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Equipment Leasing and Financing Glossary

Advance Rental One or more lease payments required to be paid to the lessor at the beginning of the lease term. A lease, commonly paid “in advance” requires the first payment up front. The lessor can negotiate any number of additional rental to be paid in advance with the first month’s rent.

Broker A company or person who arranges, for a fee, transactions between lessees and lessors of an asset.

Capital Lease 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 any one of 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 lease 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 its 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 less related investment tax credits retained by the lessor.

Delivery and Acceptance Certificate A document where the lessee acknowledges that the equipment to be leased has been delivered, is acceptable and payment is approved to the vendor. This certificate usually signifies the commencement of the lease obligation.

Depreciation The means for a business to recover the cost of a purchased asset over time, through periodic deductions or offsets in income. Depreciation is considered a tax benefit because the depreciation deduction result in a reduction in taxable income, thereby lowering the firm’s tax liability.

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.

Fair Market Value 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.

Funding Source The party that advances the money to fund a lease transaction.

Lease A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined payment.

Lease Agreement The contractual agreement between the lessor and the lessee that sets forth all the terms and conditions of the lease.

Lesee The user of the equipment being leased.

Lessor The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.

Master Lease Line A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

Net Lease A lease where payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

Purchase Option A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value.

Residual Value The value of an asset at the conclusion of a lease.

Sale-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.

Security Deposit A specific amount paid by the lessee at the inception of the lease to insure full compliance with the term of the lease and to provide additional protection to the lessor against defaults or other failures of performance by the lessee.

Structuring Pulling together many components to arrive at a single lease transaction. Structuring includes, but is not limited to, taking additional collateral (such as real estate or additional equipment), guarantees (personal and/or cross corporate), security deposits and term of the transaction.

True Lease A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.

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 to the vendor's customers. The vendor’s 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.