Leasing Glossary

Alternative Minimum Tax (AMT) – A separate tax calculation in which a taxpayer must pay the higher of its regular tax or AMT liability. The corporate AMT rate, although lower than the regular tax rate, is applied to a different, typically higher, taxable income than for regular taxes. This form of tax makes it more difficult to avoid paying “fair share” of tax through the use of certain regular tax benefits, which are known as “tax preference items” or “adjustment items”.

Bargain Purchase Option – An option allowing the lessee to purchase the lease asset at the end of the lease term for a price that is fixed substantially below the expected “fair market value”, such that, at the inception of the lease, purchase appears to be reasonably assured.

Bargain Renewal Option – A lease provision allowing the lessee to extend the lease for an additional term with payments substantially lower than the fair value of the asset, such that exercise of the option appears, at the inception of the lease, purchase appears to be reasonably assured.

Call Option – Another term for a purchase or a renewal option, that is exercisable at the discretion of the lessee, not the lessor.

Capital Lease – A lease that from the financial reporting standpoint has the characteristics of a purchase agreement, that meets at least one the criteria outlined in paragraph 7 of FASB 13. A capital lease must be shown as an asset and a related obligation on the balance sheet of the lessee. (Also known as Financial Lease or Nontax Lease)

Certificate of Deliver and Acceptance (D & A) – A document signed by the lessee to confirm the leased asset has been delivered and is acceptable. In most cases, the least term commences once this document has been signed.

Closed-End Lease – 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. This term is used in auto leasing.

Conditional Sales Contract – An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income purposes, therefore entitled to the tax benefits of ownership, such as depreciation.

Direct Financing Lease – A lessor capital lease that does not give rise to manufacturer’s or dealer’s profit (or loss) to the lessor.

Discounted Cash Flow Analysis – Comparison of cash flows resulting from two or more investment or payment obligation alternatives by calculating the “Present Value” of each, using the same discount rate.

Economic Life of Leased Property – The estimated period during which the property is expected to be economically useful by one or more users, with normal repair and maintenance, or the purpose intended at the inception of the lease.

Effective Lease Rate – The effective rate to the lessee of cash flows resulting from a lease transaction. The rate includes the compounding effect of interest during the year.

End of Term Options – Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased asset at the end of the lease. Common end of term options include purchasing the asset, renewing the lease or returning the property to the lessor.

Estimated Residual Value – The forecasted “fair market value” of the leased asset, used for purposes of calculating the maximum allowable term of a tax-oriented lease, and calculated in constant dollars (excluding inflation and deflation.)

Estimated Useful Life – The period, during which an asset is expected to be useful in a trade or business, used for calculation the maximum allowable term of a tax-oriented lease.

Fair Market Value (FMV) – The value of an asset if it were to be sold in an arms-length transaction, between a willing buyer and a willing seller. FMV is determined by either agreement or appraisal.

Fair Market Value (FMV) Purchase Option – A lessee option to purchase the leased equipment at the end of the term from the lessor at fair market value.

FASB 13 – Financial Accounting Standards Board Statement No 13, “Accounting for Leases.” FASB 13 contains specific guidelines for proper classification, accounting and reporting of lease transactions.

Financing Statement – A notice of a security interest filed under the Uniform Commercial Code (UCC).

Fixed Price Purchase Option – A lessee option to purchase the lease asset at the end of the leasing term at a predetermined price.

Full Payout Lease – A lease in which the cash flows will return to the lessor the acquisition cost of the asset, the cost of financing, overhead and an acceptable return on investment.

Guideline Lease – A tax-oriented lease, which complies with all the IRS guidelines for a “true” lease.

Implicit Rate – The discount rate that, when applied to the minimum lease payments together with any unguaranteed residual, causes the aggregate present value at the inception of the lease to be equal to the fair market value of the leased property.

Indemnity Clause – A clause in a master lease agreement that requires lessees to indemnify lessors against any and all claims, suits, actions, damages, liabilities, expenses, costs, including attorney fees, whether or not suit is instituted or incurred in connection with the equipment.

Lease Line – A lease line of credit that allows the lessee to add equipment without having to renegotiate a new lease each time.

