Leasing Terminology

Definitions of Equipment Leasing

Acknowledgment - A formal statement before a notary public that a person has executed an attached document.

Agent - A person who has been given legal authority by a third party to act for them in dealings with others.

All Risk Insurance - Coverage for all risks other than those specifically excepted by the policy.

Authorized Signature - A signature by a person authorized by a company to obligate the company on a long-term lease. An authorized signer will usually be sustained by the Corporate Resolution which specifies who can sign and what their responsibilities may be.

Basis Points - One one-hundredth of one percent is one basis point. One-hundred basis points = one percent.

Bill of Sale - The agreement document giving the lessee title to the equipment upon exercising of purchase option. Also used in sales leasebacks to convey itile of equipment from lessee to lessor at time the lease is initiated.

Built-in Residual - Building in or guaranteeing a residual amount in the rate structure of a lease. This is typical with low residual eqyuipment to assure the lessor a proper residual amount and allows most any type of eguipment to be leased.

Cash Flow - The cash that flows into and out of a company as a result of doing business. Generally after tax earnings plus "non-cash" items such as depreciation and amortization expenses equals "Cash Flow" for purposes of credit analysis.

Closed End Lease - A lease that allows the lessee to return the equipment at the end of the lease term without further liability.

Commitment Fee - A fee charged from the time of a commitment to the final takedown. This fee usually only applies to large transactions with prolonged takedowns. If full lease is not utilized, then lessor may retain an unapplied portion of the fee as consideration for the line.

Commitment Letter - Letter prepared by the lessor to spell out terms and conditions between lessee and lessor for a lease transaction.

Conditional Sales Contract - A transaction that is recognized by law as providing the seller (or contract holder) with full proprietary rights in the underlying asset until the buyer (debtor) has satisfied all the terms and conditions of the contract, at which time title to the asset passes automatically from the seller to the buyer. For accounting purposes, the buyer will show an asset and corresponding liability on the balance sheet, the same as most finance leases.

Corporate Seal - A registered mark of the corporation which may be applied to a legal document such as a lease, only by the secretary or assistant secretary of the corporation. Spells out the name, date, and state of incorporation. May be required by some states and not in others. Often affixed to the corporate resolution to lease.

Default - A default occurs when any of the lease terms are not met and are not corrected within the time specified in the lease.

Delivery and Acceptance Certificate (D&A) - The document the leasing company requires from the lessee as confirmation that the equipment was delivered, is the equipment requested and that it is in good wroking order. Sometimes referred to as D&I (Delivery & Installation).

Depreciation - A method of reducing the value of an asset over a period of time for both financial statement and tax purposes. The reduction for tax purposes is an expense which reduces taxable income.

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/supplier, while a lessee may be tax-exempt for other reasons, i.e., a nonprofy enity or a bank.

Fair Market Value (F.M.V.) - The market value of the leased aset at the termination of the lease assuming a willing buyer and a willing seller.

Financing Statement (or UCC-1) - A standardized form recorded with the Secretary of State and/or County Clerk to perfect a security interest under the Uniform Commercial Code by notification to all interested parties. Used with financing leases (not true leases) to protect lessor's interest in the equipment.

Floating Rental Rate - Rental which is subject to upward or downward adjustments during the lease term. If the prime interest rate or other index changes during the term of the lease the rental rate may change to reflect this.

Full Payout Lease - A lease in which the cash flows will return the lessor the full equipment cost plus a satisfactory return over the lease term.

Funding - The point in time when the equipment is delivered, accepted, and paid for by the lessor and the lessee is "taking-down" a portion of a lease line.

Institutional Investors - Investors such as banks, insurance companies, trusts, pension funds, foundations, and educational, charitable, and religious institutions.

Insured Value - A schedule included in a lease which states the agreed value of equipment at various times during the term of the lease, and establishes the liability of the lessee to the lessor in the event the leased equipment is lost or rendered unusable for any reason during the term of the lease. Sometimes called stipulated loss value.

Landlord Waiver - Same as a mortgagee waiver except signed by the landlord allowing lessor to remove the equipment in case of default or at the end of the lease.

Lease - An agreement granting or letting the possession of land, buildings, machinery, personal proerty, etc., for a fixed or indeterminate period, for a stated consideration, usually known as rent.

