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COST RECOVERY SYSTEM
(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.
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.
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.
A market segment, generally dominated
by leveraged leases, represented by lease
financing over $2 million.
A company or person who arranges, for
a fee, transactions between lessees and
lessors of an asset.
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.
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
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.
LIFE (Useful Life) The period of time
during which an asset will have economic
value and be usable.
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.
PARTICIPANT The owner participant,
trustor owner, or grantor owner.
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.
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
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.
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
LEASE A lease written under criteria
established by the IRS to determine the
availability of tax benefits to the lessor.
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.
CLAUSE A clause in which the lessee
indemnifies the lessor from loss of tax
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.
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 (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
The user of the equipment being leased.
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
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.
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.
MARKET A market segment generally
represented by financing under $2 million
and dominated by single investor leases.
LEASE A lease wherein payments to
the lessor do not include insurance and
maintenance, which are paid separately
by the lessee.
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.
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.
The leasing company, investment banker,
or broker who arranges a leveraged lease.
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.
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.
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.
VALUE The value of an asset at the
conclusion of a lease.
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.
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.
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.
LEASING Transactions under $100,000,
typically using conditional sale leases
or single investor true leases.
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.
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
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.
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.
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 programs.