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Glossary |
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Accelerated Cost Recovery System (ACRS) (Modified): The Tax Reform Act of 1986 established the modified ACRS tax appreciation system. It sets depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10,15, or 20-year classes, depending on ADR lives.
Advance Rental Payments: The payment or payments made at the inception of the lease agreement (i.e., the first rental payment or first and last rental payment.)
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, making it more likely that a taxpayer who buys equipment may be subject to the AMT rather than to regular tax.
Bargain Purchase Option: A lease provision that lets the lessee, at its option, purchase equipment for a price predetermined at lease inception. This price is substantially lower than the expected fair market value at the date the option can be exercised.
Capital Lease: Type of lease 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. (See also Finance Lease.)
Captive Financing: A company, usually a subsidiary, that is wholly owned, whose main function is financing consumer purchases from the parent company.
Certificate of Acceptance (Delivery and Acceptance): A document through which the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.
Commitment Letter: The letter prepared by the lessor to spell out terms and conditions between lessee and lessor for a master lease line of credit.
Conditional Sale: A situation under the income tax provisions whereby the actual user is seen as the owner of an asset for availing the capital allowances. In India, a conditional sale will include the hire purchase transaction.
Dealer: Provider of rental equipment to end-user; offers leasing as financing option for sales of equipment, software, or systems.
Dealer Lease Referral Application and Agreement: This one-page agreement provides the lessor with valuable information about the equipment vendor. Through this agreement, the vendor agrees to pass clear title to the equipment to the lessor upon delivery, acceptance by the Lessee, and funding by the lessor.
Direct Financing Lease (Direct Lease): A nonleveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
Economic Life (or Useful Life): The period of time during which an asset will have value and be usable.
Effective Lease Rate: The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, you must include any effect the transactions has on federal tax liabilities.
Electronic Funds Transfer (EFT): A wire transfer in which the lessor pays the equipment vendor. At time of funding this amount is wired to the vendor minus any payments agreed to in the assignment of proceeds.
Equity Participant: The owner participant, trustor owner, or grantor owner.
Equipment Schedule: A document that describes the equipment being leased. It may also include additional information such as the lease term, commencement date, repayment schedule, and location of the equipment.
Fair Market Purchase Option: An option to purchase leased property at the end of the lease term at its current fair market value.
Fair Market Value (FMV): The open market value of the asset at the termination of the lease. A purchase option under a true lease is generally the fair market value at the end of the lease.
Fair Market Renewal Value: The rental payment paid monthly for a period of up to one year if the Lessee chooses to renew the lease once it has initially terminated. The value is determined by negotiation between lessee and lessor and represents the Fair Market Rental/Renewal Value.
Finance Lease (Single Investor Lease): Typically, a finance lease is a full-payout agreement that cannot be cancelled. In the agreement, the lessee is responsible for maintenance, taxes, and insurance.
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 on 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.
Indemnity Clause: A clause in which the lessee indemnifies the lessor from loss of tax benefits.
Indenture of Trust (Indenture): An agreement between the owner trustee and the indenture trustee: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Same as a security agreement or mortgage.
Lease: An agreement granting or letting the possession of land, building, machinery, personal property, etc., for a fixed or indeterminate period, for a stated consideration usually known as rent.
Lease Commencement: The lease commencement date is the date equipment is accepted by the lessee as evidenced by lessee's execution of an acceptance certificate.
Lease Proposal: A written agreement between the lessor and lessee that outlines the basic terms and conditions of a specific lease transaction. Both parties sign this proposal, and it is subject to credit approval.
Lease Rate (Rental Payment): The periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.
Lessee: 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.
Lessor: The company or leasing entity that is the legal owner of the leased equipment.
Level Payments: Equal payments over the term of the lease.
Master Lease: An open-ended lease agreement under which a lessee obtains the use of specific property and can add additional equipment periodically. Eliminates signing new leases as additional equipment is leased.
Net Lease: A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.
Nonrecourse Loan Open-End 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: Any lease that is not a capital lease. These are generally used for short-term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.
Present Value: The current equivalent of payments or a stream of payments to be received at various times in the future. The present value will vary with the discount interest factor applied to future payments.
Purchase Option: A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value.
Residual Value: The value of an asset at the conclusion of a lease.
Security Deposit: An advance payment usually equal to two lease payments. This deposit is retained by the lessor for the term of the Lease. If the lease is never finalized for reasons that are not the fault of the lessor, the deposit will be kept by the lessor for administrative costs. If any part of the deposit is left at the end of the lease term and the Lessee has completed all of his or her obligations, the deposit is returned to the lessee or can be applied to the purchase option, if any, or to any remaining payments.
Single Investor Lease (See Full Payout or Finance Lease): A tax-oriented lease whereby the lessor achieves its desired rate of return through 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.
Soft Costs: Freight, software, labor, consulting services, and other intangible items are frequently defined as soft costs. Many funding sources will only allow a certain percentage of the total transaction to be soft costs. Because these costs can generally not be recovered in case of default, they increase the inherent risk of the lease.
Stipulated Loss Value: A schedule included in a lease that states the agreed value of equipment at various times during the term of the lease and establishes the liability of the lessee to the lessor in the event that the leased equipment is lost or rendered unusable during the lease term due to a casualty loss.
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.
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 tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws.
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 tax deductions.
Trustee: A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: an owner trustee and an indenture trustee.
Useful Life: The time during which an asset will be usable and have some economic value. To qualify as an operating lease, the property must have a remaining useful life of 25 percent of the original estimated useful life of the leased property at the end of the lease term, and life of at least one year.
Usury: State-enacted laws limiting the interest rate that can be charged on loans. In states such as Texas, Arkansas, Florida, and Nebraska, $1.00 buyout leases are also subject to usury. Leasing companies have either refused to write such leases in these states or have required certain addendums or additional documentation.
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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