A
ACCELERATED COST
RECOVERY SYSTEM (ACRS) (Modified)
The Tax
Reform Act of 1986 established the modified ACRS tax appreciation system
prescribing depreciation methods for each ACRS class in lieu of statutory
tables. Equipment is assigned among 3, 5, 7, 10,15, or 20-year classes
depending on ADR lives.
ALTERNATIVE MINIMUM TAX (AMT)
An alternative, separate tax calculation based on the taxpayer's regular
taxable income, increased by the taxpayer's preferences for the year.
The resulting amount is called the alternative minimum taxable income
(AMTI). After certain exemptions and offsets, the taxpayer determines
its AMT and is required to pay the larger of the regular tax or alternative
minimum tax. Among the preferences that can increase the taxpayer's AMTI
is the accelerated portion of depreciation, thereby making it more likely
that a taxpayer that buys equipment may be subject to the AMT rather than
to regular tax.
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B
BARGAIN PURCHASE
OPTION
A lease provision allowing the lessee, at its option, to purchase the
equipment for a price predetermined at lease inception, that is substantially
lower than the expected fair market value at the date the option can be
exercised.
BIG-TICKET
A market segment, generally dominated by leveraged leases, represented
by lease financing over $2 million.
BROKER
A company or person who arranges, for a fee, transactions between lessees
and lessors of an asset.
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C
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 any one of 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 lease 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 its 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 less related investment tax credits retained
by the lessor. (Also see finance lease.)
CERTIFICATE OF ACCEPTANCE (Delivery and Acceptance)
A document whereby the lessee acknowledges that the equipment to be leased
has been delivered, is acceptable, and has been manufactured or constructed
according to specifications.
CONDITIONAL SALE
A situation under the income tax provisions whereby the actual user is
seen as the owner of an asset for availing the capital allowances. In
India, a conditional sale will include the Hire Purchase transaction.
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D
DIRECT FINANCING
LEASE (Direct Lease)
A non-leveraged lease by a lessor (not a manufacturer or dealer) in which
the lease meets any of the definitional criteria of a capital lease, plus
certain additional criteria.
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E
ECONOMIC LIFE (Useful
Life)
The period of time during which an asset will have economic value and
be usable.
EFFECTIVE LEASE RATE
The effective rate (to the lessee) of cash flows resulting from a lease
transaction. To compare this rate with a loan interest rate, a company
must include in the cash flows any effect the transactions have on federal
tax liabilities.
EQUITY PARTICIPANT
The owner participant, trustor owner, or grantor owner.
EQUIPMENT SCHEDULE
A document that describes in detail the equipment being leased. It may
also state the lease term, commencement date, repayment schedule and location
of the equipment.
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F
FAIR MARKET PURCHASE
OPTION
An option to purchase leased property at the end of the lease term at
its then fair market value. The lessor does not have the ability to retain
title to the equipment if the lessee chooses to exercise the purchase
option.
FIRST AMENDMENT LEASE
The first amendment lease gives the lessee a purchase option at one or
more defined points with a requirement that the lessee renew or continue
the lease if the purchase option is not exercised. The option price is
usually either a fixed price intended to approximate fair market value
or is defined as fair market value determined by lessee appraisal and
subject to a floor to insure that the lessor's residual position will
be covered if the purchase option is exercised.
If the purchase option is not exercised, then the lease is automatically
renewed for a fixed term (typically 12 or 24 months) at a fixed rental
intended to approximate fair rental value, which will further reduce the
lessor's end-of-term residual position. The lessee is not permitted to
return the equipment on the option exercise date. If the lease is automatically
renewed, then at the expiration of that initial renewal term, the lessee
typically has the right either to return the equipment without penalty
or to renew or purchase at fair market value.
FINANCE LEASE (See
Single Investor Lease.)
Typically, a finance lease is a full-payout, noncancellable agreement,
in which the lessee is responsible for maintenance, taxes, and insurance.
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.
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G
GUIDELINE LEASE
A lease written under criteria established by the IRS to determine the
availability of tax benefits to the lessor.
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H
HELL-OR-HIGH-WATER
CLAUSE
A clause in a lease that reiterates the unconditional obligation of the
lessee to pay rent for the entire term of the lease, regardless of any
event affecting the equipment or any change in the circumstances of the
lessee.
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I
INDEMNITY CLAUSE
A clause in which the lessee indemnifies the lessor from loss of tax benefits.
INDENTURE OF TRUST (Indenture)
An agreement between the owner trustee and the indenture trustee: The
owner trustee mortgages the equipment and assigns the lease and rental
payments under the lease as security for amounts due to the lenders. Same
as a security agreement or mortgage.
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L
LEASE
A contract in which one party conveys the use of an asset to another party
for a specific period of time at a predetermined rate.
