Equipment Leasing Terms
Equipment Sale Leaseback:
Selling currently owned equipment to a leasing firm. The asset remains with the business/seller, which then contracts to lease it back. By using equipment equity a business can quickly obtain cash they need for working capital, or expanding the business.
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Article: Equipment Sale Leaseback Financing
Equipment Leasing Terms
Accelerated Cost Recovery System (ACRS)
The depreciation schedule of the Economic Recovery Tax Act of 1981 (ERTA), modified by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), that allows faster write offs of plant and equipment is classified as 3, 5, or 10 years property. The accelerated cost recovery system (ACRS) replaced the asset depreciation range (ADR) system which was built on the concept of useful life.
The Tax Reform Act of 1986 modified the ACRS by 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.
Advanced Lease Payments
The payment or payments made at the initiation of the lease contract. Example: first rental payment or first and last rental payments.
Alternative Minimum Tax
An alternative or specially calculated tax, which assists in ensuring items such as accelerated depreciation do not keep taxpayers from paying their fair share of taxes.
The signature of a person who is authorized by a company to obligate the company. An authorized signer will usually be established or identified in the Corporate Resolution, which specifies who can obligate the company.
Bargain Purchase Option
An End-of-Term option that allows the Lessee to purchase the leased equipment at a value that is substantially below the expected Fair Market Value.
Bargain Renewal Option
A provision of the lease that allows the lessee to renew the equipment lease, at a predetermined rental rate, which is substantially lower than the expected fair market value.
An intermediary, or middle-man, who arranges a leasing transaction between the lessee (the user of the equipment) and the leasing company.
A specific classification of a lease for accounting purposes, which meets criteria outlined in Paragraph 7 of FASB.
Capped Fair Market Value
A provision in the lease allowing the lessee to purchase the leased property for its fair market value, but not exceeding a certain amount. The cap allows the lessee to know the maximum payment required to purchase the leased property.
Certificate of Acceptance
A written verification by the lessee that they have received the equipment to be leased and have accepted the equipment after full and satisfactory inspection of the equipment. Most leases begin after the date stated on the certificate of acceptance.
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.
Conditional Sale Lease
A Lease in which the Lessee is treated as the owner and enjoys the tax benefits of ownership.
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.
Cross Corporate Guaranty
A guarantee by one corporation to pay the lease obligations of another corporation.
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.
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.
Direct Finance Lease
Same as a capital lease except this accounting classification only applies to a lessor.
An option at the end of the lease to buy the leased property for $1.00.
Economic Life of Leased Property
The estimated time the leased property can be used with normal repairs and maintenance.
Effective Lease Rate
The effective lease rate (for the lessee) of the cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.
Depending on the lease structure, options that may be available in which a Lessee may choose to return, purchase, or re-lease equipment at the end of the lease term.
Estimated Residual Value
The "fair market value" of the leased equipment at the end of the lease term, calculated in constant dollars excluding inflation or deflation.
Estimated Useful Life
The estimated time period the leased equipment is expected to be useful.
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, such as being a non-profit entity or a bank.
Fair Market Value
The value of the leased equipment at the end of the lease. The price a buyer is willing to pay the seller, at the end of the lease, for the equipment on an “as is, where is” basis.
Fair Market Value Purchase Option
Similar to a purchase option. This option provides the lessee the ability to purchase the leased property at its fair market value at the end of a lease.
The Financial Accounting Standards Board, which establishes the general accounting policy and theory to be followed by both internal accountants and external auditors.
FASB 13 (FAS 13)
The abbreviation for Financial Accounting Standards Board Statement No. 13, which sets standards for how parties should account for financial accounting of leases.
1. The basic term applied to most types of equipment leases. Typically, a finance lease is a full-payout, non cancelable agreement, and the lessee is responsible for maintenance, taxes, and insurance.
2. As defined in the Uniform Commercial Code, Article 2A: to designate a lease from a non-vendor lessor who acts solely as a funding source and does not deal directly in the equipment.
Accounting statements that provides financial information about a company's financial position. Includes Income Statement (Profit & Loss Statement), Balance Sheet, and the Statement of Cash Flows.
Financing Statement (UCC-1)
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 a lessor's interest in the equipment. This puts the world on notice that a security interest has been filed.
First Amendment Lease
A Lease that allows the Lessee to purchase the leased equipment at Fair Market Value.
