Understanding the words used by leasing companies is very important. If you understand these terms, it will help you in understanding a leasing transaction. We have provided this glossary of terms to provide a clearer understanding of the words used by leasing companies.
Accelerated Cost Recovery System (ACRS)(Modified)
The Tax Reform Act of 1986 established the modified ACRS tax appreciation system prescribing 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.
Equipment added to an existing lease, resulting in an increased monthly lease payment, for the remaining term of the lease.
Non-hardware or other non-liquid acquisition costs of lessor.
Modifications to leased equipment, generally subject to restoration at the conclusion of the lease.
A stream of even (equal) cash flows occurring at regular intervals, such as even monthly lease payments. An annuity in advance is one which the annuity payment is at the beginning of each period. An annuity in arrears is one in which the annuity payment is due at the end of each period.
A signature by a person authorized by a company to legally bind the company into a contract (e.g., lease). In a proprietorship or partnership this is the owner or a partner. In a corporation, it’s a corporate officer.
The process of allocating a portion of a leased asset’s value to business expense over the periods benefited.
Automated Clearinghouse (ACH)
A system used to electronically transfer funds through a clearinghouse facility directly into the payee’s bank account. A direct deposit.
The legally declared condition of being unable to pay one’s debts. Bankruptcy Dismissal – Rejection of a bankruptcy petition by the court.
The initial, non cancel-able term of the lease used by the lessor in computing the payment. The base term is the minimum time period during which the lessee has the use and custody of the equipment.
An incremental charge in interest rate equal to one hundredth of one full percent of interest.
A company or person who arranges transactions between lessees and lessors for a fee.
Most businesses use “Budgets” to forecast and allocate expenditures for specific periods of time. Typically, Capital Budgets include allocations for Equipment acquisitions, while Operating Budgets apply to the periodic expenses incurred in running a business. Often, when Capital Budgets are exhausted, or have been allocated for other purposes, businesses can use available funds from Operating Budgets to Lease needed equipment. Since leasing payments are made periodically (i.e. monthly, quarterly or yearly) and are small in comparison to the full outlay of the Equipment’s Purchase Price, businesses’ can “stretch” their equipment acquisition power by Leasing.
The amount a lessee must pay to the lessor to terminate a lease early. Usually calculated to include tax recaptures, unpaid property taxes and lost revenues.
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 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 lessee 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 it’s 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. The foregoing is set forth in the Financial Accounting Standards Board.
The process of analyzing projects, such as the acquisition of new equipment and deciding whether or not the revenue and/or cost savings generated by a specific project are sufficient to justify the costs of the project.
To record an expenditure that may benefit future periods as an asset rather than as an expense to be charged off in the period of its occurrence.
A term describing the postponing of tax loses until they can be used. Examples include net operating loss and investment tax credit carryovers.
It is an accounting term that refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project.
Casualty Value (see also Stipulated Loss Value Table
A schedule included in a lease that establishes the liability of the leasee in the event the leased equipment is lost or rendered unusable during the lease term because of casualty loss. The casualty value is the amount that maintains the lessor’s yield in the event of casualty.
The lessee is committed only to the stated monthly payments with no further financial obligation at the end of the lease.
Any property designated as security for the payment of a debt or for execution of a contract.
Conditional Sale (Time Sale)
A purchase agreement which presumes the customer to be the owner of the equipment immediately upon signature, provided all payments/conditions are met. (This contract allows immediate ownership for tax treatment and gives the seller a security interest until payments are completed)
The corporate resolution identifies those officers authorized by the board of directors to enter the cooperation into the lease. This document should be certified by the corporate secretary or assistant secretary and may be required for large transactions (over $75,000.00.)
The power to obtain money, materials or service by promising to pay for them at some definite future date.
Credit Bureau Report
A report from a credit service, such as TRW or Equinox, that summarizes an individual’s credit history with retail establishments and financial institutions.
The process of gathering and verifying the references provided by a prospective lessee, e.g. credit bureau reports, Dun and Bradstreet reports, bank and trade references, etc
A condition whereby the lessee does not make the payments as required by the lease contract.
Income tax calculated on book income but not currently due for payment. Balance is carried on the balance sheet until it is reversed in later years.
Delivery and Acceptance (“D&A”)
This document is executed by the lessee after the equipment has been delivered and installed. The lessee represents that the equipment works satisfactorily and that the lessor has performed all its duties under the lease agreement.
