Glossary of Leasing Terms

FAQ About Leasing | Glossary of Leasing Terms

$1.00 or 100 dollar Buy Out

An end of lease option where you have the option to purchase the equipment for $1.00 or $100.00 provided that you have fulfilled the terms of your agreement.

Acceptance Certificate (Certificate of Acceptance or 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 specification. When this document is executed the lease commences which signals to the Lessor that they can make payment to the vendor.

Advanced Payments (Advance Rentals)

Lease payments made prior to start of the lease term. Depending on the lease transaction it could call for one, two, or more payments in advance.

Amortization

The process of setting aside a portion of a leased asset's value to business expense over the periods benefited.

Application Form

Most Lessors use a Lease Application form to list the information required to evaluate a prospective Lessee's credit condition and history. The Lease application forms require specific information about the applicant, such as, but not limited to: Company name, Principal Owner, Type of Organization, Number of years in the business, Type of equipment considering, requested term, amount requested, contact phone, Banks or Trade references, and or social security number.

"Application-Only" Credit Review

Most Lessors grant credit using only the information submitted to them on Lease Applications. This document along with bank and trade references and independent credit bureau reports is used to review credit up to a certain transaction size (usually up to $25,000). Written financial statements are generally not required from the applicant because the Lessors usually make a decision based on the use of "Credit Scoring" systems and/or bank and trade references.

Assignment

Lease Agreements typically contain a provision permitting the Lessor, or other type of Lender, to transfer the Lease to another party by "Assignment". Terms and conditions for assignment vary regarding options and other provisions such as the right, title and interest in the equipment financed. Generally, Lessors employ their own documents and utilize assignment provisions to sell transactions to funding sources.

Bankruptcy

The legally declared condition of being unable to pay one's debts.

Bargain Purchase Option

A lease provision allowing the lessee at the end of the lease to purchase the leased property for a price lower than the property's Fair Market Value (FMV) provided the lessee has complied with their responsibilities under the lease.

Buy Out

The purchase of leased equipment by the lessee during the term of the lease.

Big Ticket

A market segment, generally dominated by leveraged leases, represented by lease financing over $2 million.

Broker

A company or person who arranges transactions between lessees and Lessors of an asset.

Capital Lease

A type of lease which is treated as a purchase by the Lessee and by the Lessor as a sale or financing. Generally Capital Leases can be identified if it meets the following criteria:

• a) The Lessor transfers ownership or title to the lessee at the expiration of the lease term.
• b) The lease term is equal to 75% or more of the estimated economic life of property (there are exceptions for used property leased toward the end of its economic life).
• c) The lease contains an option to purchase the asset at a bargain price.
• d) The present value of the required lease rental payments is equal to 90% or more of the estimated Fair Market Value of the leased asset at lease inception. If you plan on owning the equipment at the end of lease term or your long term goal is to own the equipment this might be a good lease for you. Please contact your accountant.

Cash Flow

Money that isn't tied up and is available for use. Typically a measure of a business' ability to meet lease obligations. Usually figured by adding the business net income to its depreciation expense for a certain period of time, and subtracting the current portion of long-term debt. The remainder of this formula is the available cash to assist new lease obligations.

Closed End Lease

The lessee is committed only to the stated monthly payments, with no further financial obligation at the end point of the lease.

Collateral

Any property designated as security for the payment of a debt or for execution of a contract.

Commencement Date

The date that certifies delivery and acceptance of the equipment.

Conditional Sale (Time Sale)

A purchase agreement which presumes the customer to be the owner of the equipment immediately upon signature provided all payments and conditions are met. (This contract allows immediate ownership for tax treatment and gives the seller a security interest until payments are completed).

Corporate Resolution (Certificate of Secretary)

The corporate resolution is a document that must attest that individual executing a Lease Agreement on its behalf is duly authorized to do so. The resolution identifies those officers authorized by the board of directors to enter the corporation into the lease. A signatory's authority is commonly confirmed by the execution of a "corporate resolution or certificate of secretary". This document should be certified by the corporate secretary or assistant secretary and usually the "Lessee's Corporate Seal" is ordinarily required for large transactions over $75,000.

Credit

What America thrives on! The power to obtain money, materials or services by promising to pay for them as some definite date in the future.

Credit Bureau Report

A report from a credit service generally provided by one of the "Big 2" (Equifax, AND Transunion) that summarizes or scores an individual's credit history with retail establishments, financial institutions, or trade references.

Credit Investigation

The process of checking and verifying the references provided by a prospective lessee (end user) which typically include financial institutions, Dunn and Bradstreet reports, Equifax and Transunion.

Credit Scoring

A system used for evaluating credit  history to determine acceptability based on assigning values to various credit criteria creating a pass or fail situation based generally on points.

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.

Conditional Sale

A situation under the income tax provisions whereby the actual user is seen as the owner of an asset for availing the capital allowances. In India, a conditional sale will include the Hire Purchase transaction.

Default

The failure to carry out a legally binding promise

Depreciation

An allowable tax deduction for assets or property that are used up over their economic life period of time.

