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The leasing business has many terms and phrases that are unique to the business. Below is a list of many of those terms. Pease contact us with questions.
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ADR-Asset Depreciation Range
Refers to regulations under the Internal Revenue Code (Section 167 (m)), which permits shorter or longer than usual life to be used for tax depreciation. Under certain circumstances, capital equipment may be depreciated over a period which may be up to 20% more or less than the applicable class life, rounded to the nearest half-year.App. Only
A short two page form that with account numbers handy should only take 10-15 minutes to complete. If everything checks out, no additional information is required to make a decision.Advance Lease Payment
The payments are due at the beginning of the month for that month. Not to be confused with Payments in Advance (see below).Arrears Lease Payment
The payments are due at the end of the month for that month.
Bargain Purchase Option
A provision allowing the lessee, at his option, to purchase the leased asset for a price which is sufficiently lower than the expected fair market value (at the date such option becomes exercisable), that exercise of the option appears, at the inception of the lease, to be reasonably assured.Bonds
Certificates evidencing indebtedness or loan certificates issued by the owner trustee.Broker
A company or person who arranges lease transactions between lessees and lessors for a fee.Burdensome Buyout
A provision in a lease allowing the lessee to purchase the leased equipment at a predetermined value in excess of termination value, or at a value to be determined in some fashion when the buyout is exercised. In the event that payments under the tax or general indemnity clauses are deemed by the lessee to be unduly burdensome. Care must be taken if the existence of such a provision is not to invalidate the true lease nature of the transaction and thus, by its existence, make the lessee liable under the tax indemnity clause.Burn-up Contract
Another name for a nuclear fuel lease.
Capital Lease
A lease is classified and accounted for be a lessee as a capital lease if it meets any of the following criteria:
a. The lease transfer ownership to the lessee at the end of the lease term:
b. The lease contains an option to purchase property at a bargain price:
c. The lease term is equal to 75% or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life):or
d. The present value of minimum lease rental payments is equal to 90% or more of the fair market value of the leased property less related ITC retained by the lessor.
Casualty Value
See insured valueCertificate of Acceptance
A document whereby the lessee acknowledges that the equipment to be leased has been delivered to him, is acceptable to him, and has been manufactured or constructed in accordance with specifications.Close-End Lease
A true lease in which the lessor assumes the risk of depreciation and residual value. Usually a net lease in which the lessee maintains, insures and pays property taxes on the equipment. The term is used to distinguish a lease from an open-end lease, particularly in automobile leasing.Collateral
Collateral under a lease is the equipment, which is leased.Conditional Sale
A transaction for purchase of an asset in which the user, for federal income tax purposes, is treated as the owner of the equipment at the outset of the transaction.Conditional Sale Lease
A lease, which is substance, is a conditional sale (sometimes called a hire-purchase agreement).Contingent Rentals
Rentals in which the amounts are dependent upon some factor other than passage of time.
Deferred Lease Payments
Are found on a lease that allows the lessee to generate revenue using the leased property before the first payment is due. Usually these payment "holidays" are for 1, 3, or 6 months and are often a useful tool to prevent a cash flow crunch resulting from an acquisition.Dollar Buy-out
An option to purchase the leased property for $1 at the end of the lease.Debt Service
Payments of principal and interest due lenders.Direct Financing Lease
A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the criteria definitions of a capital lease, as follows:
A: The lease transfers ownership to he lessee at the end of the lease term.
B: The lease contains an option to purchase property at a bargain price:
C: The lease term is equal to 75% or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life): or
D: The present value of minimum lease rental market value of the leased property less related ITC retained by the lessor, and for which
E: Collection of minimum lease payments must be reasonable predictable; and
F: No uncertainties surround the amount of unreimbursable costs to be incurred by the lessor under the lease.
Direct Investor
Refers to the lessor in a direct financing lease.Direct Lease
Same as a direct financing lease.
Economic Life of Leased Property
The estimated remaining period during which the property is expected to be economically usable by one or more users, with normal repairs and maintenance, for the purpose for which it was intended at the inception of the lease.Equity Participant
The lessor or one of the groups of lessors in a leveraged lease. Equity participants hold trust certificates evidencing their beneficial interest as owners under the owner trust. An equity participant is the same as an owner participant, trustee owner, or grantor owner.Estimated Residual Value of Leased Property
The estimated fair value of the property at the end of the lease term.Extended Term Agreement
An agreement to renew a lease commonly used to describe a guaranteed renewal of a lease by a third party.
