The following Glossary of Equipment Leasing Terms should help all business owners, whether a lessor or lessee, to understand key leasing terms when in the market to acquire equipment. Without some basic knowledge of these terms and qualified legal counsel, it may be substantially more difficult to make an educated decision in any leasing transaction.
This type of depreciation refers to the method that depreciates a fixed asset so that the amount of depreciation taken each year is higher during the earlier years of the life of an asset.
When a transaction adds related equipment to an existing lease, it is simply referred to as an “add-on.” Usually used when the new equipment is financed using the same lease structure that was used in the original transaction. Typically, the lease term for the add-on expires coterminously with any equipment in the underlying transaction.
*Advance Rental Payments:
These are the payments made by the lessee to the lessor at the inception of the lease transaction, which usually consists of rent payments for the first and last month of the lease term.
This is a one-page application used to acquire equipment based entirely on the applicant’s credit score.
Amortization divides periodic loan payments into the portion that is the principle and the portion that is interest.
*Bargain Purchase Option:
A lease provision which grants the lessee the option to purchase leased equipment for a price predetermined at the inception of the lease. This price is typically lower at the date that the lessee may exercise the option than the expected fair market value of the leased equipment.
*Big Ticket aka Large Ticket:
This is a market segment where the equipment financed is over $5 million.
This type of lease is categorized and by a lessee as a purchase and by the lessor as a sale or financing, as long as it meets any one of the following criteria:
- the lease contains an option to purchase the asset at a bargain price;
- the lease term is equal to 75 percent or more of the estimated economic life of the property;
- the lessor transfers ownership to the lessee at the end of the lease term; or
- 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 applicable investment tax credits held by the lessor.
*Capped Fair Market Value:
A Fair Market Value Lease has a predetermined or “capped” ceiling to limit fair market exposure at the end of the term of the lease.
*Captive Leasing Company:
This refers to a subsidiary leasing division of a manufacturer or dealer.
*Conditional Sales Agreement (CSA):
A CSA is a contract that addresses an asset’s installment financing. For tax and accounting purposes, a lessee is treated as the owner of the equipment while the lessor has a first-position priority security interest in the equipment.
This is a term used when two or more leases of equipment are linked so that both will terminate contemporaneously.
If a party breaches certain material lease obligations, it may default. After the event of default, the lease company may exercise all its rights and remedies under its lease contract or other applicable agreements to pursue damages and remedies to repossess the collateral.
Depreciation is a reasonable allowance for wear and tear, exhaustion, and obsolescence of business equipment. Depreciation allows an equipment’s owner to recover the cost of the equipment over its economic life.
*Delivery and Acceptance Certificate:
This Certificate is a document where a lessee acknowledges that specified, identifiable equipment is acceptable for lease. This document notifies a lessor that the leased equipment has been delivered, inspected and accepted as of a specified date.
This refers to a certain interest rate used to bring a series of future cash flows to their present value.
This is any fee charged for preparing, distributing and storing transaction documents for a financing transaction.
*Dollar Buy Out:
Also known as a dollar-out lease, this is an option at the end of the lease term to purchase the leased equipment for $1.00.
An asset’s economic life refers to the period of time during which an asset has economic value and is capable of use.
*Estimated Useful Life:
This simply refers to the period during which an asset is expected to be useful in trade and business.
*Equipment Finance Agreement (EFA):
An EFA is a loan against the equipment with a fixed monthly payment that does not change monthly with the applicable Prime Rate. The obligor will own the equipment at the end of the finance term when the lender releases its security interest.
This document details the leased equipment, the lease’s commencement date, and other lease terms including the lease’s repayment schedule.
*Fair Market Purchase Option:
This is an option to purchase leased property at the end of the lease term at fair market value.
*Fair Market Value (FMV):
Fair Market Value refers to the price for which property may be sold in an “arm’s length” transaction.
*Fair Market Value Lease:
An FMV lease includes an option for the lessee to either renew the lease at Fair Market Value or purchase the equipment for Fair Market Value at the end of the lease’s term.
This refers to Financial Accounting Standards No. 13 of the Financial Accounting Standards Board, which establishes standards for lessees’ and lessors’ accounting and reporting for leases. FASB 13 includes the characterization of a lease as an operating lease or capital lease for the lessee’s purposes. The underlying policy behind the provisions of FASB 13 is that a lease that transfers substantially all of the benefits and risks of ownership should be treated for accounting purposes as the acquisition of an asset.
A lease in which the lessor does not select, manufacture, or supply the goods. The lessor acquires the goods or the right to possession and use of the goods in connection with the lease.
*First Amendment Lease:
This type of lease grants a purchase option at one or more defined points in time with the requirement that the lease is renewed or continued the lease if the purchase option is not exercised.
*Fixed Priced Purchase Option:
This is an option on behalf of the lessee to purchase leased equipment from the lessor on the option date for a certain price, which both must be determined at the lease’s inception.
A lease from which the lessor can reasonably expect to realize a return of its full investment in the leased property, plus the estimated cost of financing the property over the term of the lease, from rentals, estimated tax benefits, and the estimated residual value of the property at the expiration of the initial term of the lease; provided that no more than 20 percent of the return may be realized from the residual value of the property at the expiration of the initial term of the lease.
*Guaranteed Residual Value:
This refers to an agreement where a manufacturer guarantees that a lessor will receive not less than a certain amount for equipment when disposed of at the end of the term of the lease.
This type of clause or provision obligates a lessee to pay the rent unconditionally. The lessee waives any right that exists or may arise to withhold any rent from the lessor or any assignee of the lessor for any reason, including any setoff, counterclaim, recoupment, or defense.
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