Glossary of Equipment Leasing Terminology
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 accelerated write offs of plant
and equipment classified as 3, 5, or 10 years property. The accelerated cost recovery
system (ACRS) replaced the asset depreciation range (ADR) system.
ACRS (Modified): 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 3,5,7,10,15, or 20 year class lives.
Advanced Lease Payment(s): The payment or payments made at the initiation
of the lease contract, i.e. first rental payment or first and last rental payments
Alternative Minimum Tax: An alternative, separate tax calculation based on
the taxpayer's regular taxable income, increased by the taxpayer's preference items
for the year. The resulting amount is called the alternative maximum taxable income
(AMT). After certain exemptions and offsets, the taxpayer determines his/her AMT
and is required to pay the larger of the regular tax or alternative minimum tax.
Among the preferences which can increase the taxpayer's AMT is the accelerated portion
of depreciation, thereby making it more likely that a taxpayer that buys equipment
will be subject to the AMT.
Bargain Renewal Option: A lease provision allowing the lessee, at this option,
to renew the equipment lease for a rental rate predetermined at lease inception,
which is substantially lower than the expected fair market value at the date the
option can be exercised.
Broker: A broker acts as an intermediary between the lessee (the user of
the equipment) and the leasing company that ultimately provides the lease facility.
Brokers typically receive a fee for their work.
Capital Lease: A FASB 13 accounting classification to be accounted for by
a lessee as a purchase and by the lessor as a sales or financing agreement, provided
it meets any one of the following criteria: (a) The lessor automatically 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% or more of the estimated economic life of the property (exceptions apply 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 value
of the leased asset, less related investment tax credits retained by the lessor.
Certificate of Acknowledgement and Acceptance of Leased Equipment: A written
verification by the lessee that they have received the equipment to be leased and
have accepted the equipment after full inspection thereof as satisfactory for the
purpose of the lease.
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.
Coterminous: Two of more leases that end at the same time. Both the original
lease and a later added addendum lease terminate at the same time.
Cross Corporate Guaranty: A guarantee by one corporation to pay the lease
obligations of another corporation.
Default: 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.
Depreciation: A method for determining the useful life of a piece of equipment.
The total depreciation expense is equal to the difference between the initial cost
of the unit and its estimated residual or salvage value. This expense can be deducted
from income taxes each year.
Dollar Buyout: Assuming that the lessee is not in default, an option at the
end of the lease to buy the leased property for $1.00
Estimated Useful Life: The estimated time period leased equipment is expected
to be useful.
Estimated Residual Value: This is the "fair market value" of the lease equipment
at the end of the lease term, calculated in constant dollars excluding inflation
Effective Lease Rate: The effective lease rate (for the lessee) of the cash
flows resulting from a lease transaction.
Fair Market Value Purchase Option: An option to purchase leased property
at the end of the lease term at its then fair market value.
FASB 13: Statement issued by the Financial Accounting Standards Board establishing
financial accounting standards for lessees and lessors.
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.
Finance Lease: 1) General 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.
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, and an acceptable return
Guideline Lease: A tax lease written under criteria or "guidelines" established
by the IRS to determine the availability of tax benefits to the lessor.
Interim Rent: Interim rent is a one-time daily rental charge for a period
of time between the day the equipment is delivered/accepted and the first invoice
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 rate.
Lease Rate (Monthly Payment): The periodic payment to a lessor for the use
Lease Rate Factor: Numerical factor multiplied by total cost of equipment
to compute periodic rentals.
Lease Term: The fixed term of the lease.
Leasing Line: A maximum amount of funding designated by the lessor for a
lessee to use over a fixed commitment period.
Lessee: A party who makes use of property owned by another party (the lessor)
and pays the lessor, usually in the form of rentals.
Lessor: Company, Bank or leasing entity that is the owner of the leased equipment
for accounting, tax, or commercial law purposes.
Level Payments: Equal periodic payments over the term of the lease.
Leveraged Lease: In this type of tax lease, the lessor provides and equity
portion of the equipment cost and lenders provide the balance on a non-recourse
debt basis. The lessor receives the tax benefits of ownership.
Master Lease: A contract where the lessee leases assets and is able to acquire
other assets under the same basic terms and conditions without negotiating a new
Municipal Lease: A municipal Lease is a contract entered into by a state
or local government such as a county, city, town or municipal authority.
Net Lease: A lease where payments paid to the lessor do not include insurance,
taxes and maintenance, which are paid separately by the lessee.
Off-Balance Sheet Financing: Unlike the traditional methods of financing,
operating lease obligations are not capitalized, thus improving balance sheet ratios.
Open-End Lease: A lease which includes a provision for extending payments
under the lease on predetermined terms after a set period of time.
Operating Lease: For accounting purposes, an operating lease is any lease
which is not a capital lease. These are generally used for short term leases of
Present Value: The current equivalent value of payments or a stream of payments
to be received at various times in the future.
Purchase Option: A provision, assuming the lessee is not in default under
the terms of the lease, 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 specific dollar
amount or at fair market value.
Put: In lease agreements, a lessor negotiates an option to sell leased equipment
to the lessee or a third party at an established price at the end of the lease term.
Recourse Agreement: 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.
Renewal Option: Lessee's option to renew a lease contract at the end of the
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 that owns the equipment. The lessor becomes the owner of the equipment
and leases it back to the original owner, who continues to use the equipment.
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.
Stipulated Loss Value: A schedule included in the lease that states the value
of the equipment at various times during the lease thus establishing the liability
of the lessee if the equipment is lost, suffers damage, or becomes unusable during
the lease term.
Synthetic Lease: 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.
Tax Lease: A lease where the lessor recognizes the tax benefits of ownership
Term: The length of time a lease agreement will remain in force.
True Lease: Alease arrangement in which the risks and rewards of ownership
are retained by the owner (the lessor) of the leased asset and the lesseeretains
its possession and use for the lease period. The lessor claims the depreciationbenefits
and the lessee claims the lease payments as capitalexpense. Such leasesoffer comparatively
lower lease payments.
Uniform Commercial Code (UCC): A statutory program under the law of administering,
legalizing, and recording contracts and lien instruments.