Advance Lease Payments
One or more lease payments required to be paid to the lessor at the beginning of the lease term. Lease structures commonly require at least one payment to be made in advance.
All-Risk Insurance
An insurance policy which covers an insured against loss from any peril other than those specifically excluded by the terms of the policy.
Bargain Purchase Option
A lease provision allowing the lessee, at its option, to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.
Business Lease
A lease in which the lessee has entered into the lease transaction for business and commercial purposes; commercial lease.
Capital Lease
From a financial reporting perspective, a lease that has the characteristics of a purchase agreement, and also meets certain criteria established by the Financial Accounting Standards Board Statement No. 13 (FASB 13). Such a lease is required to be shown as an asset and a related obligation on the balance sheet.
Closed-End-Lease
A lease that does not contain a purchase or renewal option, thereby requiring the lessee to return the equipment to the lessor at the end of the initial lease term.
Co-Lessee
An additional lessee to a lease. The lease will usually provide that the co-lessee is jointly and severally liable on the lease with the lessee.
Commercial Lease
A lease in which the lessee has entered into the lease transaction for business or commercial purposes; business lease.
Conditional Sales Contract
An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes. This entitles the lessee to the tax benefits of ownership, such as depreciation , but the lessee does not become the free and clear owner of the asset until all terms and conditions of the agreement have been satisfied.
End-Of-Term Options
Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common options include purchasing the equipment, renewing the lease or returning the equipment to the lessor. Options are sometimes given as an amendment to the lease documents and are not made part of the actual lease document.
Fair Market Value
The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm's length, between a willing buyer and a willing seller, for the equivalent property and under similar terms and conditions. Simply, the actual market value of the leased asset.
Financing Statement
A notice of security interest filed under the Uniform Commercial Code (UCC). Generally filed with the State's Secretary of State and/or the appropriate county office.
Full-Payout Lease
A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
Full-Service Lease
A lease that includes many additional services such as maintenance, insurance and property taxes that are paid by the lessor, the cost of which is built into the lease payments.
Funding Sources
A party who provides financing for a lease transaction. The term is frequently used by brokers in referring to lessors, but it can also be used by lessors in referring to those parties who provide lessors with the funds lessors use to purchase equipment.
Guarantor
One who is obligated on a guaranty agreement.
Independent Lessor
A type of leasing company that is independent of any one manufacturer, and, as such, purchases equipment from various unrelated manufacturers or dealers. The equipment is then leased to the end-user or lessee. This type of lessor may also be called a third-party lessor.
Landlord Waiver
A document in which a landlord acknowledges that certain property on its tenant's premises is owned by a third party (the lessor) and is leased to the tenant and in which a landlord agrees to recognize and not interfere with the lessor's rights respecting the lessor's property.
Lease
A transaction in which use and possession but not title to tangible personal property is transferred for a consideration.
Lease Agreement
The contractual agreement between the lessor and the lessee that sets forth all the terms and conditions of the lease.
Lease Broker
An entity that provides one or more services in the lease transaction for its own portfolio. Such services include finding the lessee, working with the equipment manufacturer or dealer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor or equity participant in the lease transaction. The lease broker is also referred to as a packager or syndicator.
Lease Line
1. A pre-approved amount of borrowing allowed a lessor by a lessor's financier. The lease line is used for acquiring equipment for lease and is not used for financing a lessor's operational expenses.
2. A pre-approved amount of leasing allowed a lessee by a lessor.
Lease Payment
The periodic payment made during the lease term. Such payments are usually of an even amount but it is not uncommon for a lease to have "gaps" in the payment amount, or to be otherwise contoured to fit, for example, the seasonal fluctuations of a lessee's income. Generally, leasing may provide for more creativity in this regard than a loan.
Leveraged Lease
A specific form of lease involving at least three parties: a lessor, lessee and funding source. The lessor borrows a significant portion of the equipment cost on a nonrecourse basis by assigning the future lease payment stream to the lender in return for up-front funds (the borrowing). The lessor puts up a minimal amount of its own equity funds (the difference between the equipment cost and the present value of the assigned lease payments) and is generally entitled to the full tax benefits of equipment ownership.
