AUTOMATIC EXTENSION
A provision that will allow the lease to automatically extend past
its original term (generally for a period from one to twelve months)
if the lessee fails to provide lessor with notice, in a specified
time-frame, of which end of term option the lessee will exercise.
During an extension period, the rental payment is usually the same
as during the original lease term.
B
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 fair market value at the date the
option can be exercised. Examples: $1 purchase or a 10% option purchase
when the equipment's fair market value is 25% of its original cost.
BIG-TICKET
A market segment, dominated by leveraged leases, where the lease
size is generally over $5,000,000.
BRACKET LEASE
A provision in the lease allowing the lessee to purchase the leased
property for its fair market value, bracketed between a minimum
and maximum amount (e.g. that fair market value shall be no less
that 5%, and no more than 15% of the leased property's original
cost). The advantage of the bracket is that the lessee will know
the maximum payment required to purchase the leased property, and
the lessor will know the minimum payment.
BROKER
An intermediary between the lessee and lessor. The broker arranges
a leasing transaction. The broker is usually paid a fee by the leasing
company, or the customer, for its services.
C
CAPITAL LEASE
A specific classification of a lease for accounting purposes. The
lease is 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 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 less related investment tax credits retained
by the lessor. (Also see finance lease.)
CAPPED FAIR MARKET VALUE
A provision in the lease allowing the lessee to purchase the leased
property for its fair market value, but not exceeding a certain
amount. The advantage of the cap is that the lessee will know the
maximum payment required to purchase the leased property.
CASUALTY LOSS VALUE
A schedule is included in the lease which states the agreed value
of equipment at various times during the term of the lease, and
which 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.
CERTIFICATE OF ACCEPTANCE (Delivery and Acceptance)
A document whereby the lessee acknowledges that the equipment to
be leased has been delivered, is acceptable, and is working to the
customer's satisfaction. Most leases begin after the date stated
on the certificate of acceptance.
COTERMINOUS EXPIRATION
Two or more leases for the same lessee that end at the same time.
CROSS CORPORATE GUARANTY
A guarantee by one corporation to pay the lease obligations of another
corporation.
D
DEFAULT
If a lessee does not comply with the terms of the lease, a default
occurs. Generally, after a default, the lessor can exercise all
of its rights under the lease to repossess the property and seek
monetary damages.
DIRECT FINANCE LEASE
Same as a capital lease except this accounting classification only
applies to a lessor.
DOLLAR BUYOUT
An option at the end of the lease to buy the leased property for
$1.
E
ECONOMIC LIFE (USEFUL LIFE) OF
LEASED PROPERTY
The estimated time the leased property can be used with normal repairs
and maintenance. This may vary by company and the usage of the leased
property.
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.
EQUITY PARTICIPANT
The lessor, or one of the group of lessors, in a leveraged lease.
Equity participants hold trust certificates evidencing their beneficial
interest as owners under the owner trust.
EQUIPMENT SCHEDULE
A document that is attached to a master lease agreement that outlines
any terms, conditions and equipment information that are not covered
in the master lease. It describes in detail the equipment being
leased, and may also state the lease term, commencement date, repayment
schedule and location of the equipment. Multiple equipment schedules
may be added to a master lease and each one (with the terms of the
master lease) will be a separate contract.
EXTENSION
A lease clause that allows for the continuation of the lease agreement
(including the lessee's obligation to pay rent) past the original
term of the lease. The extended lease payments may be the same as
the original payments, or they may be assessed at the fair market
value for rental payments for the specific equipment. It can be
an option exercised by the lessee at the end of the term of the
lease, or it may be imposed automatically (see Automatic Extension).
F
FAIR MARKET VALUE
The technical definition of fair market value is the price a willing
buyer will pay a willing seller for leased property on an "as is,
where is" basis with both under no compulsion to either buy or sell.
In reality, this is a vague term, often creating a question between
a lessor and lessee regarding what is the fair market value.
