Glossary

A
ADVANCE RENTALS - the periodic rental payments which are collected by the lessor at lease inception and applied to the rentals due under the lease. Advance Rentals are applied to the payments that you owe, Security Deposits are not.

B
BARGAIN PURCHASE OPTION - a provision of the lease or an agreement which is separate from the lease that allows the lessee to purchase the leased asset for a predetermined price which is lower then the fair market value of the asset. This option is normally exercised at the end of the lease and provided the lessee has complied with their responsibilities under the lease.

BROKER - a person or entity that acts as a financial intermediary between the end-user, lessee, and a financial institution, lessor.

C
CAPITAL LEASE - a type of lease which is treated as a purchase on the lessee's books. Generally capital leases can be identified by one of the following characteristics:

• The lease term is equal to or greater than 75% of the estimated useful life of the leased asset.


• Title to the asset is automatically transferred to the lessee at the end of the term.


• Title to the asset can be obtained by the lessee for a bargain option at the end of the lease term.


• The present value of the required lease payments are equal to or the estimated fair market value of the asset at lease inception.

D
DELIVERY AND ACCEPTANCE - a document executed by the lessee indicating that the asset has been delivered, is as appears on the lease and operates to the lessee's satisfaction and manufacturer's specifications. This is generally the final document executed by the lessee and signals the lessor that they may remit payment to the vendor.

E
EQUIPMENT SCHEDULE - a schedule signed by the lessee which becomes part of the lease agreement. This schedule will identify all assets being leased and will generally include model and serial numbers. It should be identical to the vendor's invoices and will become the defining document in the event of an asset dispute.

F
FAIR MARKET VALUE PURCHASE OPTION - a provision of the lease or an agreement which is separate from the lease that allows the lessee to purchase the leased asset for its true market value. This value is generally determined by an independent third party knowledgeable in such matters. This option is normally exercised at the end of the lease and provided the lessee has complied with their responsibilities under the lease.

FINANCE LEASE - a type of lease which requires the lessee to remit payment of the rentals which total the cost of the asset plus the lessor's required profit. It is non-cancelable, requires the lessee to pay all taxes and other assessments, requires the lessee to provide insurance, and to maintain the asset according to the manufacturer's guidelines. It is anticipated that the lessee will acquire title to the asset at the conclusion of the lease term.

FULL PAYOUT LEASE - a lease in which the total periodic payments exceed the cost of the asset being leased.

H
HELL OR HIGH WATER CLAUSE - an aspect of the lease agreement which requires the lessee to honor all conditions of the lease regardless of any other fact.

L
LEASE - a document executed by the owner of the asset, the lessor, and the user of the asset, the lessee, which details the terms of the lessee's usage and payment.

LESSEE - the user of the asset and party to the lease.

LESSOR - the owner of the asset and party to the lease

M
MASTER LEASE - a type of lease in which the parties detail the terms and conditions under which leased asset will be used, but do not address the periodic payment requirements. These requirements are addressed in a separate document which becomes an addendum to the lease. A Master Lease may have several addenda each one dealing with a separate asset acquisition.

O
OPEN-END LEASE - a type of lease which contains most of the characteristics of a conditional sales contract and which contains a guarantee from the lessee that the lessor will realize a minimum amount from the sale of the leased asset at the end of the lease term.

OPERATING LEASE - a type of lease which is not a CAPITAL LEASE. This lease, from a financial reporting perspective, has the characteristics of a true rental agreement and meets certain criteria established by the FASB (Financial Accounting Standards Board). OPERATING LEASES are not required to be reflected on the financial statements of the lessee. The criteria for qualifying as an OPERATING LEASE are:

• Title to the leased assets may not automatically transfer to the lessee at any time during the lease term or subsequent to the lease term.


• There is no provision for a bargain purchase option.


• The lease is non-cancelable for its term and that term is less than 75% of the economic life of the leased asset.


• The present value of the total or minimum required lease payments when discounted at the implicit interest rate in the lease is less than 90% of the leased asset's fair market value at inception.

P
PURCHASE OPTION - a document or provision of a lease by which the lessee is granted the right to purchase the leased asset at the end of the lease term.

PUT OPTION - a document executed by the parties in which the lessee commits to purchase the leased asset for a predetermined amount at the conclusion of the lease term. As with any other option to purchase, if the lessee defaults in their obligations as defined by the lease, the lessor may terminate the lessee's right to purchase.

R
RESIDUAL VALUE - the value of the leased asset at the end of the lease term.

S
SALE-LEASEBACK - a type of lease in which an asset that is owned by the lessee is sold to the lessor and then leased back to the lessee. This type of lease is generally used when the lessee desires additional cash for their business. When a Sale-Leaseback is used it is likely that the lessee will have to pay income tax on the difference between the sale price of the equipment and the depreciated value of that equipment on the lessee's books. The lessee will also have to pay a sales or use tax.

SECURITY DEPOSIT - funds which are held by the lessor as additional collateral to insure performance. Security Deposits may be forfeited by the lessee in the event of a default.

T
TERM - the agreed upon number of months the lease will run or the number of periodic payments.

TRAC LEASE - a type of lease which is tax oriented and used exclusively for titled motor vehicles. TRAC derives its name from a clause in the contract which is the terminal rental adjustment clause. This clause adjusts the residual value of the vehicle based upon usage.

TRUE LEASE - a type of lease which qualifies as a lease under the guidelines established by the Internal Revenue Code.

U
UNIFORM COMMERCIAL CODE FINANCING STATEMENT (UCC-1) - a document which is filed with the Secretary of State and in some cases other public agencies which describes for the public record the nature of the relationship between the lessee and the lessor. This filing also describes the asset being leased and is generally regarded as the defining record in the event of a dispute as to the rightful owner of specific assets.