Loss Payee
A party entitled to receive proceeds from an insurance settlement arising in connection with a covered casualty or loss.
Master Lease
A lease line of credit that allows a lessee to obtain additional leased equipment under the same basic lease terms and conditions originally agreed to, without having to renegotiate and execute a new lease contract with the lessor. Each new piece of equipment is listed on a separate schedule, and the specific pricing, terms, and conditions for that schedule are dependent upon the policies of the lessor, the terms and conditions of the Master Lease, and the cost of the equipment.
Mortgagee's Waiver
A document in which a mortgagee acknowledges that a certain property on its mortgagor's premises is owned by a third party (the lessor) and is leased to the mortgagor and in which the mortgagee agrees to recognize and not interfere with the lessor's right respecting its property.
Municipal Lease
A conditional sales contract disguised in the form of a lease available only to municipalities, in which the interest earnings are tax-exempt to the lessor.
Net Lease
A lease in which all costs in connection with the use of equipment, such as maintenance, insurance and property taxes, are paid for separately by the lessee and are not included in the lease rental paid to the lessor.
Open-End Lease
A lease in which the lessee guarantees the amount of the future residual value to be realized by the lessor at the end of the lease. If the equipment is sold for less than the guaranteed value, the lessee must pay the amount of any deficiency to the lessor. This lease is referred to as open-end because the lessee does not know its actual cost until the equipment is sold at the end of the lease term.
Operating Lease
From a financial reporting perspective, a lease that has the characteristics of a usage (rental) agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee. The term is also used to refer to leases in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. The criteria for meeting FASB 13 classification of an operating lease are:
1. Title for the equipment does not automatically transfer to the lessee during, or by the end of, the lease term.
2. There is no bargain purchase price.
3. The non-cancelable lease term is lesser than 75% of the asset's economic life.
4. The present value of the minimum lease payments, discounted at the lessor's interest rate implicit in the lease, is less than 90% of the leased asset's FMV.
Option To Purchase
A right to purchase property at a future date: a call.
Payments In Advance
A payment stream in which the lease payment is due at the beginning of each period during the lease.
Payments in Arrears
A payment stream in which the lease payment is due at the end of each period during the lease.
Payoff
The amount which will retire a debt or other obligation at any given point in time. The term has commonly been used in reference to both loans and non-cancelable leases.
Purchase Option
An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term for either a fixed amount or at the future fair market value of the leased equipment.
Put Option
An option in a lease in which the exercise of the option is at the lessor's, not the lessee's, discretion.
Residual
The value of the lease property at the end of the lease term as estimated at the time the lease is executed; term value. Although the terms "residual value" or "term value" are sometimes used in reference to the actual value of the property at the conclusion of the term, the term "realized value" is the more commonly used and more appropriate term for the actual value of the property at the conclusion of the lease term.
Sale-Leaseback
A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.
Terminal Rental Adjustment Clause (TRAC)
A lessee guaranteed residual value for vehicle leases (automobiles, trucks or trailers), the inclusion of which will not, in and of itself, disqualify the tax lease status of tax-oriented vehicle leases.
Third Party Lessor
An independent leasing company, or lessor, that writes leases involving three parties: (1) the unrelated manufacturer or dealer, (2) the independent lessor and (3) the lessee.
TRAC Lease
A motor vehicle lease with a terminal rental adjustment clause (i.e., an open-end lease) which meets the requirements of section 210 of TEFRA (as amended by TRA).
True Lease
Another term for tax lease where, for IRS purposes, the lessor qualifies for the tax benefits of ownership and the lessee is allowed to claim the entire amount of the lease rental as a tax deduction.
UCC
Uniform Commercial Code, a code of commercial law enacted in all states.
Venue
The physical location, or specifically the court, which will hear a legal dispute between parties.
