| Accelerated
Depreciation |
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|
Any
depreciation method that allows for greater
deductions or charges in the earlier years of
an assets depreciable life, with charges becoming
progressively smaller in each successive period.
Examples would include the double declining
balance and sum-of-the-years digits methods
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| Add-On
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A
transaction to add related equipment/software
to an existing lease. Typically this term is
used when the new equipment is financed using
the same lease structure (i.e. Fair Market Value,
$1.00 Purchase Option, Fixed Purchase Option,
etc.)
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| Advanced
Lease Payment(s) |
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| The
payment or payments made at the initiation of
the lease contract, i.e. first rental payment
or first and last rental payments. |
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| What
factors are used to determine credit worthiness
of the business? |
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| The
length of time in business, references from bank
and trades, Dunn & Bradstreet and credit bureau
ratings. |
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| Authorized
Signature |
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A
signature by a person authorized by a company
to obligate the company on a long-term lease.
An authorized signer will usually be substantiated
by the Corporate Resolution which specifies
who can sign and what his/her responsibilities
may be.
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| Bargain
Renewal Option |
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A
lease provision allowing the lessee, at this
option, to renew the equipment lease for a rental
rate predetermined at lease inception, that
is substantially lower than the expected fair
market value at the date the option can be exercised.
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| Basis
Point |
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| One
one-hundredth of a percent (.01%) |
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| Broker
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A
broker acts as the middle-man between the lessee
(the user of the equipment) and the full service
leasing company that ultimately provides the
credit approval, documentation, funding, and
billing. There are many leasing companies
that act as brokers and receive a fee for their
work. There are fewer full service leasing
companies that have the ability to hold and
service their leases throughout the entire term
of the lease. The full service lessor
provides greater control for the lessee and/or
vendor in the event the lessee wants to upgrade
or early terminate their lease. Since there
is no middleman, doing business directly with
a full service lessor usually results in a lower
lease rate for the lessee and a higher sale
price for the vendor.
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| Capital
Lease |
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A
lease that meets at least one of the criteria
outlined in paragraph 7 of FASB 13 and, therefore,
must be treated essentially as an installment
purchase for book accounting purposes. The four
criteria are
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| Title
passes automatically by the end of the lease term. |
| Lease
contains a bargain purchase option |
| Lease
term is greater than 75% of estimated economic
life of the equipment |
| Present
value of lease payments is greater than 90% of
the equipment's fair market value |
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|
A
Capital Lease is treated by the lessee as both
the borrowing of funds and the acquisition of
an asset and corresponding liability (lease
payable). Periodic lessee expenses consist of
interest on the debt and depreciation of the
asset
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| Captive
Lessor |
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|
A
leasing company that has been set up by a manufacturer
or dealer of equipment to finance the sale or
lease of its own products to its customers.
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| Certificate
of Delivery and Acceptance |
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| A
document that is signed by the lessee to acknowledge
that the equipment to be leased has been delivered
and is acceptable. |
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| Closed
End Lease |
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A
true lease in which the lessor assumes the depreciation
risk. The lessee bears no obligation at the
end of the lease. This term is used to distinguish
the lease from an open-end lease.
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| Coterminous
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Two
of more leases that end at the same time. A
Coterminous Addendum can be used allowing you
to add equipment to an existing lease, adjusting
the payments to reflect the addition. Both the
original lease and the addendum will terminate
at the same time.
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| Cross
Corporate Guaranty |
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| A
guarantee by one corporation to pay the lease
obligations of another corporation. |
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| Default
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|
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 money damages.
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| Depreciation
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A
method for determining the useful life of a
piece of equipment and for costing its value
over the years of its active use. The total
depreciation expense is equal to the difference
between the initial cost of the unit and its
estimated residual or salvage value. When divided
over the years of the equipment's usefulness,
this periodic expense can be deducted from income
taxes each year.
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| Direct
Finance Lease |
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| Same
as a capital lease except this accounting classification
only applies to a lessor. |
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| Discount
Rate |
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A
certain interest rate that is used to bring
a series of future cash flows to their present
value in order to state them in current, or
today's dollars. Use of a discount rate removes
the time value of money from future cash flows.
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| Dollar
Buyout
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| Assuming
that the lessee is not in default, an option at
the end of the lease to buy the leased property
for $1.00 |
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| Early
Termination |
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|
Early
Termination of a lease occurs when the lessee
pays off the balance of the lease prior to its
maturity date or returns the lease equipment
to the lessor prior to 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.
