Glossary of Terms
- Bargain Purchase Option
- A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.
- 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 payment 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. (Also see finance lease.)
- Certificate of Acceptance (Delivery and Acceptance)
- A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.
- Direct Financing Lease (Direct Lease)
- A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
- Economic Life (Useful Life)
- The period of time during which an asset will have economic value and be usable.
- Effective Lease Rate
- The effective rate (to the lessee) of cash flows resulting from of 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.
- Equipment Schedule
- A document that describes in detail the equipment being lease. It may also state the lease term, commencement date, repayment schedule and location of the equipment.
- Fair Market 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.
- Finance Lease
- Typically, a finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.
- Full Payout Lease
- A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus and acceptable rate of return, without any reliance upon the leased equipment's future residual value.
- Guideline Lease
- A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.
- Indemnity Clause
- A clause in which the lessee indemnifies the lessor from loss of tax benefits.
- Lease
- A contract in which one part conveys the use of an asset to another party for a specific period of time at a predetermined rate.
- Lease Rate (Rental Payment)
- The periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.
- Lessee
- The user of the equipment being leased.
- Lessor
- The party to a lease agreement who has legal or tax title to the equipment for the lease term, and is entitled to the rentals.
- Leveraged Lease
- In this type of lease, the lessor provides an equity portion (usually 20 to 40 percent) 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 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 wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.
- Open-End Lease
- A conditional sale lease in which the lessee guarantee that the lessor will realize a minimum value from the sale of the asset at the end of the lease.
- Operating Lease
- Any lease that is not a capital lease. These are generally used for short term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.
- Present Value
- The current equivalent 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.
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- Residual Value
- The value of an asset at the conclusion of a lease.
- Sale-Leaseback
- An arrangement whereby 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.
- Sales-Type Lease
- A lease by a lessor who is the manufacturer or dealer, in which the lessee meets the definitional criteria of a capital lease or direct financing lease.
- 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.
- 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 payment as tax deductions.
- Trustee
- A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: an owner trustee and an indenture trustee.
