Glossary of Leasing Terms

Advance payments
This term refers to the one or more payments that must be paid at the beginning of the term of the lease. Such payments are also called 'Advance rents.'

Amortization
Often used in connection with real estate financing, the term amortization refers to the breakdown of periodic loan payments into their two components: the portion of the payment that reduces the principal owed, and the portion that reduces the interest owed on the remaining balance.

Annual percentage rate (APR)
The term APR indicates the true, or effective, rate of interest being paid on a loan when compounding of interest and the costs of various fees are taken into account. The term typically identifies the actual rate of interest being paid for a specified period, usually one year.


Balloon
A large payment - usually at the end of the term. Used in Conditional sales Contracts as an attempt to offer similar payment structure to a lease with an option to purchase.

Bargain purchase option
Refers to an option given to the customer leasing the equipment. Typically, this option gives that customer the right to purchase the equipment, on lease, at a bargain price-a price lower than the expected fair market value.

Basis point
A basis point is a unit of measurement equal to 1/100th of a percent. Using this definition, 125 basis points equal 1.25 percent.

Broker
A company or person who arranges, for a fee, transactions between lessees and lessors of an asset. The fee is usually paid by the lessor.

Buyout This term indicates the amount a customer leasing the equipment must pay in order to terminate the lease in advance of the expiration date. This amount is calculated to include recapture of taxes paid, unpaid property taxes, and lost revenues.


Capital Cost Allowance (CCA)
An amount (expressed as a %) allowed to be expensed for tax purposes against the cost of capital assets acquired by a business. Different types of assets attract different %'s. Using this CCA or passing it on to a leasing company in exchange for the ability to expense lease payments is one of the main determinants in deciding to lease or not to lease.

Capital lease
A capital Lease meets at least one of the following criteria:

  • The Lease transfers ownership of the property to the lessee, by the end of the lease term.
  • The Lease contains a bargain purchase option.
  • The Lease term is equal to 75 percent or more of the estimated useful life of the leased property.
  • The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90 percent of the property fair market value at the start of the lease.

Therefore, the lease must be treated as a loan for accounting purposes.

The customer leasing the equipment under a capital lease typically treats it, first, as the borrowing of funds; and, second, as the acquisition of an asset to be depreciated. As a result, the individual or organization records a capital lease as both an asset and a corresponding liability-a lease payable.

Periodic expenses incurred by that person or organization consist of interest on the debt and depreciation of the asset.

Certificate of Acceptance (Delivery and Acceptance)
A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Closed End Lease
Wherein the lessee is not expected or required to exercise an option to purchase the leased equipment. Most commonly seen in automobile leases from dealers and manufacturers. At the end of the lease the vehicle may be returned subject to mileage and condition of vehicle restrictions (which if not met can exact penalties).


Depreciation
Depreciation is a tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence. The owner of the equipment claims this type of deduction so that the cost of the equipment can be allocated over a longer period of time. Depreciation lowers the company's balance sheet assets and is recorded as an operating expense over that extended period.


Economic Life (Useful Life)
The period of time during which an asset will have economic value and be usable.

Equipment Schedule
A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment. The lease agreement itself then is incorporated in a Master Lease to which the schedule(s) is deemed attached


Fair Market Purchase Option
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.

Fair market value
This term is defined as the price for which property can be sold in an "arm's length" transaction-one that occurs between informed, unrelated, and willing parties, each of whom is acting rationally and in his/her/their own best interest.

Finance lease
A lease of this type is used to finance the purchase of equipment; it is not, therefore, a true lease. From an accounting perspective, finance leases generally are considered capital leases; while from a tax point of view, they are considered non-tax leases.

Fixed purchase option
This option allows the customer to purchase the equipment at the end of the lease term for a fixed percent of the original purchase cost. A typical fixed purchase option is 10% of the original purchase cost.

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.

Future Value
The value of a present amount at a certain date in the future based on a determined rate of return.


Lease
A contract, through which the owner of equipment conveys the right to use its equipment to another party for a specified period of time (the lease term), for specified periodic payments.

Lease purchase agreements
These are full-payout net leases with a term reflecting the equipment's estimated useful life. Because many lease purchase agreements include a bargain purchase option providing for the purchase of the equipment for $1 at the expiration of the lease-lease purchase agreements often are referred to as 'dollar-buyout' or 'buck-out' leases. Lease purchase agreements generally are considered capital leases from an accounting perspective and non-tax leases from a tax perspective, due to their bargain purchase option features and the length of their terms.

Lease schedule
This term refers to the schedule attached to a master lease agreement, describing the leased equipment, rentals, lease term, and other terms applicable to the lease.

Lessee
A lessee is the party to a lease agreement who is obligated to pay rental installments to the lessor and is entitled to use and possess the leased equipment during the lease term.

Lessor
The lessor is the party to a lease agreement who has legal or tax title to the equipment (in the case of a true tax lease); grants the lessee the right to use the equipment for the term of the lease; and is entitled to receive all rental payments.


Master lease
A master lease is a continuing lease arrangement-in, which all terms and conditions of the original lease remain in force-permitting additional equipment to be added to the lease merely by describing such equipment in a new lease schedule executed by the parties to the original master lease.

Middle Market
Leases where the capital cost of the equipment is between $50,000 to $5,000,000.


Off-balance-sheet financing
This term refers to a leasing arrangement that qualifies as an operating lease for the financial accounting purposes of the person or company leasing the equipment. Such leases are described as 'off-balance-sheet financing' because they're not included in the traditional balance sheet asset and debt presentation-except for that portion of each payment that is due in the current fiscal period. Full disclosure of these transactions typically is provided in an auditor's notes on financial statements. Periodic payments are recorded as expense items on the income statement of the person or company leasing the equipment.

Operating lease
This lease is treated as a true lease-rather than as a loan-for accounting purposes. An operating lease is accounted for on balance sheets without showing the equipment as an asset or the lease payment obligations as a liability. Periodic payments are accounted for by the customer leasing the equipment as operating expenses for the period.


Payment in advance
This term refers to the periodic payments due at the beginning of each period.

Payment in arrears
This term refers to the periodic payments due at the end of each period.

Present value
Present value is the discounted value of a payment or stream of payments that will be received in the future, predicated on a specific interest or discount rate. Present value represents a series of future cash flows expressed in terms of today's dollars.

Purchase option
This is an option that permits the customer leasing the equipment to purchase it outright from the owner, usually as of a specified date.


Residual value
This term refers to the book value to which a piece of equipment is depreciated during the lease term, typically based on an estimate of future value, minus an amount that provides a safety margin.


Sale-leaseback
This term represents a type of transaction involving the sale of equipment to a leasing company and the subsequent leasing of the same equipment to the original owner, who continues to use the equipment.

Skip-payment lease
This type of lease contains a payment stream requiring the person or company leasing the equipment to make payments only during certain periods of the year.

Small-Ticket Leasing
Leases where the capital cost of the equipment is under $50,000.

Step-up or step-down
A lease feature that provides for a payment stream where individual payments may increase (step-up) or decrease (step-down) over the term of the lease.

Stretch Lease
A lease with an option to purchase prior to the end of the term where the option is roughly equal to the value of the remaining rentals. Very common structure.


Useful life
This term-used interchangeably with the term 'economic life'-refers to the period of time during which an asset is usable and has economic value. To qualify as an operating lease, the property must have, at the end of the lease term, a remaining useful life of 25 percent of its original estimated useful life-a useful life of at least one year.

Upgrade
A term referring to a trade-in of leased equipment, during the term of the lease, for a newer, more advanced model.


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 programs.

 

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