|
Understanding some of the jargon used by leasing companies is
often helpful. Listed below is a glossary of leasing terms. If
you understand these terms, it should help in better
understanding a leasing company and leasing transactions. We hope
they are of some use. We have tried to define each term without
use of other technical and jargonistic terms to provide a clear
understanding of the defined term. If there is a term that you
would like defined that is not defined or you think should be in
the glossary, please send us an Email and we will
consider updating the glossary and will certainly define any
terms for you.
- Acceleration Clause
- This is a provision of a lease that allows the lessor,
upon default by the lessee, to require all payments due
in the future to be made immediately.
- Advanced Lease Payment
- Lease payments made at the beginning of a lease. For
instance, lease payments due on the first of the month.
This is contrasted with “Arrears Lease
Payment”.
- Arrears Lease Payment
- A payment made at the end of a lease term such as at the
end of a month.
- Automated Clearinghouse (ACH)
- A system used to electronically transfer funds through a
clearinghouse facility directly into the payee's bank
account. A direct deposit.
- Balloon Payment
- A large payment made at the end of a lease. Use of a
balloon payment in a lease will have the effect of
reducing the periodic payment during the lease term.
- Bargain Purchase Option
- Similar to a purchase option, it is a provision in a
lease giving the lessee the right to purchase the leased
property for a price less than its anticipated fair
market value. This term is most often used in connection
with classifying a lease for accounting purposes.
- Broker
- An intermediary between the lessee and lessor. The broker
arranges a leasing transaction. The broker is usually
paid some fee by the leasing company for its services.
- Buy-out
- The purchase of leased equipment by the lessee during the term of the lease.
- Capital Lease
- A specific classification of a lease for accounting
purposes. The classification of the lease will determine
how the lease is to be accounted for. A lease is
accounted for by the lessee as a capital lease if it
meets one of the following criteria: (a) at the end of
the lease, the lessee owns the property being leased; (b)
at the end of the lease, the lessee can purchase the
property for a bargain purchase option; (c) the lease
term exceeds 75% of the estimated economic life of the
leased property; (d) the present value of all lease
payments is equal to 90% or more of the cost of the
leased property.
- Capped Fair Market Value
- A provision in the lease allowing the lessee to purchase
the leased property for its fair market value, but not
exceeding a certain amount. The advantage of the cap is
that the lessee will know the maximum payment required to
purchase the leased property.
- Certificate of Acceptance
- A written verification by the lessee that they have
received the property to be leased. Most leases begin
after the date stated on the certificate of acceptance.
- Commencement Date
- Date the base term of the lease begins.
- Coterminous
- Two or more leases that end at the same time.
- 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.
- Cross Corporate Guaranty
- A guarantee by one corporation to pay the lease
obligations of another corporation.
- Default
- If a lessee does not comply with the terms of the lease,
a default occurs. Generally, after a default, the lessor
can exercise all of its rights under the lease to
repossess the property and seek money damages.
- Direct Finance Lease
- Same as a capital lease except this accounting
classification only applies to a lessor. Why FASB choose
two names for the same term, only they in their infinite
wisdom know.
- Dollar Buyout
- An option at the end of the lease to buy the leased
property for $1.
- Economic Life of Leased Property
- The estimated time the leased property can be used with
normal repairs and maintenance.
- Fair Market Value
- The technical definition of fair market value is the
price a willing buyer will pay a willing seller for
leased property on an “as is, where is” basis
with both under no compulsion to either buy or sell. In
reality, this is a vague term, often creating a question
between a lessor and lessee regarding what is the fair
market value. Stated another way, what will someone pay
for the leased property at the end of a lease.
- Fair Market Value Purchase Option
- Similar to a purchase option, this lease term gives the
lessee the ability to purchase the leased property at its
fair market value at the end of a lease.
- FAS 13
- Technically, this is the statement of Financial
Accounting Standards No. 13 entitled “Accounting for
Leases”. This book sets forth standards for how
parties to a leasing transaction should account for such
transaction.
- FASB
- This is the Financial Accounting Standards Board. This is
the group that, on high, dictates the general accounting
policy and theory which is to be followed by both
internal accountants as well as external auditors.
- FAZ-BEE
- Another name for FASB.
- Finance Lease
- General term applied to most types of equipment leases. Typically, a finance lease is a full-payout, noncancellable agreement, and the lessee is responsible for maintenance, taxes and insurance.
- Financial Statements
- Accounting statements that provide specific information
about a company’s financial position. They include
the Profit & Loss Statement, also known as the Income
Statement, the Balance Sheet, and the Statement of Cash
Flows. Financial statements can generally be audited by
an outside CPA firm or be unaudited and, thus, prepared
by the company.
- Financing Statement
- Under the Uniform Commercial Code (UCC), a financing statement (UCC-1 Form) reflects a security interest in, or claim to, specified personal property. The statement names the secured party or lessor and the debtor or lessee. When the financing statement if filed by the secured party or lessor with the secretary or other appropriate public office, it becomes public record and perfects lien rights.
- Guarantor
- A person or business promising to perform all of the lessee's obligations - including making payments should the lessee fail to do so.
- Hell or High Water Clause
- This is a provision in a lease agreement which indicates
the lessee is required to pay the lease payment for the
entire term of the lease. Problems encountered by the
lessee with the leased property are not valid reasons for
not making lease payments.
- Interim Rent
- Rent paid for an interim period of time. Many leases
begin at the start of a period such as the first of the
month. If leased property is received and a certificate
of acceptance is signed prior to that date, often there
is an interim period between the acceptance and the start
of the first lease rental. This period of time is called
the interim term during which the interim rent is paid.
The interim rent is generally calculated as a percent of
the standard monthly rent prorated over the number of
days in the month the lessee has use of the leased
property.
