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Why
a Leasing Glossary?
Leasing is a
unique financial tool that provides important benefits for
both the equipment dealer and the company or individual
needing to acquire new equipment.
As with many specialized fields, some terminology has
evolved that is unique to this industry. In addition, a
number of fairly common financial terms have a somewhat
different meaning when applied to leasing.
The goal of this glossary is to help insure that you will be
a knowledgeable user of leasing through ready access to its
technical "language."
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
lessor
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 or partnership this is the owner or a
partner. In a corporation, it's a corporate officer.
Amortization
- The
process of allocating a portion of a leased asset's value to
business expense over the periods benefited.
Automated
Clearinghouse (ACH) -
A system used to electronically transfer funds through a
clearinghouse facility directly into the payee's bank
account. A direct deposit.
Bankruptcy
(Chapters 7, 11 and 13) -
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 charge in interest rate equal to one
hundredth of one full percent of interest.
Broker
- A
company or person who arranges transactions between lessees
and lessors for a fee.
Buy-out
- The
purchase of leased equipment by the lessee during the term
of the lease.
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 lessee term is equal to 75 percent or
more of the estimated economic life of the property
(exceptions for used property leased toward the end of it's
useful life); or (d) the present value of 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 Standards 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 end of the
lease.
Collateral
- Any
property designated as security for the payment of a debt or
for 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)
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
cooperation into the lease. This document should be
certified by the corporate secretary or assistant secretary
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 at some definite future date.
Credit
Bureau Report
- A report from a credit service, such as TRW or Equinox,
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, e.g. credit bureau
reports, Dun and Bradstreet reports, bank and trade
references, etc.)
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 that reflects the "using up" of the
service life of equipment.
Discharged
in Bankruptcy -
Order of bankruptcy court which releases the borrower from
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. (See U.C.C.)
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 compiles and provides a
variety of information relating to the management, operating
trends and credit worthiness of business organizations for a
fee.
Estimated
Economic Life -
The expected period of time during which the 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.
Executor
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 for excample, a lessor is
buying the equipment for "re-sale" as would a
vendor/supplier, or a lessee may be tax-exempt due to
non-profit status or because it is a bank.
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 or open bidding.
Finance
Lease -
General term applied to most types of equipment leases.
Typically, a finance lease is a full-layout, 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-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 is filed by the secured party or
lessor with the secretary or other appropriate public
office, it becomes public record and protects 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 investment.
Guarantor
- A
person or business promising to perform all of the lessee's
obligations - including making payments should the lessee
fail to do so.
Guaranty
- A
written promise by one party to perform some duty or pay a
debt if another party should fail to do so.
Guarantee
- An agreement to obligate one's self 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.
Insurable
Value -
The value of the leased equipment that is to be insured by
the lessee.
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 cooperation.
IRS Form
1040 -
Tax return form for an individual
Judgement
- A
court decision against person, persons or an entity that
grants a specific amount of money or other relief to another
party.
Landlord
Waiver -
An acknowledgement 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 of 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
that is multiplied by the equipment cost (e.g. 0.0360 x
$5,000=$180.00)
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 (.0360x$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 is a letter from 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 a 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.
Master
Lease -
Continuing lease agreement which provides for property
becoming subject to the 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.
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.
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 -
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.
Parent
Company -
A corporation which owns the controlling voting stock (over
50%) in another corporation.
Partnership
- An association of two or more persons as co-owners of a
business operated for profit. (In a General Partnership,
partners share responsibility for any debts; in a Limited
Partnership, debt liability is limited to the amounts
invested by the partners.)
Personal
Credit -
The credit a retailer, bank or finance company extends to an
individual in connection with the sale of goods or borrowing
of funds.
Present
Value -
Refers to today's value of money to be received in the
future. (For example, how much is the right to receive
$10,000 in five years worth to you today?)
Prime
- A rate of interest that banks charge to their most
creditworthy customers.
Proprietorship
- A
non-corporation business owned by one person.
Purchase
Option -
A provision in the lease which gives the lessee the right to
purchase the equipment at the end of the lease for an amount
specified or its future fair market value.
Recourse
- An
agreement between the lessor and the seller which allows the
lessor to take recovery action against the seller would the
lessee default.
Rental
(Use) Tax
- Many states charge a "use" tax in lieu of a sales tax when
equipment is leased. 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.
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.
Residual
Value -
The estimated wholesale market value of the equipment at the
conclusion of the lease.
Robert
Morris Association (RMA) -
A trade association of bank credit people who set
thestandards for bank credit information.
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.
Standard
Industrial Classification (S.I.C.) -
The federal system of coding businesses according to
industry type.
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.
Step
Payment Lease
- A lease in which the monthly payment either increase
(step-up) or decreases (step-down) to a pre-determined
amount over the term of the lease.
Subsidiary
- A
company owned by another corporation.
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 -
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.)
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.
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.
3 - The
form used to formally terminate the record of security
interest in a piece of commercial equipment.
Useful
Life -
The period of time during which an asset will have economic
value and be usable. (Also called "economic life")
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.
Workout
-
Process by which a lessor, following unsuccessful collection
efforts, attempts to compromise or otherwise settle the
delinquent account prior to taking legal action.
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