Fixed Purchase Option
An End-of-Term option in which a Lessee may choose to purchase the leased equipment for a fixed price at the end of the lease term.
Floating Rental Rate
Rental which is subject to upward or downward adjustments during the lease term. If the prime interest rate changes during the term of the lease, the rental rate may change to reflect this.
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.
Good Faith Security Deposit
A deposit required by lessor to cover processing costs but is applied to Rentals when the transaction is funded. Typically one month's Rental.
A promise usually provided by an entity such as a majority owner, partnership or corporation, to uphold the terms and conditions in the Master Lease or Lease Schedule.
A tax lease written under criteria or "guidelines" established by the IRS to determine the availability of tax benefits to the lessor.
Hell or High Water Clause
A clause in a Lease that states the Lessee's unconditional obligation to make all lease payments.
The prorated, one-time daily rental charge for the period between the day the equipment is delivered (and accepted) and the first invoice date for a full month.
Investment Grade Credit
Refers to a lessee of high credit standing. A company rated highly by one of the recognized credit agencies.
A contract where the lessor provides the equipment to a leasee for a specific period of time at a predetermined rate.
A line of credit similar to a bank line of credit. It allows the lessee to easily add additional leased property under the same terms and conditions without negotiating additional agreements.
The monthly or periodic payment the lessor pays for the use of the equipment.
Lease Rate Factor
A number expressed as a percentage of equipment cost, and when multiplied by the equipment cost, yields the lease payment. It is a helpful number in the event the cost of the leased property is either not exactly known or may change, having the lease rate factor allows a quick recalculation of a lease payment when that number becomes known. Generally expressed as $1.00 of rent for each $1,000 of acquisition cost.
A Lease document that is a component of a Master Lease and abides by the terms and conditions of the Master Lease.
The fixed term of the lease.
Provides a company the opportunity to obtain equipment while matching a payment schedule to a predetermined budget.
The company who uses the equipment owned by the lessor. The lessee pays the lessor.
The owner of the equipment (or someone with a security interest in the equipment) who allows a lessee to use the leased equipment in exchange for rental payments.
Letter of Credit
A specific arrangement between a lessee and one of its banks. The bank agrees in the event of a defined event, the lessor can look to the bank to make payment instead of the lessee. This is similar to a security deposit in that it is one way for a lessor to insure that it will be paid under a lease.
Equal periodic payments over the term of the lease.
A tax lease, where the lessor provides an equity portion (usually 20 to 40%) of the equipment cost and lenders provide the balance on a non-recourse debt basis. The lessor receives the tax benefits of ownership.
Long Term Lenders
Term typically used to describe the institutional lenders supplying debt (up to 80% of equipment cost) for leverage leases. Lenders receive no tax benefits from the lease but receive a fixed rate over a long term.
The primary document between the lessor and lessee containing all of the general terms and conditions for leasing. The contract allows the lessee the ability to acquire additional equipment under the same basic terms and conditions without negotiating a new contract.
A market segment generally represented by financing under $3 million and dominated by single investor leases.
Middle Market Credit
A lessee without an investment grade credit rating, but generally with sales greater than $50 million annually.
A lease contract entered into by a state or local government such as a county, city, town or municipal authority. It is similar to a capital lease except that the lessee is a public entity. Although the product and features are identical, the legal documentation is different because of the unique status of public entities.
A Lease in which all costs related to the use of the leased equipment are paid by the Lessee. Payments paid to the lessor do not include insurance, taxes and maintenance, which are paid separately by the lessee. Capital leases are generally net leases.
A lease in which the cash flows will not be sufficient to cover the full costs of the equipment, the costs of financing, the costs of administration and to provide a satisfactory return. The lessor looks to the residual to realize profit.
Off-Balance Sheet Financing
A financial structure in which an asset and its associated debt are not required to be reported on the balance sheet. Unlike the traditional methods of financing, operating lease obligations are not capitalized, thus improving balance sheet ratios. Leases are generally footnoted.
A lease which includes a provision for extending payments under the lease on predetermined terms after a set period of time.
At the end of the lease term, the lessee will either purchase the leased property or renew the lease, or the leasing company can remarket the leased property for its residual value. These are generally used for short term leases of equipment. Operating leases do not meet the criteria for a capital lease.
