Leasing Terms
A
Add On
Equipment added to an existing lease, resulting in an increased monthly lease payment for the remaining term of the lease.
Air/Soft Charges
Non-hardware or other non-liquid acquisition costs of the lessor.
Amortization
The process of allocating a portion of a leased asset’s value to business expense over the periods benefited.
Authorized Signature
A signature by a person authorized by a company to legally bind the company into a contract (e.g., lease). In a proprietorship of partnership, this is the owner or a partner. In a corporation, a corporate officer.
Automated Clearinghouse (ACH)
A system used to electronically transfer funds through a clearinghouse facility directly into the payee’s bank account. A direct deposit.
B
Bankruptcy
The legally declared condition of being unable to pay one’s debts.
Bankruptcy Dismissal
Rejection of a bankruptcy petition by the court.
Basis Point
An incremental change in interest rate equal to one hundredth of one full percent of interest.
Broker
A Company or person who arranges – for a fee transactions between lessees and lessors.
Buyout
The purchase of leased equipment by the lessee during the term of the lease.
C
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 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 minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset. The foregoing is set forth in the financial Accounting Standard Board Statement #13 (FASB No. 13) (See Finance Lease).
Closed-End Lease
The lessee is committed only to the stated monthly payments, with no further financial obligation at the endpoint of the lease.
Collateral
Any property designated as security for the payment of a debt or for the execution of a contract.
Conditional Sale (Time Sale)
A purchase agreement, which presumes the customer to be the owner of the equipment immediately upon signature – provided all payments/conditions are met. (This contract allows immediate ownership for tax treatment and gives the seller a security interest until payments are completed.
Conditional Sales Contract (CSC)
A transaction that is recognized by as providing the seller (or contract holder) with full proprietary rights in the underlying asset until the buyer (debtor) has satisfied all the terms and conditions or the contract, at which time titles to the asset passes automatically from the seller to the buyer. For accounting purposes, the buyer would show an asset and corresponding liability in the balance sheet, the same as most finance leases.
Confession of Judgment
A provision in a contract that allows the creditor to apply to the court for judgment without notice to the debtor.
Corporate Resolution
The Corporate Resolution identifies those officers authorized by the board of directors to enter the corporation into the lease. This document should be certified by the corporate secretary or assistant security and may be required for large transactions (over $75,000.00).
Credit
The power to obtain money, materials or service by promising to pay for them a t some definite future date.
Credit Bureau Report
A report from a credit service, such as TRW or Equifax that summarizes an individual’s credit history with retail establishments and financial institutions.
Credit Investigation
The process of gathering and verifying the references provided by a prospective lessee. (For example, obtaining credit bureau reports, Dun and Bradstreet reports, checking bank and trade references, etc.)
D
Default
Failure to carry out a legally binding promise.
Delivery and Acceptance (“D&A)
This document is executed by the lessee after the equipment has been delivered and installed. The lessee represents that the equipment works satisfactorily and that the lessor has performed all its duties under the lease agreement.
Depreciation
An allowable tax deduction which reflects the “using up” of the service life of equipment.
Discharged in Bankruptcy
Order of bankruptcy court, which releases the borrower form debt obligations.
Division
A business unit within a corporation that is not legally separate from the corporation, which means the assets of the corporation are available to meet any credit obligations of the division.
Documentation Fee
A fee charged to the lessee for the processing of the lease and other insurable costs.
Draft
A written order by one party to another party demanding the payment of a specified sum of money to a designated third person.
Dun and Bradstreet
A commercial credit agency that complies and provides, for a fee, a variety of information relating to the management, operating trends and credit worthiness of business organization.
E
Estimated Economic Life
The expected period of time during which the leased equipment should be able to function as intended.
Estimated Residual Value
The estimated Fair Market Value of leased property at the end of the lease term.
Executory Costs
Costs such as insurance, maintenance, taxes and third party guarantees that may be incurred when property is leased.
Exemption Certificate (Tax)
A document exempting a lessor or lessee from paying sales tax on the equipment being leased. A lessor is buying the equipment for “re-sale” as would a vendor/supplier, while a lessee may be tax-exempt for other reasons, i.e., a non-profit entity or a bank.
F
Fair Market Value
The value of an asset at the termination of the lease, often determined by the then agreement between lessor and lessee, or alternatively by appraisal of open bidding.
Finance Lease
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. (See also Capital Lease.)