FAIR MARKET PURCHASE OPTION
An option to purchase leased property at the end of the lease term
at its then fair market value. Since different lease contracts use
different definitions of fair market value, this purchase option
can lead to a great deal of confusion for lessees.
FAS 13
Technically, this is the statement of Financial Accounting Standards
No. 13 entitled "Accounting for Leases". It sets forth standards
for how parties to a leasing transaction should account for such
transaction. The lease is 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 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 less related investment tax credits retained
by the lessor.
FASB
This is the Financial Accounting Standards Board. Since 1973, it
has been the designated organization in the private sector for establishing
standards of financial accounting and reporting. Those standards
govern the preparation of financial reports. They are officially
recognized as authoritative by the Securities and Exchange Commission.
FINANCE LEASE
A financing device whereby a lessee can acquire use of an asset
for most of its useful life. The lessee 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.
FINANCIAL STATEMENTS
Accounting statements that provide specific information about a
company's financial position. They include the Profit & Loss Statement,
also known as the Income Statement, the Balance Sheet, and the Statement
of Cash Flows. Financial statements can generally be reviewed, compiled
or audited by an outside CPA firm or can be internally prepared
by the company.
FINANCING STATEMENT
This is a form document specified under the Uniform Commercial Code,
a law applicable in all states. It provides public notice that a
security interest has been filed against the company listed as the
debtor on the form.
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.
G
GUIDELINE LEASE
A lease written under criteria established by the IRS to determine
the availability of tax benefits to the lessor.
H
HELL-OR-HIGH-WATER CLAUSE
This is a provision in a lease agreement, which indicates the lessee
is required to pay the lease payment for the entire term of the
lease. Problems encountered by the lessee with the leased property
are not valid reasons for not making lease payments.
I
INCREMENTAL BORROWING RATE
The rate that, at the inception of the lease, the lessee would have
incurred to borrow the funds (over a similar term) necessary to
purchase the leased property.
INDEMNIFICATION CLAUSE
A clause in which the lessee indemnifies the lessor from loss of
tax benefits.
INSTALLATION PERIOD FINANCING
This is an interest-only financing product that is intended to cover
Capital Advance's multiple payments to our customer's vendors that
may be required prior to the commencement of the lease term. Our
customers are billed for the amounts that have been paid to vendors
over the course of a given month prior the commencement of the lease.
It can be used to cover multiple vendors for multiple pieces of
equipment, and can include Capital Advance's payment of deposits
and progress payments to your vendors.
INTERIM RENT
Rent paid for an interim period of time. Many leases begin at the
start of a period such as the first of the month. If leased property
is received and a certificate of acceptance is signed prior to that
date, often there is an interim period between the acceptance and
the start of the first lease rental. This period of time is called
the interim term during which the interim rent is paid. The interim
rent is generally calculated as a percent of the standard monthly
rent prorated over the number of days in the month the lessee has
use of the leased property.
INVESTMENT GRADE CREDIT
Generally refers to a lessee of high credit standing. Technically,
an investment grade credit is a company rated highly by one of many
recognized credit agencies such as Standard & Poor's. In the case
of S&P it is defined as a company with a bond rating of BBB- or
better.
L
LEASE
A contract in which one party conveys the use of an asset to another
party for a specific period of time at a predetermined rate.
LEASE LINE
A line of credit similar to a bank line of credit. It allows the
lessee to easily add additional leased property under the same terms
and conditions without negotiating additional agreements.
LEASE RATE FACTOR
This is a percentage which when multiplied by the cost provides
a periodic rental. It is a helpful number when used by either a
sales person or the lessee. In the event the cost of the leased
property is either not exactly known or may change, having the lease
rate factor allows a quick recalculation of a lease payment when
that number becomes known.
LEASE TERM
The fixed term of the lease. Generally, lease terms run for 12 to
84 months, and sometimes longer.
Lessee
The user of leased property under the lease.
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.