- Investment Grade Credit
- Generally refers to a lessee of high credit standing.
Technically, an investment grade credit is a company
rated highly by one of many recognized credit agencies
such as Standard & Poor's.
- Late Charges
- A contractual financial penalty that is imposed when the delinquency of a payment due exceeds the grace period.
- Lease
- A contract giving the lessee the right to use the leased
property for a period of time.
- Lease Cost
- The purchase price, which may include sales tax.
- 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. 0.0360x$5,000=$180 per month)
- Lease Line
- A line of credit similar to a bank line of credit. It
allows the lessee to easily add additional leased
property under the same terms and conditions without
negotiating additional agreements.
- Lease Payment
- Amount due, excluding separately stated sales tax on
LPI's invoice, for the period.
- Lease Rate
- The interest rate charged on the lease.
- Lease Rate Factor
- This is a percentage which when multiplied by the cost
provides a periodic rental. It is a helpful number when
used by either a sales person or the lessee. In the event
the cost of the leased property is either not exactly
known or may change, having the lease rate factor allows
a quick recalculation of a lease payment when that number
becomes known.
- Lease Term
- The fixed term of the lease.
- Lessee
- The user of leased property under the lease.
- Lessor
- Depending on the type of lease, either the owner of the
leased property or the owner of a security interest in
the leased property.
- Letter of Credit
- A specific arrangement between a lessee and one of its
banks. The bank agrees in the event of a defined event,
the lessor can look to the bank to make payment instead
of the lessee. This is similar to a security deposit in
that it is one way for a lessor to insure that it will be
paid under a lease.
- Master Lease
- The primary document between the lessor and lessee
containing all the general terms and conditions for
leasing. Individual leases can then be relatively short
and incorporate the master lease by reference. It is a
very convenient administrative document so that once
agreed, legal terms and conditions never need to be
negotiated again.
- Middle Market Credit
- A lessee without an investment grade credit rating, but
generally with sales greater than $50 million annually.
- Municipal Lease
- Same as a capital lease except that the lessee is a
public entity. Although the product and features are
identical, the legal documentation is different because
of the unique status of public entities.
- Net Lease
- Any lease where all costs in connection with the use of
the leased property are paid by the lessee and are not
part of the periodic lease payments. For instance,
maintenance, insurance and taxes are paid directly by the
lessee. Capital leases are generally net leases.
- 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.
- 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's or seller's balance sheet. A lease is considered off-balance sheet to the lessee when the agreement is not a capital lease under the Financial Accounting Standards Board Statement #13.
- Operating Lease
- Another accounting classification for a lease. A lease
that does not meet the criteria for a capital lease is an
operating lease. With an operating lease, the lessor is
generally taking a risk that at the end of the term the
lessee with either purchase the leased property, renew
the lease, or the leasing company can remarket the leased
property for its residual value.
- Personal Guaranty
- The guarantee of someone to be individually responsible
for the obligations under the lease. Generally for
Subchapter S closely held companies and small businesses,
a leasing company may ask for a personal guaranty as a
way to insure that the lease payments will be made.
- Prime
- A rate of interest that banks charge to their most creditworthy customers.
- Progress Payment Loan
- LPI makes all milestone payments required by the software
vendor until all software, equipment, customization,
training, installation and conversion has been provided
by the software vendor. This product is generally used
with larger transactions that require milestone payments
over a short time between three months and 18 months.
- Purchase Option
- Option to purchase leased property at the end of the
lease term.
- Refundable Security Deposit
- An amount paid by a lessee to provide extra protection to
the lessor to insure that the lessee will pay its
obligations under the lease.
- Remarketing
- The process of selling or re-leasing leased property
which has been returned to the lessor either at the end
of the term or as a result of a default in lease.
- Remarketing Fee
- A fee paid for selling or re-leasing leased property.
- Rent Holiday
- A period of time during which a lessee is not required to
pay rent.
- Residual Value
- The value of leased property at the end of the lease
term.
- Sale-Leaseback
- A transaction which involved the sale of property by the
lessee to the lessor and a lease of the property back to
the lessee.
- Sales/Use Tax
- A state tax on leased equipment based on the amount of the monthly lease payment or the lease cost or the lease cost.
- Security Interest
- An interest in property that is acquired for purpose of
securing payment of a lease obligation. A security
interest allows the holder of the security interest to
obtain the property in the event of default and gives the
holder additional rights in the event of bankruptcy.
- Spread
- The difference between funding costs and the rate of
return to the lessor on a lease.
- Step Down Lease
- Another variant of the “Step Rental Lease”. A
lease where the lease payments decrease over the term of
the lease.
- Step Rental Lease
- A lease where the rent may change during the term of the
lease. The change is known at lease inception and is
agreed by both the lessor and the lessee. Often a step
rent lease allows the lessee to pay less initially and
more later in the term.
- Step Up Lease
- Similar to, again, a “Step Rental Lease” and a
“Step Down Lease” except the lease payment is
increased during the term of the lease.
- Stipulated Loss Value
- This is a term in a lease requiring the lessee to pay the
value of the leased property in the event there has been
some type of damage or destruction to the leased
property.
- Term
- Generally you can lease software over 12, 24, 36, 48 or
60 months.
- Termination Date
- Date the term of the lease ends.
- Vendor
- An entity that provides leased property to customers.
- Vendor Leasing
- A working relationship between a leasing company and a
vendor to provide leasing to the vendor’s customers.
In some sense, the leasing company is working as an
extension of the vendor providing credit checking,
billing and collecting documentation, and customer
service. The leasing company, generally, is accepting the
credit risk.
- Wire Transfer
- The transfer of funds from one party to another
through the Federal Reserve banking system
|
February 27, 2006