Lease Rate (Service Fee) - These are terms used in determining what the rentals equate to in Simple Interest or nominal interest equivalents excluding depreciatation and residuals.

Leasing Line - An amount of funds set aside by the lessor for a lessee to use over a commitment period.

Lessee - A party who makes use of a personal property owned by another party (the lessor) and pays the lessor, usually in the form of rentals, for that use.

Lessor - Company or leasing entity that is legal owner of the leased equipment.

Level Payments - Equal payments over the term of the lease.

Leverage - Amount borrowed. A lease sometimes is referred to as 100 percent leverage for the lessee.

Master Lease - An open-ended type agreement under which a lessee obtains the use of property, and can add additional equipment periodically at rates to be negotiaited and through the use of "schedules", under the basic terms of the original instrument. Eliminates signing new leases as additional equipment is leased.

Off-Balance Sheet Financing - Unlike the traditional methods of financing, operating lease obligations are not capitalized, thus improving balance sheet ratios. Leases are generally footnoted.

One Hundred Percent Financing - Because no compensating balances or down payemnts are required, leasing may provide 100% financing.

Personal Property - From a lessor's standpoint, basically any type of "leaseable" equipment(as opposed to real property).

Present Value - What one future payment of series or payments is worth today, i.e., if a friend agrees to pay you $1.00 at some future date, how much would you give him today to realize a specific rate of interest.

Progress Payments (Interin Financing) - Payments advanced to a manufacturer while equipment is being manufactured and until final scheduling when permanent funds will be advanced. Purchase Option - Some leases allow a lessee to purchase the equipment at the end of the lease term for Fair Market Value of a pre-determined percentage amount.

PUT - An option one person has to sell an asset to another person at a set price at some established point in time, in the future. In lease agreements, a lessor sometimes negotiates an option to sell leased equipment to the lessee or to some third party at an established price at the end of the lease term. This is to protect the lessor's exposure on the residual value of the leased equipment at the end of the lease term. A lessor may also negotiate to put to a third party as a hedge against future loss on the sale of the residual.

Recourse Agreement - An agreement with a vendor whereby the vendor willpurchase or repurchase the lessor's interest in a lease, generally upon demand, after default of the lessee. Generally, the lease must be in default sixty to ninety days and a reasonable amount of collection effort exerted by the lessor. "Recourse" is more common in the finance industry and not in leasing.

Renewal Option - After the initial lease term, a lessee may have the option to renew, or extend, the lease for estimated fair market rental values or as otherwise agreed upon.

Repurchase Agreement - A common arrangement in the finance business which is an agreement that the vendor will buy back the equipment at a stipulated price in the event of default and/or repossession, but only in the event the equipment can be located and made available to the vendor.

Residual Value - The value of the leased property at the end of the lease term. Lessor retains title of the equipment unless a purchase option is exercised, and this residual is important in the overall profits of the lessor.

Sale Leaseback - An arrangement whereby a company sells fixed assets, currently owned, for cash to a lessor and leases the same from the lessor. Converts a fixed asset to cash. Selling price can be appraised value or book value, acceptable to the lessor. Book value may be best for the lessee to eliminate taxes.

Special Purpose Equipment - Equipment which is unique and has no relative market value to anyone other than the original user.

Stream Rate - The lessor's yield or lessee's cost based upon the equipment cost and rental payment exclusive of any fee's, tax benefits, deposits or residual value.

TRAC Lease - A lease for motor vehicles combining the benefits of a true lease and a conditional sales agreement due to the inclusion of "terminal rental adjustment clause". The TRAC Lease enjoys true lease tax treatment despite the terminal rental adjustment clause at lease end which may require the lessee to pay the difference between the actual and projected value of the vehicle.

Useful Life - The period of time during which an asset will have economic value and be useable. Useful life of an asset is sometimes called the economic life of the asset.

Uniform Commercial Code (U.C.C.) - A standardized program and metod of administering, legalizing, and recording lien instrumrnts adopted now by all states.

Vendor - Supplier of equipment who sells the equipment to the lessee.

Working Capital - The difference between current assets and current liabilities, and generally what leasing is desined to save a company.