LEASE RATE (Rental Payment)
The periodic rental payment to a lessor for the use of assets. Others
may define lease rate as the implicit interest rate in minimum lease payments.
LESSEE
The user of the equipment being leased.
LESSOR
The party to a lease agreement who has legal or tax title to the equipment,
grants the lessee the right to use the equipment for the lease term, and
is entitled to the rentals.
LEVERAGED LEASE
In this type of lease, the lessor provides an equity portion (usually
20 to 40 percent) of the equipment cost and lenders provide the balance
on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.
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M
MASTER LEASE
A contract where the lessee leases currently needed assets and is able
to acquire other assets under the same basic terms and conditions without
negotiating a new contract.
MIDDLE MARKET
A market segment generally represented by financing under $2 million and
dominated by single investor leases.
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N
NET LEASE
A lease wherein payments to the lessor do not include insurance and maintenance,
which are paid separately by the lessee.
NONRECOURSE LOAN
In a leveraged lease, the lenders cannot look to the lessor for repayment.
The lender's only recourse is to the lessee and, therefore, the lessee's
credit rating is of prime importance.
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O
OPEN-END LEASE
A conditional sale lease in which the lessee guarantees that the lessor
will realize a minimum value from the sale of the asset at the end of
the lease.
OPERATING LEASE
Any lease that is not a capital lease. These are generally used for short
term leases of equipment. The lessee can acquire the use of equipment
for just a fraction of the useful life of the asset. Additional services
such as maintenance and insurance may be provided by the lessor.
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P
PACKAGER
The leasing company, investment banker, or broker who arranges a leveraged
lease.
PRESENT VALUE
The current equivalent of payments or a stream of payments to be received
at various times in the future. The present value will vary with the discount
interest factor applied to future payments.
PURCHASE OPTION
A provision by which a lessee has the right to purchase the equipment
at the end of the lease. The purchase option may be stated at a specified
amount or at fair market value.
PUT OPTION
The requirement to purchase equipment at a particular time and at a predetermined
price. In a lease transaction, this is a lessor's right to force the lessee
(or some third party) to purchase the equipment at the end of the lease
term. IRS guidelines prohibit put options in tax-oriented leases.
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R
RESIDUAL VALUE
The value of an asset at the conclusion of a lease.
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S
SALE-LEASEBACK
An arrangement whereby equipment is purchased by a lessor from the company
owning and using it. The lessor then becomes the owner and leases it back
to the original owner, who continues to use the equipment.
SALES-TYPE LEASE
A lease by a lessor who is the manufacturer or dealer, in which the lease
meets the definitional criteria of a capital lease or direct financing
lease.
SINGLE INVESTOR LEASE (See Full Payout or Finance Lease.)
A tax-oriented lease whereby the lessor achieves its desired rate of return
via a combination of the rental payments, depreciation, and the fair market
value of the equipment at the end of the original lease term. Because
of the value of the tax benefit, the rental payments will be lower than
for a finance lease.
SMALL-TICKET LEASING
Transactions under $100,000, typically using conditional sale leases or
single investor true leases.
STIPULATED LOSS VALUE
A schedule included in a lease that 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 that the leased equipment is
lost or rendered unusable during the lease term due to a casualty loss.
SYNTHETIC LEASE
A synthetic lease is basically a financing structured to be treated as
a lease for accounting purposes, but as a loan for tax purposes. The structure
is used by corporations that are seeking off-balance sheet reporting of
their asset based financing, and that can efficiently use the tax benefits
of owning the financed asset.
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T
TAX LEASE
A lease wherein the lessor recognizes the tax incentives provided by the
tax laws for investment and ownership of equipment. Generally, the lease
rate factor on tax leases is reduced to reflect the lessor's recognition
of this tax incentive.
TRAC LEASE
A tax-oriented lease of motor vehicles or trailers that contains a terminal
rental adjustment clause and otherwise complies with the requirements
of the tax laws.
TRUE LEASE
A type of transaction that qualifies as a lease under the Internal Revenue
Code. It allows the lessor to claim ownership and the lessee to claim
rental payments as tax deductions.
TRUSTEE
A bank or trust company that holds title to or a security interest in
leased property for the benefit of the lessee, lessor, and/or creditors
of the lessor. A leveraged lease often has two trustees: an owner trustee
and an indenture trustee.
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V
VENDOR LEASING
A working relationship between a financing source and a vendor to provide
financing to stimulate the vendor's sales. The financing source offers
leases or conditional sales contracts to the vendor's customers. The vendor
leasing firm substitutes as the captive finance company of a manufacturer
or distributor through the extension of leasing to customers, provisions
of credit checking, and performance of collections and operational administration.
Also known as lease asset servicing or vendor program.
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