Financing Statement
Under the Uniform Commercial Code (UCC), a financing statement (UCC-1Form) reflects a security interest in, or claim to, specified personal property. The statement names the secured party of lessor and the debtor or lessee. When the financing statement is filed by the secured party or lessor with the security or other appropriate public office, it becomes public record and perfects lien rights.
Full Payout Lease
A Lease in which the payments made to the lessor will return the cost of the leased asset, plus the cost of financing and overhead, as well as an acceptable return on the investments.
G
Guarantor
A person or business promising to perform all of the lessee’s obligations – including making payments should the lessee fail to do so.
Guarantee
An agreement to obligate oneself for the debt of another. A guarantee by an individual is called a personal guarantee; and by a corporation, a corporate guarantee. The guarantor is obliged to pay the obligation in the event of a default by the entity being guaranteed. A guarantee is not a standard requirement, but is required by policy under certain circumstances (less than three years in business) and from time to time by the credit officer charged with approval or rejection of a transaction.
Guaranty
A written promise by one party to perform some duty or pay debt if another party should fail to do so.
I
Interim Rent
A charge for the use of a piece of equipment from its in-service or delivery date, up to the date when the lease actually starts.
IRS Form 1120
Tax return form for a corporation.
IRS Form 1040
Tax return form for an individual.
J
Judgment
A court decision against a person, persons or an entity that grants a specific amount of money or other relief to another party.
L
Landlord Waiver
An acknowledgment by the owner of property where leased equipment is located that the equipment belongs to the lessor and may be removed or inspected according to the terms of the lease and will not be considered to be a “fixture”.
Late Charges
A contractual financial penalty that is imposed when the delinquency of a payment due exceeds the grace period.
Lease
A contract by which the owner or property (lessor) grants to another (lessee) the right to possess and use the property for a specified period of time in exchange for a stipulated periodic payment (rent).
Lease Assignment
The lessor assigns the lease to another party giving the assignee the rights, powers, privileges and remedies specified in the lease.
Lease Factor
The rate used to determine a monthly payment for a given equipment cost – usually expressed as a decimal fraction, which is multiplied by the equipment cost (e.g. 0.0360 x $5,000 = $180 per month).
Lease Rate
The periodic charge a lessee pays stated as a percentage of the original cost of the equipment.
Lease Rate Factor
The periodic lease or rental payment expressed as a percentage (or decimal equivalent) of equipment cost. Used to calculate payments given the cost of equipment. (E.g. A factor of .0360 on an equipment cost of %5,000.00 requires a monthly payment of $180.00 (.0360 x $5,000.00 = $180.00).
Lessee
An individual, partnership, or corporation that pays the owner (lessor) for the use of an asset, but does not own it.
Lessor
The company that owns the equipment and leases it to the lessee.
Letter of Credit
This a letter form a bank to a correspondent bank stating that the person named can draw on the issuing bank’s credit for the amount stated, subject to the conditions stipulated.
Leverage
An area of financial measurement that can be useful in determining the degree of protection a company’s assets provide for its creditors.
Line of Credit
An agreement by a lender to provide funds to borrower up to a specified maximum amount.
Liquidity
A firm’s ability to meet its short-term obligations on a timely basis and to convert assets to cash quickly and without loss in value when needed.
M
Master Lease
Continuing lease agreement, which provides for property becoming subject to their terms of a single lease over a period of time. Schedules are added to reflect property becoming subject to the terms of the master lease.
N
National Account
A manufacturer or distributor who sells through a dealer network across the United States.
Non-appropriation Clause
Contractual provision found in many tax-exempt leases that provides that if the governmental lessee fails to appropriate or make available funds to make the lease payments called for under the agreement for the next appropriation period, the agreement terminates at the end of the current appropriation period. Such a clause is used to prevent lease payment obligations in future years from being classified as debt. Exercise of the non-appropriation clause is not an event of default.
O
Off-Balance Sheet
A leasing or receivable sales transaction in which neither the asset nor the lease contract or other liability is shown on the lessee or seller’s balance sheet. A lease is considered an off-balance sheet to the lessee when the agreement is not a capital lease under the Financial Accounting Standards Board Statement #13.
Operating Lease
A lease in which a lessee can acquire the use of equipment for a term that is less than the equipment’s useful life. The lessor may assume certain risks of ownership, which may include personal property taxes, maintenance and insurance costs. At the expiration of the initial lease, the lessor depends on the residual value to pay out its investment and realizes a profit based on the residual value of the equipment (through either renewals or sale). Note: For financial accounting purposes, an operating lease does not meet the Financial Accounting Standards Board Statement #13 criteria of a capital lease.