LETTER OF CREDIT
A specific arrangement between a lessee and a bank. The bank agrees
in the event of a defined event, that the lessor can look to the
bank to make payment instead of the lessee. This is similar to a
security deposit in that it is one way for a lessor to insure that
it will be paid under a 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.
M
MASTER LEASE
The primary document between the lessor and lessee containing all
of the general terms and conditions for leasing, but none of the
details for a specific transaction. Significant additional documentation
is required to make the Master Lease a complete binding contract.
MIDDLE TICKET (MARKET)
A market segment generally represented by financing under $5 million
and dominated by single investor leases.
MIDDLE TICKET (MARKET) CREDIT
Generally, a lessee without an investment grade credit rating, but
with sales between $20 million and $1 billion annually.
MUNICIPAL LEASE
Municipal leasing is a financing alternative enabling the 85,000
existing state and local government entities to acquire essential-use
equipment. A municipal lease-purchase agreement lets state agencies
and local municipalities conserve cash, manage annual budgets and
eliminate lengthy and costly bond issue referendums while obtaining
the benefits of a tax-exempt interest rate. It is generally the
same as a capital lease except that the lessee is a public entity.
Although the product and features are identical, the legal documentation
is different because of the unique status of public entities.
N
NET LEASE
Any lease where all costs in connection with the use of the leased
property are paid by the lessee and are not part of the periodic
lease payments. For instance, maintenance, insurance and taxes are
paid directly by the lessee. Capital leases are generally net leases.
NON-RECOURSE LOAN
In a leveraged lease, the lenders cannot look to the lessor for
repayment. The lender's only recourse is to the lessee and, therefore,
the lessee's credit rating is of prime importance.
NOTICE
There may be a requirement in a lease that the lessee must give
notice (in a specific time-frame) to the lessor of which end of
term option the lessee would like to exercise. If the lessee fails
to give this notice in the time period provided, then there may
be an automatic extension of the lease.
O
OPEN-ENDED 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
This is an accounting classification for a lease. These leases are
typically short term leases and are generally considered a rental.
A lease that does not meet the criteria for a capital lease is an
operating lease. In this case the criteria would be: (a) the lessor
does not transfer ownership to the lessee at the end of the lease
term; (b) the lease does not contain an option to purchase the asset
at a bargain price; (c) the lease term is less than 75 percent 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 less than 90 percent of
the fair market value of the leased asset less related investment
tax credits retained by the lessor.
OPTION (OR 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.
P
PACKAGER
The leasing company, investment banker, or broker who arranges a
leveraged lease.
PERSONAL GUARANTY
The guarantee of someone to be individually responsible for the
obligations under the lease. Generally for Subchapter S closely
held companies and small businesses, a leasing company may ask for
a personal guaranty as a way to insure that the lease payments will
be made.
PRESENT VALUE
This is the today's dollar value for all future lease payments taking
into account when the payments will be made. A discounting interest
rate is utilized to calculate the present value. The present value
will vary with the discount interest factor applied to calculating
the future payments.
PROGRESS PAYMENTS
Lessor makes all milestone payments required by the vendor until
all equipment, customization, training, installation and conversion
has been provided by the software or equipment vendor. This product
is generally used with larger transactions that require milestone
payments over a short time between three months and 18 months. See Pro-Rata Rentals and Installation
Period Financing.
PRO-RATA RENTALS
This is a financing product that is intended to cover the lessor's
payments to the lessee's vendors prior to the commencement of the
lease term. It can cover multiple vendors for multiple pieces of
equipment, and can include the lessor's payment of deposits and
progress payments to the vendors. The lessee is generally billed
at a daily rental rate equal to 1/30th of a rental payment for each
vendor payment made that month.
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
The requirement to purchase equipment at a particular time and at
a predetermined price. In a lease transaction, this is the lessee's
requirement to purchase the equipment at the end of the lease term.
IRS guidelines prohibit put options in tax-oriented leases.