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| Estimated
Useful Life |
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|
The
estimated time period leased equipment is expected
to be useful. Estimated useful life is used
to calculate the maximum allowable term of a
"tax-oriented lease".
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| Estimated
Residual Value |
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|
For
purposes of calculating the maximum allowable
term of a "tax-oriented lease", this
is the "fair market value" of the
lease equipment at the end of the lease term,
calculated in constant dollars excluding inflation
or deflation.
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| Exemption
Certificate |
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|
A
document exempting a lessor from paying sales
tax on the equipment being leased. A lessor
may be buying the equipment for "re-sale"
as would a vendor/supplier, while a lessee may
be tax exempt for other reasons, i.e., non-profit
entity or a bank.
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| Fair
Market
Value Purchase Option |
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|
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
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| FASB
13 |
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|
Statement
number 13 of the Financial Accounting Standards
Board (FASB) which establishes standards for
lessees' and lessors' accounting and reporting
for leases. This includes the characterization
of a lease as an operating lease or capital
lease for the lessee's purposes. A company's
assets, liabilities and net income will differ
depending on how it chooses to structure its
leases. The provisions of FASB 13 derive from
the view that a lease that transfers substantially
all of the benefits and risks of ownership should
be accounted for as the acquisition of an asset
and the incurrence of an obligation by the lessee
(a capital lease) and as a sale of financing
by the lessor. Other leases should be accounted
for as the rental of property (operating leases).
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| Financial
Statements |
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|
Accounting
statements that provide specific information
about a company's financial position. They include
the Profit & Loss Statement, also know as
the Income Statement, the Balance Sheet, and
the Statement of Cash Flows. Financial statements
can generally be audited by an outside CPA firm
or be unaudited and, thus, prepared by the company.
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| Financing
Statement (UCC-1) |
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|
A
standardized form recorded with the Secretary
of State and/or County Clerk to perfect a lien
under the Uniform Commercial Code by notification
to all interested parties. Used with some financing
leases to protect lessor's interest in the equipment.
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| Finance
Lease |
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|
A
lease used to finance the purchase of equipment;
not a true lease. Finance leases are generally
considered to be capital leases from an accounting
perspective and non-tax leases from a tax perspective.
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| Fixed
Purchase Option |
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| An
option given to the lessee to purchase the leased
equipment from the lessor on the option date for
a guaranteed price. Both the date and the price
must be determined at the inception of the lease.
A typical fixed purchase option is 10% of the
original cost of the equipment. |
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| Full
Payout Lease |
|
| A
lease in which the total of the lease payments
pays back to the lessor the entire cost of the
equipment including financing, overhead, and a
reasonable rate of return, with little or no dependence
on a residual value. |
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| Interim
Rent |
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| Interim
rent is a one-time daily rental charge for a period
of time between the day the equipment is delivered/accepted
and the first invoice date. It is a partial payment
for using the equipment during a partial month,
and will be billed to the lessee on the first
invoice. |
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| Lease
|
|
| A
contract through which an owner of equipment (the
lessor) conveys the right to use its equipment
to another party (the lessee) for a specified
period of time (the lease term) for specified
periodic payments. |
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| Lease
Rate (Monthly Payment) |
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| The
periodic payment to a lessor for the use of assets.
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| Lease
Schedule |
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| A
schedule to a Master Lease Agreement describing
the leased equipment, rentals and other terms
applicable to the equipment. |
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| Lease
Term |
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| The
fixed term of the lease. |
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| Leasing
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| Leasing
is a tax oriented method of gaining the use of
an asset that can produce more income or benefits
than the cost. A lease can be a method by which
a client can obtain either use and/or ownership
of an asset while matching a payment schedule
to a predetermined budgetary allotment. |
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| Leasing
Line |
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| A
maximum amount of funding designated by the lessor
for a lessee to use over a fixed commitment period.
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| Lessee
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| A
party who makes use of property owned by another
party (the lessor) and pays the lessor, usually
in the form of rentals, for that use. |
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| Lessor
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| Company
or leasing entity that is the owner of the leased
equipment for accounting, tax, or commercial law
purposes. |
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| Master
Lease |
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|
A
continuing lease arrangement whereby additional
equipment can be added from time to time merely
by describing that equipment in a new lease
schedule. The original lease contract terms
and conditions apply to all subsequent schedules.
In contrast to a lease contract for a single
transaction involving a specific unit of equipment,
a Master Lease is essentially a line of credit
to draw from over time in order to purchase
equipment.