An allowable tax deduction that reflects the “using up” of the service life of equipment. It is a means for a firm to recover the cost of a purchased asset, over time, through periodic deductions or offsets to income. Depreciation is used in both a financial reporting and tax context, and is considered a tax benefit because the depreciation deductions cause a reduction in taxable income, thereby lowering a firm’s tax liability.
Discharged in Bankruptcy
Order of bankruptcy court which releases the borrower from debt obligations.
A business unit within a corporation that is not legally separate from the corporation, which means the assets of the corporation are available to meet any credit obligations of the division.
A fee charged to the lessee for the processing of the lease and other insurable costs. (See U.C.C.)
Leases don’t require down payments. It is a term used in the context of purchasing an expensive item, whereby the payment is the initial upfront portion of the total amount due and is usually given in cash at the time of finalizing the transaction. A loan is then required to make the full payment.
A written order by one party to another party demanding the payment of a specified sum of money to a designated third person.
Most lessors require the lessee to insure equipment against casualty loss, all risks and require that lessee indemnify the lessor against any liability incurred from the possession, operation or usage of the equipment.
It is a formal transaction when a lessor owns particular equipment and agrees to permit a lessee to use it. Lease terms typically cover one to eight or more year periods, depending on the specific equipment’s type and usage. Lessores ordinarily offer monthly, quarterly, semi-annual or annual payment shceduling. Individualized payment structures can be tailored to meet particular Lesee cash-flow and financial needs. Lesee most often may select specific equipment and the vendor where the equipment will be purchased. The Lessor will then purchase the equipment on the Lessee’s behalf.
Estimated Economic Life
The expected period of time during which the equipment should be able to function as intended and has economic value.
Estimated Residual Value
The estimated Fair Market Value of leased property at the end of the lease term.
Costs such as insurance, maintenance, taxes and third party guarantees that may be incurred when property is leased.
Exemption Certificate (Tax)
A document exempting a lessor or lessee from paying sales tax on the equipment being leased for excample, a lessor is buying the equipment for “re-sale” as would a vendor/supplier, or a lessee may be tax-exempt due to non-profit status or because it is a bank.
Fair Market Value
The value of an asset at the termination of the lease, often determined by the then agreement between lessor and lessee, or alternatively by appraisal or open bidding.
General term applied to most types of equipment leases. Typically, a finance lease is a full-layout, non-cancelable agreement, and the lessee is responsible for maintenance, taxes and insurance. (See also Capital Lease)
Under the Uniform Commercial Code (UCC), a financing statement (UCC-1 form) reflects a security interest in, or claim to, specified personal property. The statement names the secured party or lessor and the debtor or lessee. When the financing statement is filed by the secured party or lessor with the secretary or other appropriate public office, it becomes public record and protects lien rights.
Full Payout Lease
A lease in which the payments made to the lessor will return the cost of the leased asset, plus the cost of financing and overhead, as well as an acceptable return on the investment.
A person or business promising to perform all of the lessee’s obligations – including making payments should the lessee fail to do so.
A written promise by one party to perform some duty or pay a debt if another party should fail to do so.
An agreement to obligate one’s self for the debt of another. A guarantee by an individual is called a personal guarantee; and by a corporation, a corporate guarantee. The guarantor is obliged to pay the obligation in the event of a default by the entity being guaranteed. A guarantee is not a standard requirement, but is required by policy under certain circumstances (less than three years in business) and from time to time by the credit officer charged with approval or rejection of a transaction.
The value of the leased equipment that is to be insured by the lessee.
A charge for the use of a piece of equipment from its in-service or delivery date, up to the date when the lease actually starts.
An acknowledgement by the owner of property where leased equipment is located that the equipment belongs to the lessor and may be removed or inspected according to the terms of the lease and will not be considered to be a “fixture”.
A contractual financial penalty that is imposed when the delinquency of a payment due exceeds the grace period.
A contract by which the owner of property (lessor) grants to another (lessee) the right to possess and use the property for a specified period of time in exchange for a stipulated periodic payment (rent).
The lessor assigns the lease to another party giving the assignee the rights, powers, privileges and remedies specified in the lease.
The rate used to determine a monthly payment for a given equipment cost – usually expressed as a decimal fraction that is multiplied by the equipment cost (e.g. 0.0360 x $5,000=$180.00).
The periodic charge a lessee pays stated as a percentage of the original cost of the equipment.
Lease Rate Factor
The periodic lease or rental payment expressed as a percentage (or decimal equivalent) of equipment cost. Used to calculate payments given the cost of equipment (e.g. A factor of .0360 on an equipment cost of $5,000.00 requires a monthly payment of $180.00 (.0360x$5,000.00=$180.00).
