Advance Rental Payment — The payment or payments made at the initiation of the lease contract. For example, the first rental payment or first and last payments which are typically paid at the inception of the lease.
Application Fee — A non-refundable deposit sometimes collected by a lender or broker to review and process an application in anticipation of approval.
Authorized Signature — A signature by a person authorized by a company to obligate the company on a long-term lease. An authorized signer might be substantiated by a Corporate Resolution.
Bill of Sale — A document transferring title to the equipment to the Lessee upon exercising of their lease-end purchase option. Also used in Sale and Leasebacks to convey title of equipment from Lessee to Lessor at time the lease is initiated.
Broker — A company or person who arranges lease transactions between Lessees and Lessors for a fee.
Cash Flow — The cash that flows into and out of a company as a result of doing business. Generally, earnings plus “non-cash” items such as depreciation and amortization expenses equals “cash flow.”
Cash on Cash — A method of measuring a business’ or an investor’s return on investment. In terms of leasing, generally indicates that the contemplated transaction is a finance or full-payout lease. Similarly, “money over money”.
Chattel Mortgage — An instrument by which the borrower (mortgagor or “Lessee”) gives the lender (mortgagee or “Lessor”) a lien on property other than real estate as security for the payment of an obligation. The borrower to use the property, and when the obligation is satisfied, the lien is removed. Some types of equipment leases would be considered a chattel mortgage.
Collateral — Collateral under a lease is the equipment which is leased. Occasionally, on a marginal credit or low-resale-value equipment lease (including software, web sites, and similar) ADDITIONAL COLLATERAL may be pledged to secure approval.
Commitment Deposit — A deposit collected from the Lessee to secure a commitment to the final takedown. This deposit usually only applies to large transactions with prolonged takedowns. Depending on the terms of the commitment agreement or commitment letter, if the full lease approval is not utilized, then Lessor may retain any unapplied portion of the fee as consideration for the line and any special pricing that may have been based on the Lessor’s assumption of a larger total relationship with the Lessee.
Commitment Agreement/Letter — Letter prepared by the Lessor to spell out terms and conditions between Lessee and Lessor for a lease line of credit.
Compensating Balances — The amount of deposits required by a bank to be deposited by a company or individual in return for a loan. Although leasing companies don’t generally require compensating balances on leases, many bank loan agreements call for compensating balances as a percentage of the loan. These can run 10% to 20% of the bank’s loan commitment
Conditional Sales Contract — A transaction that is recognized by law 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 of the contract, at which time title 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. Many finance leases are interpreted as conditional sales contracts.
Corporate Resolution — Document used to specify who can sign a lease and what that person’s responsibilities (and limitations) are.
Corporate Seal — A registered mark of the corporation which may be applied to a legal document, such as a lease, only by the secretary of the corporation. Spells out the name of the corporation, date of incorporation, and state of incorporation. May be required in some states and not in others.
Default — A default occurs when any of the lease terms are not met and are not corrected within the time specified in the lease.
Delivery and Acceptance Certificate — The document the Lessor requires from the Lessee as confirmation that the equipment was delivered, is the equipment requested, and is in good working order. This is a standard part of a lease documentation package.
Dilution of Equity — Dilution occurs when common stock offerings reduce earnings per share of a corporation.
Discounted Cash Flows — An analysis applying a present value factor to a future stream of payments to determine their present value. The most precise method of comparing an equipment lease to alternative financing methods.
Evergreen Clause — An ‘evergreen clause’ is a portion of a lease agreement that allows the Lessor to extend the lease under certain conditions. Often the conditions are set by the lessor to increase their opportunity to extend the lease. It is aptly named “Evergreen” because it is like a tree that seems to die in the winter but comes back to full green beauty every spring. (Note: because it is part of some leasing companies’ contract, it is usually legal, but Lease $mart believes that it is almost never ethical. (Evergreening is a tactic which allows some leasing companies to quote an artificially-low payment because they know from statistics and experience that a significant number of their customers will end up paying an extra 12 months — maybe an extra 24 months or more — before the lease is allowed to be satisfied.) Click here to read more about Evergreen. READ your lease agreement carefully – and work with a leasing company you can trust!
Exemption Certificate — A document exempting a Lessor or Lessee from paying sales tax on the equipment being leased. A Lessor buys the equipment for “resale,” as would a vendor/supplier, and does not pay tax. A Lessee may be tax-exempt for other reasons, i.e., a qualifying health care organization, a manufacturer, etc.
Fair Market Value (F.M.V. or FMV) — In the world of leasing, this refers to the value of the leased asset at the termination of the lease. If a purchase option if offered at below fair market value, the lease contract may be treated by tax authorities as a conditional sales contract or time sales agreement, potentially negating the tax benefits of a true lease.
Finance Lease — A financing device whereby a Lessee can acquire use of an asset for most of its useful life. Generally, a finance lease is non-cancelable during the term of the lease; rentals are net to the Lessor; and the Lessee is responsible for maintenance, taxes, and insurance.