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| Municipal
Lease |
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|
A
lease designed to meet the special needs of
state and local governments. The lease contains
a non-appropriation clause which states that
the only condition under which the entity may
be released from its payment obligation is when
legislature or funding authority fails to appropriate
funds. Since the lessee is a municipality or
an organization supporting the government, it
is exempt from paying federal income taxes.
For this reason, the IRS does not charge the
lessor income taxes on leases to these customers.
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| Net
Lease |
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|
A
lease where payments paid to the lessor do not
include insurance, taxes and maintenance, which
are paid separately by the lessee .
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| Off
Balance Sheet Financing |
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|
A
lease that qualifies as an Operating Lease for
the lessee's financial accounting purposes.
Such leases are referred to as off-balance sheet
financing due to their exclusion from the balance
sheet asset and debt presentation, except for
that portion of the payments that is due in
the current fiscal period. Full disclosure of
such transactions is typically made in the auditor's
notes to the financial statements. Periodic
payments are recorded as expense items on the
lessee's income statement.
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| Operating
Lease |
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|
A
lease which is treated as a true lease (as opposed
to a loan) for book accounting purposes. As
defined in FASB 13, an operating lease must
have all of the following characteristics:
|
|
| Lease
term is less that 75% of estimated economic life
of the equipment |
| Present
value of lease payment is less than 90% of the
equipment's fair market value. |
| Lease
cannot contain a bargain purchase option (i.e.
less than the fair market value). |
| Ownership
is retained by the lessor during and after the
lease term. |
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|
An
operating lease is accounted for by the lessee
without showing an asset (for the equipment)
or liability (for the lease payment obligations)
on his balance sheet. Periodic payments are
accounted for by the lessee as operating expenses
of the period.
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| Personal
Guaranty |
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|
The
guarantee of someone to be individually responsible
for the obligations under the lease. Generally,
when financing closely held subchapter S 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.
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| Purchase
Option |
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| An
option given to the lessee to purchase the equipment
from the lessor, usually as of a specified date.
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| Renewal
Option |
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| Lessee's
option to renew a lease contract when it ends.
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| Residual
Value |
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|
The
book value that the lessor depreciated a piece
of equipment down to during the lease term,
typically based on an estimate of the future
values, less a safety margin.
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|
| Sale
and Leaseback |
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|
An
arrangement where 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.
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| Synthetic
Lease |
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|
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 who can efficiently use the tax benefits
of owning the financed asset.
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| Step
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-up lease allows the lessee to pay
less initially and more later in the term. A
Step Down Lease is the opposite. The lessee
pays more initially and the payment amount decreases
over the term of the lease.
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| Tax
Lease |
|
|
A
generic term for a lease in which the lessor
takes the risk of ownership (as determined by
various IRS pronouncements) and, as the owner,
is entitled to the benefits of ownership, including
tax benefits.
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| Term
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|
|
The
length of time a lease agreement will remain
in force. The rules of an agreement as supplied
on a rental or lease contract between the customer
(lessee) and the lessor. The terms of the contract
will govern such things as the length of the
agreement, rules of proper cancellation of the
agreement, renewal terms, and charges for breech
of the contract.
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|
| True
Lease |
|
|
A
type of lease under which ownership of the equipment
remains with the lessor. To qualify as a true
lease for tax purposes, the Internal Revenue
Service states that
|
|
| • |
Title
must remain with the lessor;
|
|
| • |
The
rental payments must be competitive with
industry rates, represent payment for
use of the equipment and have a rate that
does not vary appreciably with or without
purchase option;
|
|
| • |
The
option to purchase price must not be less
than the fair market price at the lease's
expiration date;
|
|
| • |
Equity
cannot be allowed on rental payments.
For tax purposes, the total monthly payments
can be deducted.
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|
|
| UCC
Financing Statement |
|
|
A
document, under the UCC, filed with the county
(and sometimes the Secretary of State) to provide
public notice of a security interest in personal
property.
|
|
| Upgrade
|
|
| To
trade in leased equipment for a newer, more advanced
model during the lease term. |
|
| Useful
Life |
|
|
The
period of time during which an asset will have
economic value and be usable. The useful life
of an asset is sometimes called the economic
life of the asset. To qualify as an operating
lease, the property must have a remaining in
useful life of 25% of the original estimated
useful life of the leased property at the end
of the lease term, and at least life of one
year.
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|
| Use
Tax |
|
|
Many
states charge a "use" tax in lieu
of a sales tax when equipment is leased. So
instead of paying a sales tax for purchase of
the leased equipment, taxes are collected by
the lessor as a percentage of the rentals over
the lease term.
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| Vendor
|
|
| A
entity that provides leased property to customers.
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