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Glossary of Terms Used in Financing


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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.

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.

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.

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.

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.

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.

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.

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.

GUIDELINE LEASE A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.

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.

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.

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.

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.

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.

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.

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.

RESIDUAL VALUE The value of an asset at the conclusion of a lease.

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.

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.

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 programs.

 

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