Fair Market Purchase Option
An option to purchase leased property at the end of the lease term at its 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
At the maturity of a lease fair market value is the price a willing buyer will pay a willing seller for the equipment on an as is, where is, basis.Fair Rental
The expected rental for equivalent property under similar terms and conditions.FASB
Financial Standards Accounting Board.FAS 13
Technically: Statement of Financial Accounting Standards No. 13, Accounting for Leases; Financial Accounting Standards Board, Stamford, Connecticut, November 1976. Sets forth financial accounting standards on an accounting for leases.Faz-Bee
Another name for the FASB, and sometimes FAS 13.Finance Lease
A financing device whereby a user can acquire use of an asset for most of its useful life. Rentals are net to the lessor: and the user is responsible for maintenance, taxes, and insurance. Rent payments over the life of the lease are sufficient to enable the lessor to recover the cost of the equipment plus a return on its investment. While the term finance lease may be used to describe either a true lease or a conditional sale, the term is more often used to describe a conditional sale lease, which finances the purchase of equipment.Financing Agreement
An agreement between the owner trustee, the lenders, the equity participants, the manufacturer, and the lessee, which spells out the obligations of the parties under a leveraged lease. Also called participation agreement.Financing Statement
A notice of a security interest filed under the Uniform Commercial Code.Floating Rental Rate
Rental which is subject to upward or downward adjustments during the lease term. Floating rents sometimes are adjusted in proportions to prime interest rate or commercial paper rate changes during the term of the lease.Foreign Source Income
Income earned overseas (net of depreciation expense allocable to such income) as reported for United States federal income tax purposes.Full Service Lease
The lease obligates the lessor to provide maintenance, repair and insurance of the leased equipment. The lessor also pays the property taxes. Full service leases are nearly always true leases, in which the lessor owns the equipment at the end of the lease.
Grantor Trust
A trust used as the owner trust in a leveraged lease transaction, usually with only one equity participant. The Internal Revenue Code refers to such a trust as a grantor trust (see Section 671). With more than one equity participant the grantor trust is usually treated as a partnership (see Subchapter K).
HTG
The honest to God yield.Heat Supply Contracts
A nuclear fuel lease.Hell-or-High Water Clause
A clause in a lease which reiterates the unconditional obligation of the lessee to pay rent for the entire term of the lease, regardless of any event affecting the equipment or any change in the circumstance of the lessee.Hire-Purchase Agreement
A conditional sale lease.
Implicit Cost
The nominal annual interest rate implicit in the basic lease payments. It is the interest rate that discounts lease's payments to 100% of equipment cost as of lease's commencement date.Inception of a Lease
The date the lease commitment or lease agreement is signed provided the property to be leased has been acquired by the lessor; otherwise, the date construction is completed or the lessor acquires the property.Incremental Borrowing Rate
The Interest rate, which a person would expect to pay for a certain loan at a certain time.Indemnity Agreement
An agreement whereby the owner participants and the lessee indemnity the trustee from liability as a result of ownership of the leased equipment.Indemnity Clause
Although lease documentation contains various indemnities, the indemnity clause usually refers to the tax indemnity clause whereby the lessee indemnifies the lessor from loss of tax benefits.Indenture Trustee
In a leveraged lease, the indenture trustee holds the security interest in the leased equipment for the benefit of the lenders. In the event of the default, the indenture trustee exercises the rights of a mortgagee. The indenture trustee also is responsible for receiving rent payments from the lessee and using such funds to pay the amounts due the lenders with the balance being paid to the owner trustee. The indenture trustee verifies that correct filings are made to protect the security interest of the lenders. The bond register is maintained by the indenture trustee, who also acts as transfer agent.Independent Lessor
Any leasing company investing in leases; also, brokers without funds to invest in leases sometimes prefer to call themselves "independent lessors" rather than "brokers."Initial Direct Costs
Direct costs incurred by a lessor in negotiating and consummating a lease, such as commissions and legal fees.Institutional Investors
Investors such as banks, insurance companies, trusts, pension funds, foundations, and educational, charitable, and religious institutions.Insured Value
