plate provisions that allows a lessee to obtain additional leased
equipment under the same basic lease terms and conditions as
originally agreed to, without having to renegotiate and execute a new
lease contract with the lessor. the actual lease rate for a
specific piece of equipment generally will be set upon equipment
delivery to the lessee.
MIDDLE MARKET
A market segment generally
represented by financing under $2 million and dominated by single
investor leases.
MODIFIED ACCELERATED
COST RECOVERY SYSTEM (MACRS)
The current tax depreciation system
as introduced by the Tax Reform Act of 1986, effective for equipment
placed in service after December 31, 1986.
MONEY-OVER-MONEY
LEASE
A nontax lease. This type of
lease is 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.
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 all costs in
connection wit the use of the equipment, such as maintenance, insurance
and property taxes, are paid for separately by the lessee and are not
included in the lease rental paid to the lessor.
NONAPPROPRIATION CLAUSE
Contractual provision found in
municipal leases that provides that if the governmental lessee fails to
appropriate or make available funds to make the lease payments called
for under the agreement for the next appropriation period, the agreement
terminates at the end of the current appropriation period. such as
clause is used to prevent lease payment obligations in future years from
being classified as debt. Exercise of the nonappropriation clause
is not an event of default.
NONRECOURSE
A type of borrowing in which the
lessor-borrower is not at-risk for the borrowed funds. The
lender expects repayment from the lessee and/or the value of the
leased equipment, hence the lender's credit decision is based upon the
creditworthiness of the lessee, as well as the expected value of the
leased equipment.
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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 lease. If the equipment is sold for less than the
guaranteed value, the lessee must pay the amount of any deficiency to
the lessor. This lease is referred to as open-end because the
lessee does not know its actual cost until the equipment is sold at the
end of the lease term.
OPERATING LEASE
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 also is used to refer to leases in which the lessor has taken a
significant residual position in the lease pricing and, therefore, must
salvage the equipment for a certain value at the end of the lease term
in order to earn its rate of return.
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PACKAGER
The leasing company, investment
banker, or broker who arranges a leveraged lease.
PAYMENTS IN ADVANCE
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 the lease
payment is due at the end of each period during the lease.
PREFERENCE ITEMS
Certain tax benefits that may create
additional tax liability under that alternative minimum tax.
PRESENT VALUE
The current equivalent of payments
or a stream of payments 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 amount or at fair market
value.
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.
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REGULATION
Y
A Federal Reserve Board rule that
regulates leasing by banks.
RESIDUAL
VALUE
The value, either actual or
expected, of an asset at the
end or termination of a lease.
RULE OF 78
An accelerated method of allocating
periodic earnings in a lease (or a loan) based upon the
sum-of-the-years method.
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SALE-LEASEBACK
An arrangement whereby equipment is
purchased by a lessor 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.
SINGLE INVESTOR LEASE
(See Full Payout or Finance Lease.)
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.
SMALL-TICKET LEASING
Transactions under $100,000,
typically using conditional sale leases or single investor true
leases.
STEP-PAYMENT LEASE
A lease that contains a payment
stream requiring the lessee to make payments that either increase
(step-up) or decrease (step-down) in amount over the term of the
lease.
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.
SUBLEASE
A transaction in which leased
property is re-leased by the original lessee to a third party, and the
lease agreement between the two original parties remains in effect.
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TERMINAL
RENTAL ADJUSTMENT CLAUSE (TRAC)
A lessee guaranteed residual value for
vehicle leases (automobiles, trucks or trailers), the inclusion of which
will not, in and of itself, disqualify the tax lease status of a
tax-oriented vehicle lease.
TRUE LEASE
Another term for a tax lease in which,
for IRS purposes, the lessor qualifies for the tax benefits of ownership
and the lessee is allowed to reclaim the entire amount of the lease
rental as a tax deduction.
TRUSTEE
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. A leveraged lease
often has two trustees: an owner trustee and an indenture trustee.
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UCC-1
A UCC document filed by a lessor
informing the public that the filing party legally owns the equipment
on lease.
USURY LAWS
Laws regulating the charging of
interest rates. Most usury laws protect consumers from
unauthorized interest rates.
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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 to the vendor's customers. The vendor leasing firm
substitutes as the captive finance company of a manufacturer or
distributor through the extension of leasing to customers, provisions
of credit checking, and performance of collections and operational
administration. Also known as lease asset servicing or vendor program
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Modified with permission from
Equipment Leasing Association's LeaseAssistant.org.
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