Documentation (Leasing Documents and Paperwork, "Doc's")

Lease agreements are set forth in documentation often comprising of several forms. Documentation varies from company to company, as do requirements depending on the type of lease, equipment, equipment cost, term, equipment configuration and additional provisions if any. Typically the more expensive the equipment is the more extensive the contracts.

Documentation Fee

A fee charged to the lessee for the processing of the lease and other insurable costs which typically include filing the PPSA registration and document preparation with government facilities usually provincially or federal.

Down Payments

Leases typically do not require Down Payments. Bank loans and other types of equipment based financing frequently require the borrower to pay 10 to 30 percent of the purchase price at the outset. If the lessee's credit is minimal or negative credit history is present, the lessee may offer a down payment to get their lease approved.

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. Normally used in the context of equipment, automobiles, computers, etc.

Equipment

The specific items or property that is leased by the Lessee as covered by a selected lease agreement.

Equipment Supplier (Vendor/Dealer)

The company, firm, or equipment supplier is the seller or manufacturer of the equipment to be leased.

Equipment Schedule

A document that describes in detail the equipment being leased. It will generally include model and serial numbers and it may also state the lease term, commencement date, repayment schedule and location of the equipment.

End of Term Options (End of Lease Options)

Options stated in the lease agreement which give the lessee flexibility in treatment of the leased equipment at the end of the term provided the lessee has complied with their responsibilities under the lease.

Estimated Residual Value

The estimated Fair Market Value (FMV) of a leased property at the end of the lease term.

Executory Costs

Costs such as maintenance, insurance, taxes and third party guarantees that may be incurred when property is leased.

Exemption Certificate

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 or supplier while a lessee may be tax exempt for other reasons like being a non-profit organization or a bank.

Fair Market Value (FMV)

An end of lease option to purchase leased property at its then fair market value.

Finance Lease

General term applied to most types of equipment leases. Typically, a finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance taxes, and insurance.

Guarantor (or Co-signer)

An individual or business that promises to perform all of the lessee's obligations, including making payments should the lessee fail to do so.

Guaranty (Personal, Corporate)

Sometimes individuals and or business owners may be required to personally guarantee a leasing transaction. An agreement to obligate oneself for the debt of another. The guarantor is obliged to pay the obligation in the event of default or non-payment by the entity being guaranteed.

Insurance

Most Lessors require the Lessee to insure the equipment against casualty loss, all risk and damages, and require that the lessee indemnify the Lessor against any liability incurred from the possession, operation, or usage of the equipment.

Late Charges

A financial penalty that is imposed when there is a delinquency of a payment due that exceeds the grace period.

Lease

A lease is a contractual document in which one party (The Lessor) conveys the use of an asset to another party (The Lessee) for a specific length of time (lease term) at a predetermined schedule of payments (usually monthly).

Lease Payment (Lease Rate)

A fixed periodic rental payment to a Lessor for the use of assets or equipment over a fixed period of time.

Lessee

The individual, partnership, or corporation using the equipment being leased from the Lessor (owner).

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 rental payments.

Master Lease

A continuing lease agreement that provides for property or equipment becoming subject to the terms of a single lease over a period of time. Schedules or addendums are then added to reflect property becoming subject to the terms of the master lease.

Off-Balance Sheet (Off-Balance Sheet Financing)

A leasing transaction in which neither the asset nor the lease contract or other liability is shown on the lessee's or seller's balance sheet. Typically considered off-balance sheet to the lessee when the agreement is not a capital lease. Please contact your accountant.

Operating Lease

Any lease that is not a Capital Lease. Generally used with equipment that rapidly depreciates or becomes obsolete in a short period of time. The Lessor books and depreciates the equipment as an asset, and the Lessee expenses the lease payments (usually classify these payments as an operating expense). An operating lease is considered an off-balance sheet liability and contains a provision to purchase the equipment at the end of the lease for the Fair Market Value. This is typically considered the most tax friendly form of leasing. Please contact your accountant.

Purchase Option

A provision 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 specified amount or at fair market value.

Put Option

A provision in a lease with the requirement to purchase equipment at a particular time and at a predetermined price at the ending of the lease term.

Residual Value

The estimated value of an asset at the end of the lease.

Sale-Leaseback

A type of lease whereby the equipment is purchased by a Lessor from the company owning and using the asset. The Lessor then becomes the owner and then leases it back to the original owner, who then continues to use the equipment. Typically used for companies that want to conserve cash flow and working capital.

Security Deposit

Funds paid at, or prior to lease inception to the Lessor as collateral and to insure payment on the asset.

Soft Costs (Air/Soft Charges)

Non-hardware or other non-liquid acquisition costs of Lessor. For example, training, shipping, service, or installation charges.

True Lease

A type of lease that qualifies as a lease under requirements of the Internal Revenue Code. It typically allows the lessee to claim lease payments as tax deductions and the Lessor to claim tax benefits of ownership as a depreciation expense. - Please consult your accountant.

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.

Vendor Leasing

A working relationship between a financing source and a vendor to provide financing to stimulate the vendor's sales. The financing source offers leases or conditional sales contracts to the vendor's customers. The vendor leasing firm substitutes as the captive finance company of a manufacturer or distributor through the extension of leasing to customers, provisions of credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor program.