Over (or Highly) Leveraged
Describes a company’s financial position when its debt is excessively high in relation to its equity.
P
Off-Balance Sheet
A leasing or receivable sales transaction in which neither the asset nor the lease contract or other liability is shown on the lessee or seller’s balance sheet. A lease is considered an off-balance sheet to the lessee when the agreement is not a capital lease under the Financial Accounting Standards Board Statement #13.
Operating Lease
A lease in which a lessee can acquire the use of equipment for a term that is less than the equipment’s useful life. The lessor may assume certain risks of ownership, which may include personal property taxes, maintenance and insurance costs. At the expiration of the initial lease, the lessor depends on the residual value to pay out its investment and realizes a profit based on the residual value of the equipment (through either renewals or sale). Note: For financial accounting purposes, an operating lease does not meet the Financial Accounting Standards Board Statement #13 criteria of a capital lease.
Over (or Highly) Leveraged
Describes a company’s financial position when its debt is excessively high in relation to its equity.
R
Recourse
An agreement between the lessor and the seller which allows the lessor to take recovery action against the seller should the lessee default.
Repossession
The process of taking back equipment that is pledged as security to the lessor, due to non-payment or other contractual breech by the lessee.
Rental (Use) Tax
Many states charge a “use” tax in lieu of a sales tax when equipment is leased. So instead of paying a sales tax for purchase of the leased equipment, taxes are collected by the lessor as a percentage of the rentals over the lease term.
Residual Value
The estimated wholesale market value of the equipment at the conclusion of the lease.
Risk Management Association (RMA)
A trade association of bank credit people who set the standards for bank credit information.
S
Sale and Leaseback
A transaction where property is sold to a party on the condition that it is immediately leased back to the seller. (Can be an attractive method for the owner of a capital asset to raise working capital.)
Sales/Use Tax
A state tax on leased equipment based on the amount of the monthly lease payment.
S Corporation
A corporation in which five or fewer individuals own at least 50% of the stock, with the same legal rights of a corporation except from a tax standpoint.
Securitization
The packaging of lease receivables into an investment grade security as an alternative funding source.
Skipped Payment Leases
A lease designed to enable the lessee to skip payments during a portion of the year when the leased equipment is idle because of adverse weather conditions or other factors.
Standard Industrial Classification (S.I.C.)
The federal system of coding businesses according to industry type.
Step Payment Lease
A lease in which the monthly payment either increases (step-up) or decreases (step-down) to a per-determined amount over the term of the lease.
Subsidiary
A company owned by another corporation.
T
Tax Lien
A legal claim imposed by a Federal, State or County agency in lieu of non-payment of taxes.
Trade-Up/Upgrade
Exchanging equipment and entering into a new lease obligation.
Treasury Note
An obligation of the U.S. government with a maturity of one to five years. (The Yield on this note serves as a basis for funding costs)
True Lease
A transaction that qualifies, under the general provisions or the Internal Revenue code, as a lease so that the lessee can claim lease payments as tax deductions and the lessor can claim tax benefits of ownership, such as depreciation. At the expiration of a conventional true lease, the lessee can either purchase the equipment for the fair market price, return it to the lessor, or renew the lease. An example of such a lease is a Fair Market Value (FMV) lease.
U
U.C.C. Filing Fee
A fee charged for processing and filing a U.C.C.-1 or U.C.C.-3.
U.C.C.-1
The form used under the Uniform Commercial Code to record security interest and collateral or commercial equipment with a state department of commerce or a county clerk.
U.C.C.-3
The form used to formally terminate the record of security interest in a piece of commercial equipment.
Uniform Commercial code (U.C.C.)
A compilation of statutory provisions designed to simplify, clarify and modernize the law governing commercial transaction; to permit the continued expansion of commercial practices through custom, usage and agreement of the parties, and to make uniform the law among various jurisdictions. Note: A minority of states adhere to the 1962 version of the U.C.C. while others have adopted the 1972 amendments. Louisiana, which still adheres to the Civil (Napoleonic) Code, has not adopted the U.C.C.
Useful Life
The period of time during which an asset will have economic value and be usable. (Also called “economic life.”)
W
Wire Transfer
The transfer of funds from one party to another through the Federal Reserve banking system.
Working Capital Lease
A financial arrangement in which commercial equipment is purchased from and leased back to the owners. Additional capital funding is made available to lessee (e.g. for business improvement or reinvestment purposes) over and above the price of the equipment leased.