The guarantee of a person to be individually responsible for the obligations under the lease. 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.
The process of purchasing a package of lease contracts.
The current equivalent value 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.
A Lease in which the Lessee has the option to purchase the leased equipment or renew the Lease for a predetermined amount.
Progress Payment Loan
The lessor makes all milestone payments required by the vendor until all associated equipment, customization, training, installation and conversion has been provided by the vendor. This product is generally used with larger transactions that require milestone payments over a short time between three months and 18 months.
Option to purchase leased property at the end of the lease term. The purchase option may be stated at a specific dollar amount or at fair market value.
An option one person has to sell an asset to another person at a set price at some established point in time in the future. In lease agreements, a lessor sometimes negotiates an option to sell leased equipment to the lessee or to some third party at an established price at the end of the lease term. This is to protect the lessor's exposure on the residual value of the leased equipment at the end of the lease term.
An agreement with a vendor whereby the vendor will purchase, or repurchase, the lessor's interest in a lease, usually upon demand, after default of the lessee. Generally, the lease must be in default and a reasonable amount of collection effort exerted by the lessor.
Refundable Security Deposit
An amount paid by a lessee to provide extra protection to the lessor to insure that the lessee will pay its obligations under the lease.
The process of selling, or re-leasing, leased property, which has been returned to the lessor either
at the end of the term or as a result of a default in lease.
A fee paid for selling or re-leasing leased property.
An End-of-Term option which allows the Lessee to extend the lease term beyond the base term.
A period of time during which a lessee is not required to pay rent.
A payment made by the Lessee to the Lessor for the use of leased equipment.
The value of leased property at the end of the lease term.
Sale and Leaseback
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.
An amount of money paid by the lessee at the initiation of a lease. However, the deposit does not reduce the number of payments left on the lease. Assuming there is no default under the lease, the deposit is usually returned to the lessee at the end of the lease or applied towards the purchase of the equipment.
An interest in property that is acquired for purpose of securing payment of a lease obligation. A security interest allows the holder to obtain the property in the event of default and gives the holder additional rights in the event of bankruptcy.
Generally referring to operating leases.
Single Investor Lease
A tax-oriented lease whereby the lessor achieves its desired rate of return via 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 benefit, the rental payments will be lower than for a finance lease.
Transaction under $100,000 typically using single investor true leases.
Intangible costs, such as computer software, training and delivery.
The difference between funding costs and the rate of return to the lessor on a lease.
Step Down Lease
A type of Step Rental Lease where the lease payments decrease over the term of the lease.
Step Rental 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.
Step Up Lease
A type of Step Rental Lease where the lease payment is increased during the term of the lease.
Stipulated Loss Value
A lease requiring the lessee to pay the value of the leased property in the event there has been some type of damage or destruction to the leased property. A schedule is included in the lease that states the value of the equipment at various times during the lease, plus its residual value and associated tax benefits, and which establishes the liability of the lessee if the equipment is lost, suffers damage, or becomes unusable during the lease term.
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.
A lease where the lessor recognizes the tax incentives provided by the tax laws for its 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. The lease meets IRS guidelines by allowing the Lessor to claim ownership tax benefits and the Lessee to deduct the full Rental for tax purposes.
The length of time a lease agreement will remain in force. The rules of an agreement as supplied in the lease contract between the 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 breach of the contract.
Terminal Rental Adjustment Clause (TRAC) Lease
A True Lease of motor vehicles that passes ownership to the Lessee with payment of the buyer's assumed Residual Value.
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:
1. Title must remain with the lessor.
2. 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.
3. The option to purchase price must not be less than the fair market price at the lease's expiration date.
4. Equity cannot be allowed on rental payments. For tax purposes, the total monthly payments can be deducted.
Uniform Commercial Code document that protects a lessor's interest in leased equipment.
Uniform Commercial Code (UCC)
A statutory program under the law of administering, legalizing, and recording contracts and lien instruments.
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.
The period of time during which an asset will have economic value and be usable. Useful life of an asset is sometimes called the economic life of the asset.
An entity that provides leased property to customers.
A working relationship between a leasing company and a vendor to provide leasing to the vendor’s customers. The leasing company, and not the vendor, performs credit checks, billing, collecting documentation, and customer service. The leasing company accepts the credit risk allowing the vendor to provide financing programs.
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