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. Used with many leases to protect Lessor’s interest in the equipment.
Fixed Residual — Locking in or guaranteeing a residual amount in the structure of a lease. This is typically calculated at 10% of the original equipment cost, but a variety of other residuals can also be contracted.
Floating Rate — An indication that the cost of using someone else’s money in a financial transaction is subject to change according to market conditions. Bank loans are usually structured with a floating rate which is subject to upward or downward adjustments during the loan term, while lease transactions are usually documented at fixed rates. If outside indexed interest rates (such as the Prime rate) change during the term of the lease the fixed rate on a lease would remain stable.
Full Payout Lease — A lease in which the cash flows will return the Lessor the full equipment cost plus a satisfactory return over the lease term.
Insured Value — A schedule included in a lease which states the agreed value of equipment at various times during the term of the lease, and establishes the liability of the Lessee to the Lessor in the event the leased equipment is lost or rendered unusable for any reason during the lease term. Sometimes called the stipulated loss value.
Investment Tax Credit — A credit against Federal income taxes, sometimes available when a company purchases capital equipment. Repealed in the Tax Reform Act of 1986.
Kicker — Generally, the amount over and above the interest rate on a loan imposed on a borrower by a lending institution. Most typical in bank loans and venture capital investments. Warrants in a company’s common stock are typical and normally run for a three- to seven-year period.
Landlord Waiver — A document signed by the landlord allowing Lessor to remove the equipment in case of default or at the end of the lease.
Lease — An agreement granting or letting the possession of land, buildings, machinery, personal property, etc., for a fixed or indeterminate period, for a stated consideration, usually known as rent.
Lease Approval — A written notice of approval for a particular transaction. Will usually specify the parameters and limitations of the approval.
Lease Rate — Generally refers to the cost per month to the end-user of the equipment. Should be considered in the context of the other aspects of the structure of the transaction.
Lease Term — The duration of the lease, expressed as a number of months, years or sometimes quarterly periods.
Lease Terms — The whole of the structure of the lease as agreed to by the parties. Will normally include aspects such as amount of payments, number of payments, amount of security deposit or prepayments, residual agreements, and provisions for maintenance, insurance, etc.
Lease vs. Buy — An analysis or comparison of the financial and practical considerations of various methods of paying for use of a capital asset.
Leasing Line — An amount of funds set aside by the Lessor for a Lessee to use over the 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, for that use.
Lessor — Company or leasing entity that is legal owner of the leased equipment.
Level Payments — Equal payments over the term of the lease.
Leverage — An amount borrowed. A Lease is sometimes referred to as 100 percent leverage for the Lessee.
Leveraged Lease — A lease in which the Lessor borrows a portion of the purchase price of the leased equipment from institutional investors. In a typical transaction twenty to forty percent of the purchase price is provided by one or more investors who become owners and Lessors of the equipment. The balance of the purchase price is borrowed from institutional investors on a non-recourse basis to the owner. The borrowing is secured by a first lien on the equipment, an assignment of the lease, and an assignment of the lease rental payments. A leveraged lease may also refer to transactions in which a Lessor finances equipment to be leased by borrowing from a bank or some other lending agency using the lease and equipment as security.
Long-Term Lease — Generally refers to a finance lease.
Master Lease — An open-end type agreement under which a Lessee obtains the use of property, and can add additional equipment periodically at rates to be negotiated and through the use of “schedules,” under the basic terms of the original instrument. Eliminates signing new leases as additional equipment is leased.
Mortgagee’s Waiver — A document prepared by the Lessor to be signed by the mortgagee (mortgage holder) giving up any rights which he may have, in the present or future, against the leased property/equipment at Lessee’s place of business. Protects the Lessor in cases in which leased equipment is attached to real property.
Net After Tax Return on Net Working Capital — The percentage typically used in standard cash flow analyses to project the compound earnings effects from tax timing on conserved cash saved via the lease versus alternative methods of finance.
Net Lease — In a net lease, the rentals are payable net to the Lessor. The lease concerns itself only with the equipment itself. All costs in connection with the use of the equipment (usually hard to predict) are to be paid by the Lessee over and above the agreed rental payments. For example, taxes, insurance, and maintenance are paid directly by the Lessee. Most finance leases are net leases.
Non-Payout Lease (Operating Lease) — A lease in which the Lessor may not receive the full recovery of cost and leasing charges over the base lease term, and must rely heavily on residual or re-leasing of the equipment to realize an acceptable yield. Common in the computer industry in which maintenance, insurance, etc., may be a part of the package.
Off-Balance Sheet Financing — Unlike the traditional methods of financing, Operating Lease obligations are not capitalized, thus improving balance sheet ratios. Off Balance Sheet leases are generally footnoted.
One Hundred Percent Financing — Because no compensating balances or down payments are required, leasing provides 100% financing.