A schedule included in a lease which state 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 the leased equipment is lost or rendered unusable during the lease term, due to a casualty.Interest Rate Implicit in a Lease
The discount rate which, when applied to minimum lease payments (excluding executory costs paid by the lessor) and unguaranteed residual value, causes the aggregate present value at the beginning of the lease term to be equal to the fair value of the leased property at the inception of the lease, minus any investment tax credit retained by the lessor and expected to be realized by him.Interim Rent
When there are multiple deliveries under one lease agreement, it is sometimes desirable that the base term begins on the same date for all or a certain group of units. This may be for the administrative convenience of the lessee in paying bills or simply so that all units come off lease at the same time. When this feature is desired, a charge is made for the use of a unity from its in-service date, often referred to as the delivery date, until the date on which the base term commences. This rate may be the daily equivalent of the base rate or some other charge. In that the lessee has the use of the equipment, this charge is properly characterized as rent instead of interest. Therefore, usury laws do not impose a limit on the rate as they don on advance rent.ITC
Investment Tax Credit
Lease Line
A lease line of credit similar to a bank line of credit, which allows a lessee to add equipment, as needed, under the same basic terms and conditions without negotiating a new lease contract.Lease Rate
The equivalent simple annual interest rate implicit in minimum lease rentals. Not the same as interest rate implicit in a lease.Lease Term
The fixed, non-cancelable 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, and for tax purposes, all periods covered by fixed-rate renewal options.Lease Underwriting
An agreement whereby a packaged commits firmly to enter into a lease on certain terms and assumes the risk of arranging any financing.Lessee
The user of the equipment being leased.Lessee's Incremental Borrowing Rate
The interest rate which the lessee, at the inception of the lease would have incurred to borrow over a similar term the funds necessary to purchase the leased assets. In a leveraged lease the rate on the bonds is normally used.Lessor
The owner of equipment, which is being leased to a lessee or user.Level Payments
Equal payments over the term of the lease.Leverage
An amount Borrowed. A lease is sometimes referred to as 100% leveraged for the lessee. In a leveraged lease, the debt portion of the funds used to purchase the asset represents leverage of the equity holder.Leveraged Lease
A lease which meets the definition criteria for a direct financing lease or a capital lease, plus all of the following characteristics:
A: At least three parties are involved: a lessee, a lessor, and a long-term creditor;
B: The financing provided by the creditor is substantial to the transaction and without recourse to the lessor; and
C: The lessor's net investment typically declines during the early years of the lease and rises during the later years of the lease.
Loan Certificates
Debt certificates or bonds issued by the owner trustee to lenders.Loan Participant
A lender in a leveraged lease; a holder of debt in a leveraged lease evidenced by loan certificates or bonds issued by the owner trustee.Low Ball Bid
A Bid to perform a lease transaction purposely priced below market or with terms not acceptable from a tax or accounting standpoint, with a view to renegotiations for a higher price and/or more expensive terms at a later date once the bid is awarded the low ball bidder and the other interested lessors are no longer available. Typically, the low-ball bidder raises the price when it is too late for the lessee to seek other leasing sources.
Master Lease
A lease line of credit, which allows a lessee to add equipment under the same basic terms and conditions without negotiating a new lease contract.Minimum Investment
For a leveraged lease to be a true lease, the lessor must have a minimum "at risk" investment of at least 20% in a lease when the lease begins, ends, and at all times during the lease term.Minimum Lease Payments for the Lessee
All payments the lessee is obligated to make or can be required to make in connections with leased property, including residual value guaranteed the lessor and bargain renewal rents or purchase options, but excluding guarantees of lessor's debt (seldom encountered) and executory costs such as insurance, maintenance and taxes.Minimum Lease Payments for the Lessor
The payments considered minimum lease payments for the lessee plus any guarantee by a third party of the residual value or rental payments beyond the lease term.Mortgage
An agreement between the owner trustee and the indenture trustee whereby the owner trustee assigns title to the equipment, the lease, and rental payments under the lease as security for amounts due the lenders. The same as on indenture of trust or security agreement.