An individual, partnership, or corporation that pays the owner (lessor) for the use of an asset, but does not own it.
The company that owns the equipment and leases it to the lessee.
Letter of Credit
This is a letter from a bank to a correspondent bank stating that the person named can draw on the issuing bank’s credit for the amount stated, subject to the conditions stipulated.
An area of financial measurement that can be useful in determining the degree of protection a company’s assets provide for its creditors.
Line of Credit
An agreement by a lender to provide funds to a borrower up to a specified maximum amount.
A firm’s ability to meet its short term obligations on a timely basis and to convert assets to cash quickly and without loss in value when needed.
Continuing lease agreement which provides for property becoming subject to the terms of a single lease over a period of time. Schedules are added to reflect property becoming subject to the terms of the master lease.
Contractual provision found in many tax-exempt leases that provides that if the governmental lessee fails to appropriate or make available funds to make the lease payments called for under the agreement for the next appropriation period, the agreement terminates at the end of the current appropriation period. Such a clause is used to prevent lease payment obligations in future years from being classified as debt. Exercise of the non-appropriation clause is not an event of default.
A leasing or receivable sales transaction in which neither the asset nor the lease contract or other liability is shown on the lessee’s or seller’s balance sheet. A lease is considered off-balance sheet to the lessee when the agreement is not a capital lease under the Financial Accounting Standards Board Statement #13.
A lease in which a lessee can acquire the use of equipment for a term that is less than the equipment’s useful life. The lessor may assume certain risks of ownership which may include personal property taxes, maintenance and insurance costs. At the expiration of the initial lease, the lessor depends on the residual value to pay out its investment and realizes a profit based on the residual value of the equipment (through either renewals or sale) Note: For financial accounting purposes, an operating lease does not meet the Financial Accounting Standards Board Statement #13 criteria of a capital lease.
Over (Highly) Leveraged
Describes a company’s financial position when its debt is excessively high in relation to its equity.
The credit a retailer, bank or finance company extends to an individual in connection with the sale of goods or borrowing of funds.
Refers to today’s value of money to be received in the future. (For example, how much is the right to receive $10,000 in five years worth to you today?)
A rate of interest that banks charge to their most creditworthy customers.
A provision in the lease which gives the lessee the right to purchase the equipment at the end of the lease for an amount specified or its future fair market value.
An agreement between the lessor and the seller which allows the lessor to take recovery action against the seller would the lessee default.
Rental (Use) Tax
Many states charge a “use” tax in lieu of a sales tax when equipment is leased. 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.
The process of taking back equipment that is pledged as security to the lessor, due to non-payment or other contractual breech by the lessee.
The estimated wholesale market value of the equipment at the conclusion of the lease.
Sale and Leaseback
A transaction where property is sold to a party on the condition that it is immediately leased back to the seller. (Can be an attractive method for the owner of a capital asset to raise working capital.)
A state tax on leased equipment based on the amount of the monthly lease payment.
The packaging of lease receivables into an investment grade security as an alternative funding source.
Skipped Payment Leases
A lease designed to enable the lessee to skip payments during a portion of the year when the leased equipment is idle because of adverse weather conditions or other factors.
Step Payment Lease
A lease in which the monthly payment either increases (step-up) or decreases (step-down) to a pre-determined amount over the term of the lease.
Exchanging equipment and entering into a new lease obligation.
Uniform Commercial Code (U.C.C.)
A compilation of statutory provisions designed to simplify, clarify and modernize the law governing commercial transaction; to permit the continued expansion of commercial practices through custom, usage and agreement of the parties, and to make uniform the law among various jurisdictions. Note: A minority of states adhere to the 1962 version of the U.C.C. while others have adopted the 1972 amendments. Louisiana, which still adheres to the Civil (Napoleonic) Code, has not adopted the U.C.C.
U.C.C. Filing Fee
A fee charged for processing and filing a U.C.C. – 1 or U.C.C. 3.
The form used to formally terminate the record of security interest in a piece of commercial equipment.
The period of time during which an asset will have economic value and be usable. (Also called “economic life”)
The transfer of funds from one party to another through the Federal Reserve banking system.
Working Capital Lease
A financial arrangement in which commercial equipment is purchased from and leased back to the owners. Additional capital funding is made available to lessee (e.g. for business improvement or reinvestment purposes) over and above the price of the equipment leased.
Process by which a lessor, following unsuccessful collection efforts, attempts to compromise or otherwise settle the delinquent account prior to taking legal action.