Lessor – Usually the owner of equipment being leased to a lessee or user.

Leveraged Lease – A specific lease involving at least three parties: a lessor, a lessee and a funding source, which allows the lessor/owner to purchase the equipment by making a specific equity investment and to finance the remaining balance by issuing non-recourse note(s) to the lender(s).

MACRS(Modified Accelerated Cost Recovery System) – The current method of tax depreciation introduced by the Tax Reform Act of 1986 and effective for equipment placed in service after 1986.

MACRS Deductions – Tax depreciation deductions calculated under the MACRS introduced by the Tax Reform Act of 1986.

Master Lease – A lease agreement that allows a lessee to obtain additional equipment under the same basic lease terms and conditions as originally agreed, without having to renegotiate a new lease contract.

Municipal Lease – A conditional sales contract disguised in the form of a lease available only to state and local governments, in which the interest earnings are tax-exempt to the lessor.

Net Lease – A lease in which the lessee assumes all the costs and expenses related to use and maintenance of the leased asset.

Non-tax-oriented Lease – A lease that is treated as a loan for tax purposes, preventing the lessor from claiming tax benefits on the equipment. The lessee would be treated as the owner for federal income tax purposes.

Off Balance Sheet Financing– Any form of financing, such as an operating lease, that, for financial purposes, is not required to be reported on a a firm’s balance sheet.

Open-end Lease – A lease in which the lessee guarantees the amount of the future residual value to be realized by the lessor at the end of the term. If the equipment is sold for less than the guaranteed value, the lessee must pay the amount of any deficiency to the lessor. The lease is referred to as open-end because the lessee does not know its actual value until the equipment is sold at the end of the lease.

Operating Lease – A lease that has the characteristics of a usage agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee.

Purchase Option – A lessee option to purchase the leased asset from the lessor at the end of the lease term for either a fixed amount or at the future fair market value of it.

Put Option – A potential requirement to purchase equipment or other assets at a particular time and at a predetermined price. To exercise this option is at the lessor’s, not the lessee’s, discretion.

Quasi Lease – A slang term for a non-tax oriented lease, also called a lease-purchase.

Rentals – Payments required under a lease to be made by a lessee to a lessor for the use of the lease equipment.

Renewal Option – An option given to the lessee to renew or extend the term of a lease at the expiration of the base term.

Sale-leaseback – A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.

Sales-type Lease – A lease in which the lessor is also the vendor (manufacturer or distributor) of the equipment.

Salvage Value – The expected or realized value from selling a piece of equipment after a reasonable allowance for the exhaustion, tear and wear, and obsolescence of a depreciable asset.

Securitization – The process of selling lease receivables to a separate legal entity that issues stocks and bonds to investors. The investors’ proceeds flow through to the company that sold the receivables and the investors receive their returns from collecting lessee receivables.

Sublease – A transaction in which leased property is re-leased by the original lessee to a third party, and the lease agreement between the two original parties remains in effect.

Stipulated Loss Value – A clause in the master lease that incorporates required lessee payments in the event of a default or casualty (loss or irreparable damage of the equipment) during the lease term.

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 a guideline lease.

True Lease/Tax Lease – A tax-oriented lease, in which, for IRS purposes, the lessor qualifies for the tax benefits of ownership and the lessee is allowed to claim the entire amount of the lease rental as a tax deduction.

Turnaround Time – The time it takes to make a credit decision and inform the lessee after receiving the lease application.

Two-Party Lessor – A captive leasing company, or a lessor, that writes leases involving two parties: 1) the consolidated parent and/or captive leasing subsidiary and 2) the lessee or end-user of the equipment.

Upgrade – An option that allows the lessee to add equipment to an existing piece of leased equipment in order to increase its capacity or improve its efficiency.

Vendor Lease – A lease offered by a manufacturer or dealer to its customers for financing its products.

Warehousing – The short-term funding of leases before permanent funding is finalized.

Wintergreen Lease – A lease that requires the lessee to give notice to the lessor in order to renew for another term. Otherwise, the lease terminates on the already established termination date.

Wrap Lease – A lease in which the lessor sells the equipment to an investor for equity and a note payable over the lease term. This method effectively transfers tax benefits to an investor.