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
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
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
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
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.