R
REFUNDABLE SECURITY DEPOSIT
An amount paid by a lessee to provide extra protection to the lessor
to insure that the lessee will pay its obligations under the lease.
REMARKETING
The process of selling or re-leasing equipment that has been returned
to the lessor either at the end of the term, or as a result of a
default during the lease.
REMARKETING FEE
A fee generally paid by the lessee at the end of the lease term
for the lessor's costs in selling or re-leasing leased property.
RENT HOLIDAY
A period of time during which a lessee is not required to pay rent.
REPLEVIN
The legal action taken to recover personal property wrongfully detained.
In the case of a lease, equipment can be considered wrongfully detained
when there is an event of default.
REPOSSESSION
The act of recovering possession of equipment for the failure of
making required payments when due.
RETURN PROVISIONS
These are the areas of the contract which governs how and when the
equipment will be returned to the lessor. They will outline such
things as: where the equipment will be shipped, who pays the cost
of shipping, whether there is a restocking fee for the return, does
the equipment have to be returned in its original packages, etc.
RESIDUAL VALUE
The value of leased property at the end of the lease term. It can
be represented as a known amount (as in the case of a 10% purchase
option) or it can be subject to determination at the end of the
lease (as in the case of a fair market value purchase option).
S
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.
SALES-TYPE LEASE
A lease by a lessor who is the manufacturer or dealer, in which
the lease meets the definitional criteria of a capital lease or
direct financing lease.
SECURITY INTEREST
An interest in property that is acquired for the purpose of securing
payment of a lease obligation. A security interest allows the holder
of the security interest to obtain the property in the event of
default and gives the holder additional rights in the event of bankruptcy.
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 $150,000, typically using conditional sale leases
or single investor true leases.
SPREAD
The difference between funding costs and the rate of return to the
lessor on a lease.
STEP DOWN LEASE
Another variant of the "Step Rental Lease". A lease where the lease
payments decrease over the term of the lease.
STEP RENTAL LEASE
A lease where the rent may change during the term of the lease.
The change is known at lease inception and is agreed by both the
lessor and the lessee. Often a step rent lease allows the lessee
to pay less initially and more later in the term.
STEP UP LEASE
Similar to, again, a "Step Rental Lease" and a "Step Down Lease"
except the lease payment is increased during the term of the lease.
STIPULATED LOSS VALUE
This is a term in a lease requiring the lessee to pay the value
of the leased property in the event there has been some type of
damage or destruction to the leased property.
SUBLEASE
The leasing of an asset that is already being leased from another
party. The existence of a sublease means that three different parties
are involved: the original lessor, who owns the asset and receives
rent; the lessee/sublessor, who pays the lessor rent and receives
rent from the sublessee; and the sublessee, who actually uses the
asset and pays rent.
SYNTHETIC LEASE
A synthetic lease is basically a financing structured to be treated
as a lease for accounting purposes, but as a loan for tax purposes.
The structure is used by corporations that are seeking off-balance
sheet reporting of their asset based financing, and that can efficiently
use the tax benefits of owning the financed asset.
T
TAX LEASE
A lease wherein 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.
TRAC LEASE
A Terminal Rental Adjustment Clause (TRAC) Lease contains a clause
that allows a company to guarantee the residual portion of their
tax lease of transportation equipment. At lease commencement the
parties agree upon a TRAC amount. If at lease expiration the equipment
sells for more than this amount, the lessee receives a rebate equal
to some or all of the sales proceeds. However, if the equipment
sells for less than the TRAC amount, the lessee must pay additional
rent equal to some or all of the deficiency.
TRUE LEASE
A type of transaction that qualifies as a lease under the Internal
Revenue Code. It allows the lessor to claim ownership and the lessee
to claim rental payments as an expense as opposed to depreciating
those assets.
V
VENDOR
An entity that provides leased property to customers. It can be
the manufacturer of the equipment or an organization that markets
the equipment of a variety of manufacturers (a VAR, or value added
reseller).
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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