Operating Lease — A short-term lease whereby a user can acquire use of an asset for a fraction of the useful life of the asset. The Lessor may provide services in connection with the lease such as maintenance, insurance, and payment of personal property taxes. From a strict accounting standpoint, the specific requirements of FASB 13 must be met for a lease to be qualified as an Operating Lease. Same as True Lease.
Packager — Another name for a Broker.
Personal Property — From a Lessor’s standpoint, basically any type of “leasable” equipment (as opposed to real property). Banks and bank-affiliated leasing companies have not been sanctioned by the Federal Reserve Board to lease real property.
Portfolio Acquisition — The process of purchasing a package of leases and/or time sales contracts and discounting the flow of remaining payments.
Present Value — What one future payment or series of payments is worth today, i.e., if a friend agrees to pay you $1.00 at some future date, how much would you give him today to realize a required rate of interest or return?
Progress Payments (‘Prefunding’) — Payments advanced to a manufacturer or dealer while equipment is being manufactured and until final scheduling when final/permanent funds will be advanced.
Purchase Option — Some leases allow a Lessee to purchase the equipment at the end of the lease term for Fair Market Value or a predetermined amount (often set at 10% of the original equipment cost).
PUT (Purchase Upon Termination) — A commitment agreement one person has to sell an asset to another person at a set price at some established point in time in the future. In lease agreements, a Lessor sometimes negotiates an option to sell leased equipment to the Lessee or to some third party at an established price at the end of the lease term. This is to protect the Lessor’s exposure on the residual value of the leased equipment at the end of the lease term. Care must be used in negotiating a PUT on a lease, lest the True Lease characteristics of the transaction be destroyed and money saving advantages lost. A Lessor may also negotiate a PUT to a third party as a hedge against future loss on the sale of the residual.
Recourse Agreement — An agreement with a vendor whereby the vendor will purchase or repurchase the Lessor’s interest in a lease, generally upon demand, after default of the Lessee. Generally, the lease must be in default sixty to ninety days and a reasonable amount of collection effort exerted by the Lessor. “Recourse” is more common in the finance industry and not in leasing.
Renewal Option — After the initial lease term, if the leased equipment is not purchased or returned to the Lessor, a Lessee may have the option to renew the lease for estimated fair rental values for a term not to exceed the useful life of the equipment. Usually renewals are on a year-to-year basis and the renewal amounts are generally lower than the rentals during the lease term.
Rental Factor or Payment Factor — Numerical factor multiplied by total cost of equipment to compute fixed periodic rental payments. Varies widely according to the actual lease, but may be expressed in the form of a decimal or as dollars/month/thousand, e.g: 0.01979 or $19.79/month/$1,000.
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 in addition to the rentals over the lease term.
Residual (or) Residual Value — The value of the leased property at the end of the lease term or during the lease term. Lessor retains title to the equipment unless a purchase option is exercised, and this residual is important in the overall profits of the Lessor.
Restrictive Covenants (Negative Covenants) — Restrictions in bank loan agreements against the borrower, i.e., working capital restrictions, dividend payment restrictions, retention of earnings covenants, prohibition against leasing, etc.
Sale and Leaseback — An arrangement whereby a company sells fixed assets, currently owned, for cash to a Lessor. Converts a fixed asset to cash. Selling price can be appraised value or book value, whichever is acceptable to the Lessor. Book value may be best for the Lessee, to eliminate tax liability on the sale.
Scheduling — Booking of a lease after a “lease schedule” is signed and equipment accepted by the Lessee.
Short-Term Lease — Generally refers to an operating lease.
Special-Purpose Equipment — Equipment that is unique and has no value except as junk to anyone other than the original user. Special-purpose equipment can be leased, however, a lease of special-purpose equipment may not qualify as a True Lease.
Stipulated Loss — Represents the purchase price of the equipment (including estimated residual values) at a given point in time, which would be the amount necessary to be paid by an insurance company in case of a total loss of equipment. Protects Lessor in recovering the amounts necessary to return the desired yield even though equipment is a total loss.
Take-Down — The point in time when the equipment is delivered, accepted, and paid for by the Lessor and the Lessee is “taking down” a portion of a lease line.
True Lease — A true lease is a transaction that qualifies as a lease under the Internal Revenue Code so that the Lessee can claim rental payments as tax deductions and the Lessor can claim tax benefits of ownership —such as depreciation and Investment Tax Credits if available. Generally the same as an Operating Lease.
Useful Life — The period of time during which an asset will have economic value and be usable. Useful life of an asset is sometimes called the economic life of the asset. The minimum term of the lease cannot exceed 75% of the useful life of the leased equipment if the lease is to qualify as a true lease under FASB 13.
Uniform Commercial Code (UCC) — A standardized program and method of administering, legalizing, and recording lien instruments, now adopted by all states.
Vendor — Supplier of equipment who receives purchase order from the Lessor.
Working Capital — The difference between current assets and current liabilities. Leasing is generally designed to save a company its working capital.