Net Lease
In a net lease, the rentals are payable net to the lessor. All costs in connection with the use of the equipment are to be paid by the lessee and are not a part of the rental. For example, taxes, insurance, and maintenance are paid directly by the lessee. Most capital leases and direct financing leases are 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. The loan is secured by a first lien on the equipment, and assignment of the lease and an assignment of the lease rental payments.
Open-End Lease
A conditional sale lease in which the lessee guarantees the lessor will realize a minimum value from the sale of the asset at the end of the lease. If the equipment is not sold for the agreed residual value, the lessee pays the difference to the lessor. If the equipment is sold for more than the agreed residual value, the lessor pays the excess to the lessee. The lease is called an "open-end" lease because the lessee does not know the actual cost until the equipment is sold at the end of the lease. The term is commonly used in automobile leasing.Operating Lease
For financial accounting purposes, a lease which does not meet the criteria of a capital lease or direct financing lease,. Also, used generally to describe a short-term lease whereby a user can acquire use of an asset for a fraction of the useful life of the asset. The lessor may provide services in connection with the lease such as maintenance, insurance and payment of personal property taxes.Owner Participant
The lessor or one of a group of lessors in a leveraged lease, holding trust certificates evidencing their beneficial interest as owners under the owner trust. An owner participant is the same as an equity participant, trustor owner, or grantor owner.Owner Trustee
Also sometimes called grantor trustee. In a leveraged lease, the primary function of the owner trustee is to hold title to the equipment for the benefit of the equity participants. The owner trustee issues trust certificates to the equity participants, maintains the register, and acts as transfer agent for such certificates. The owner trustee issues bonds to the lenders, receives distributions of rent payments from the indenture trustee, pays trustee fees due itself and the indenture trustee, and disburses amount due the equity participants. The owner trustee makes appropriate filing to perfect and protect the lenders' interest in the collateral. Compliance certificates and other information required from the lessee under the lease are received by the owner trustee and distributed by the owner trustee to the other parties.
Participation Agreement
An agreement between the owner trustee, the lenders, the equity participants, the manufacturer, and the lessee, which spells out the obligations of the parties under the leveraged lease. Also called financing agreement.PIC
An abbreviation for "pass investment tax credit." A PIC lease is one in which the lessor passes the investment tax credit through to the lessee.Present Value
The current equivalent value of cash available immediately for a future payment of 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 the future payments.Purchase Option
An option to purchase leased property at the end of the lease term. In order to protect the tax characteristics of a true lease, an option to purchase property from a lessor by a lessee cannot be at a price less than its fair market value at the time the right is exercised.
Related Parties
In leasing transactions under FAS 13; a parent and its subsidiaries; and owner and its joint ventures; and investor and its investees; provided the parent, owner, or investor has the ability to exercise significant influence over financial and operating policies of the related party. Under the Internal Revenue Code, 50% ownership is a general test for a related party.Renewal Option
An option to renew the lease at the end of the initial lease term. Here, too, care must be used in granting a renewal option for a fair rental value. If this is not done properly, it may later be ruled that the lease is not a true lease-and tax advantages lost- and tax indemnity clause activated.Residual Insurance
An insurance policy guaranteeing a certain residual value at the end of the lease term.Residual or Residual Value
The value of equipment at the conclusion of the lease term. To qualify the lease as a true lease for tax purposes, the estimated residual value at the end of the lease term must equal at least 20% of the original cost of the equipment.Residual sharing
An agreement between the lessor and another party providing for a division of the residual value between them. Care must be taken in any such agreement, lest the tax benefits be last and the lessee become liable under the tax indemnity clause.ROI
The yield. The interest rate earned by the lessor in a lease, which is measured by the rated at which the excess cash flows permit recovery of investments. The rate at which the cash flows not needed for debt service or payment of taxes amortize the investment of the equity participation.Revenue Procedures
Commonly used in leasing to refer to the IRS Revenue Procedures 75-27 and 75-28, which set forth requirements for obtaining a favorable revenue ruling on a leveraged lease.Revenue Ruling
A written opinion of the Internal Revenue Service requested by parties, which is applicable to assumed facts stated in the opinion. May also refer to published IRS ruling with general applicability.RIC
An abbreviation for "retain investment tax credit." A RIC lease is one in which the lessor retains the investment tax credit.Right of First Refusal
If a lease contains a right of first refusal, the lessor retains the right to continue ownership of the equipment at the end of the lease term. Lessor is under no obligation to sell the equipment; but, if the lessor offers the equipment for sale at a stated price, the lessee then has the right of first refusal to purchase the equipment or refuse the offer.
