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Add-on
An add-on is a type of transaction that adds related
equipment to an existing lease. Typically, the term
add-on is used when this additional equipment is being
financed using the same terms—such as Fair market value,
or $1.00 purchase option—that were used for the original
transaction. The only difference is that the length
of the add-on is not the same as that of the original
transaction. It is almost always a shorter period of
time, expiring on the same date (that is, coterminously)
as the lease for the original transaction.
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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.'
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ALTERNATIVE MINIMUM TAX ("AMT")
Applicable to taxable years beginning after December 31,
1986. Requires companies to compute their income tax twice
- once under the standard corporate tax rate and again
under new AMT provisions. The tax liability is an amount
in excess of Tentative Minimum Tax over the normal tax.
The AMT liability is computed at a 20% rate on alternative
minimum taxable income ("AMTI"). |
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.
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Assets
Anything of monetary value that is owned by a person.
Assets include real estate property, vehicles, personal
property and others including bank accounts, stocks, and
mutual funds. |
Annual percentage rate, or APR
Represents the percentage of the loan amount that
you will pay annually for the privilege of borrowing money.
It includes interest as well as the other charges. Because
all lenders follow the same rules to ensure the accuracy
of the annual percentage rate, it provides consumers with
a good basis for comparing the cost of loans, including
personal loans..
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Application Number
The number assigned to an application after it has
been completed and submitted by the lessee. The application
number always starts with an "A" and can be used for tracking
a lease through the approval and funding process.
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Bargain purchase option
The term 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
equals 1.25 percent. |
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. |
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C
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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.
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CERTIFICATE OF ACCEPTANCE
A document whereby the lessee acknowledges that the equipment
to be leased has been delivered to them, is acceptable
to them, and has been manufactured or constructed in accordance
with specifications. |
Certificate of Deposit (CD)
A certificate of deposit is a type of savings account
issued by a lender that usually pays an interest at a
certain rate for a certain period of time to the person
who opens the account. Deposit amounts for an individual
CD start as low as $100, which means the holder of the
CD gives the lender at least $100 to open the account.
CD maturities usually range from one month to several
years. Interest rates are determined by marketplace competition.
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Collateral
An asset that guarantees the repayment of a loan, or line
of credit. The borrower may risk losing the asset if the
loan, or line of credit, is not repaid according to the
terms of the contract. Any property that the lender considers
valuable can be used as collateral against the failure
to repay any or all of the debt. If a borrower fails to
repay, the lender can choose to take possession of any
or all of the property held in collateral as allowed by
law. Possession or repossession of collateral is the lender's
guarantee that loan debt will be covered if a borrower
fails to repay. |
CONDITIONAL SALE LEASE
A transaction for purchase of an asset in which the user,
for federal income tax purposes, is treated as the owner
of the equipment at the outset of the transaction. |
Coterminous
This term refers to two or more leases that are linked
so that both will terminate on the same date. |
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Depreciation
Depreciation is a tax deduction representing a reasonable
allowance for exhaustion, wear and tear, and obsolescence.
This type of deduction is claimed by the owner of the
equipment 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 also is recorded as
an operating expense over that extended period. |
DIRECT FINANCING LEASE
A non-leveraged lease by a lessor (not a manufacturer
or dealer) in which the lease meets any of the criteria
definitions of a "capital lease", as follows: a) The lease
transfers ownership to the lessee at the end of the lease
term; b) The lease contains an option to purchase property
at a bargain price; c) The lease term is equal to 75%
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% or more of the fair market
of the leased property; and e) Collectibility of minimum
lease payments must be reasonably predictable; and No
uncertainties surround the amount of unreimbursable costs
to be incurred by the lessor under the lease. |
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ECONOMIC LIFE OF LEASED PROPERTY
The estimated remaining period during which the property
is expected to be economically usable by one or more users,
with normal repairs and maintenance, for the purpose for
which it was intended at the inception of the lease. |
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FASB
Financial Accounting Standards Board. |
FASB 13
Technically: "Statement of Financial Accounting Standards
No. 13, Accounting for Leases"; Financial Accounting Standards
Board, Stamford, Connecticut, November 1976. Sets forth
financial accounting standards on accounting for leases.
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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. |
Fair market value lease
This type of lease includes an option through which the
person or company leasing the equipment has three choices.
The individual or organization may either renew the lease
at a fair market value renewal rate; purchase the equipment
for its fair market value at the end of the lease term;
or return the equipment. Though often referred to as tax
leases, not all fair market value leases offer the same
features or benefits that tax leases do. |
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. |
FINANCING STATEMENT
A notice of a security interest filed pursuant to the
Uniform Commercial Code. |
Fixed purchase option
This is an option that 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.
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IMPLICIT COST
The nominal annual interest rate implicit in the basic
lease payments. It is the interest rate that discounts
the lease payments to 100% of equipment cost as of the
lease commencement date. |
INCEPTION OF A LEASE (ACCEPTANCE DATE)
The date the lease commitment or lease agreement is signed,
provided the property to be leased has been constructed
or has been acquired by the lessor; otherwise, the date
construction is completed or the property is acquired
by the lessor. |
Incremental borrowing rate
This term refers to the rate the customer leasing
the equipment would have paid if the equipment had been
purchased outright rather than leased, determined at the
date of the inception of the equipment lease. |
INDEMNITY CLAUSE
Although lease documentation contains various indemnities,
the indemnity clause usually refers to the tax indemnity
clause whereby the lessee indemnities the lessor from
loss of tax benefits. |
Individual Retirement Account (IRA)
An IRA is a personal, tax-deferred retirement account
that an employed person can set up with a deposit limited
to $2,000 per year. Talk to an accountant about the different
types of IRAs available. |
Interest
The price you pay for borrowed money, usually expressed
as a percentage of the amount borrowed. |
Interest Rate
An amount of interest charged for the use of money, usually
expressed at an annual rate.
