Capital Advance Leasing, Inc.

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Terminology

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ACCELERATED COST RECOVERY SYSTEM (ACRS) (Modified)
The Tax Reform Act of 1986 established the modified ACRS tax 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 the Asset Depreciation Range (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.

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.

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.

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.

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.

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).

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.

GUIDELINE LEASE
A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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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