Sale-Leaseback
A transaction which involves the sale of the property by the owner and a lease of the property back to the seller.Sale-type Lease
A lease by a lessor who is manufacturer or dealer, in which the lease meets the criteria definition of a capital lease or direct financing lease.Salvage Value
The minimum value for a depreciable asset. After sufficient depreciation equals salvage value, no more depreciation may be taken. Not the same as residual value.Step-Up Lease
Has lower monthly payments in the beginning of the lease,increasing throughout the term. Another way to generate revenue to minimize the cash flow impact of your new acquisition.Security Agreement
An agreement between the owner trustee and the indenture trustee whereby the owner trustee assigns title to the equipment, the lease, and rental payments under the lease as security for amounts due to the lenders. The same as an indenture of trust or mortgage.Short-term Lease
Generally refers to an operating lease.Sinking Fund
A reserve or a sinking fund established or set aside for the purpose of payment of taxes anticipated to become due at the later date. )Generally applicable only in leveraged leases.)Sinking Fund Rate
The rate of interest allocated to a sinking fund set aside for future payment of taxes. (Generally applicable only in leveraged leases.)Special Purpose Property
Property which is uniquely valuable to the lessee and not valuable to anyone else except as scrap.Stipulated Loss Value
The same as insured value.Strip Debt
Debt in connection with a leveraged lease, arranged in tiers with different maturities and amortization to improve the lessor's cash flow and reduce the lessee's cost.Sub-lease
A transaction in which leased property is released by the original lessee to a third party, and the lease agreement between the two original parties remains in effect.
Termination Schedule
Leases sometimes contain provisions permitting a lessee to terminate the lease during the lease term in the event the leased equipment becomes obsolete and surplus to its needs. In such event, the equipment usually must be sold or transferred to some third party unconnected in any way with the lessee. The liability of the lessee in the event of such termination is set forth in a termination schedule, which values the term. If The equipment is sold at a price lower than set forth in the schedule, the lessee pays the difference. In the event the resale is at a price higher than in the termination schedule, such excess amounts belong to the lessor. The termination schedule is not the same as the casualty value schedule, insured value schedule or stipulated loss value schedule.True Lease
A true lease is a transaction which qualifies as a lease under the Internal Revenue Code so the lessee can claim rental payments as tax deductions and the lessor can claim tax benefits of ownership such as depreciation and ITC.Trust Certificate
Document evidencing the beneficial ownership of a trust estate of an equity participant (or owner participant, trustor owner, or grantor owner) in an owner trust.Trustee
A bank or trust company which holds title to or a security interest in leased property in trust for the benefit of the lessee, lessor and/or creditors of the lessor. A leveraged lease often has two trustees: owner trustee and indenture trustee.Trustee Fees
Fees due either the owner trustee or the indenture trustee.Trustor Owner
The lessor or one of a group of lessors under a leveraged lease holding trust certificates evidencing their beneficial interest as owners under the owner trust. A trustor owner is the same as an equity participant, owner participant, or grantor owner.
UCC Statement
Also known as a Financing Statement. A document filed with the county and/or state which serves as public notice of a security interest in the leased property.Unguaranteed Residual Value
The portion of residual value "at risk" for a lessor in his yield computation, i.e. which there is no party obligated to pay.Useful Life
The period of time during which an asset will have economic value and be useable. Useful life of an asset is sometimes called the economic life of the asset. To qualify as a true lease, the leased property must have a remaining useful life of 20% of the original estimated useful life of the leased property at the end of the lease term, and at least a life of one year.
Yield
The interest rate earned by the lessor or equity participant in a lease, which is measured by the rate at which the excess cash flows permit recovery of investment. The rate at which the cash flows not needed for debt service or payment of taxes amortize the investment of the equity participants.