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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 LINE
A lease line of credit is similar to a bank line of credit
which allows a lessee to add equipment, as needed, under
the same basic terms and conditions without negotiating
a new lease contract. |
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 RATE
The equivalent simple annual interest rate implicit in
minimum lease rentals, expressed as a percentage per month
of equipment cost. |
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. |
LEASE TERM
The fixed, non-cancelable term of the lease. Includes,
for accounting purposes, all periods covered by fixed
rate renewal options which for economic reasons appear
likely to be exercised at the inception of the lease,
and for tax purposes, all periods covered by fixed rate
renewal options. |
LEVEL PAYMENTS
Equal payments over the term of the lease. |
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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. |
MINIMUM LEASE PAYMENTS FOR THE LESSEE
All payments the lessee is obligated to make or can be
required to make in connection with leased property, including
residual value guaranteed the lessor and bargain renewal
rents or purchase options, but excluding guarantees or
lessor's debt (seldom encountered) and executory costs
such as insurance, maintenance and taxes. |
Mutual Fund
A fund operated by an investment company that raises money
from shareholders and invests it in stocks, bonds, options,
futures, currencies, or money market securities. |
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NET LEASE
All costs in connection with the use of the equipment
are to be paid by the lessee and are not a part of the
rental. For example, taxes, insurance, and maintenance
are paid directly by the lessee. Most "capital leases"
and "direct financing leases" are "net leases". |
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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. |
OPEN-END LEASE
A conditional sale lease in which the lessee guarantees
the lessor will realize a minimum value from the sale
of the asset at the end of the lease. If the equipment
is not sold for the agreed residual value, the lessee
pays the difference to the lessor. If the equipment is
sold for more than the agreed residual value, the lessor
pays the excess to the lessee. The lease is called an
"open-end" lease because the lessee does not know the
actual cost until the equipment is sold at the end of
the lease. The term is commonly used in automobile leasing.
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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. |
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Payment in advance
This term refers to the periodic payments due at the
beginning of each period.
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Payment in arrears
This term refers to the periodic payments due at the end
of each period. |
Personal Loan
A personal loan is the same as an unsecured loan. Personal
loans are unsecured loans because you can borrow money
without putting up collateral to secure or guarantee repayment
of the loan amount. Interest rates on personal loans are
typically much higher than rates for secured loans, such
mortgage, or auto loans. Unlike personal loans, secured
loans require that your home or other real estate, car
or other valuable assets be pledged as security until
the loan is paid in full. Use a personal loan to finance
just about anything at any time. Think of it as an all-purpose
loan for things other than a home or auto.
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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. |
Purchase upon termination lease
Purchase upon termination, commonly referred to as a PUT,
is an agreement by the lessee to purchase the property
at the end of the lease term for a fixed amount. |
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RELATED PARTIES
In leasing transactions under FASB 13: a parent and its
subsidiaries; an owner and its joint ventures; provided
the parent, owner, or investor has the ability to exercise
significant influence over the financial and operating
policies of the related party. Under the Internal Revenue
Code, 50 percent ownership is a general test for a related
party. |
RENEWAL OPTION
An option to renew the lease at the end of the initial
lease term. Here, too, care must be used in granting a
renewal option for a fair market value. If this is not
done properly, it may later be ruled that the lease is
not a"true lease" and tax advantages lost and tax indemnity
clauses activated. |
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. |
Revolving Line of Credit
An open-ended line of credit available to some borrowers.
Also called a line of credit. |
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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. |
Secured Loan
A loan that is secured with collateral. The most common
types of collateral used for personal loans include savings
accounts, certificates of deposits, stocks, or bonds. |
SHORT-TERM LEASE
Generally refers to an "operating lease." |
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. |
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. |
SUB-LEASE
A transaction in which leased property is released by
the original lessee to a third party, and the lease agreement
between the two original parties remains in effect. |
SYNTHETIC LEASE
A special structure that offers the Lessee off-balance
sheet financing for accounting purposes and is considered
a loan for tax purposes. |
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Tax lease
This is a generic term for a lease in which the owner
of the equipment assumes the risks of ownership, as determined
by the IRS, and is thus entitled to the benefits of ownership,
including tax benefits. |
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. |
Transaction Number
The number assigned to an application prior to being completed
by the lessee (also known as "partial application"). The
transaction will be assigned an Application Number once
the lessee has approved and submitted the completed application.
This Application Number will then be used for tracking
a lease through the approval and funding process. |
TRUE LEASE/TAX LEASE
Also known as a fair market value lease, a lease in which
the lessor recognizes the tax incentives provided by the
tax laws for investment and ownership of equipment. The
lessee is able to claim rental payments as tax deductions.
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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.
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Unsecured Line of Credit
A nonspecific amount of credit available to customers
on an as-needed basis without collateral backing the credit
requested. |
Unsecured Loan
A loan that is not secured with collateral. Customers
can qualify for an unsecured loan based on credit history
and financial strength. |
Upgrade
A term referring to a trade-in of leased equipment, during
the term of the lease, for a newer, more advanced model. |
