Understanding the words used by leasing companies is very important. If you understand these terms, it will help you in understanding a leasing transactions. We have provided this glossary of terms to provide a clearer understanding of the words used by leasing companies.
Capital Lease-- A specific classification of a lease for accounting purposes. The classification of the lease will determine how the lease is to be accounted for. A lease is accounted for by the lessee as a capital lease if it meets one of the following criteria:
(a) at the end of the lease, the lessee owns the property being leased;
(b) at the end of the lease, the lessee can purchase the property for a bargain purchase option;
(c) the lease term exceeds 75% of the estimated economic life of the leased property;
(d) the present value of all lease payments is equal to 90% or more of the cost of the leased property.
Capped Fair Market Value-- A provision in the lease allowing the lessee to purchase the leased property for its fair market value, but not exceeding a certain amount. The advantage of the cap is that the lessee will know the maximum payment required to purchase the leased property.
Certificate of Acceptance-- A written verification by the lessee that they have received the property to be leased. Most leases begin after the date stated on the certificate of acceptance.
Coterminous-- Two or more leases that end at the same time.
Cross Corporate Guaranty-- A guarantee by one corporation to pay the lease obligations of another corporation. This is simler to a cosignature lease.
Default-- If a lessee does not comply with the terms of the lease, a default occurs. Generally, after a default, the lessor can exercise all of its rights under the lease to repossess the property and seek money damages.
Direct Finance Lease-- Same as a capital lease except this accounting classification only applies to a lessor.
Dollar Buyout-- An option at the end of the lease to buy the leased property for $1.
Fair Market Value-- The technical definition of fair market value is the price a willing buyer will pay a willing seller for leased property on an "as is, where is" basis with both under no compulsion to either buy or sell. In reality, this is a vague term, often creating a question between a lessor and lessee regarding what is the fair market value. Stated another way, what will someone pay for the leased property at the end of a lease.
Fair Market Value Purchase Option-- Similar to a purchase option, this lease term gives the lessee the ability to purchase the leased property at its fair market value at the end of a lease.
Financial Accounting Standards No. 13-- "Accounting for Leases". This book sets forth standards for how parties to a leasing transaction should account for such transaction.
Financial Accounting Standards Board-- This is the group that, on high, dictates the general accounting policy and theory which is to be followed by both internal accountants as well as external auditors.
Financial Statements-- Accounting statements that provide specific information about a companys financial position. They include the Profit & Loss Statement, also known as the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Financial statements can generally be audited by an outside CPA firm or be unaudited and, thus, prepared by the company.
Financing Statement-- This is a document specified under the Uniform Commercial Code, a law applicable in all states. This puts the world on notice that a security interest has been filed against the person on the form listed as the debtor.
Hell or High Water Clause-- This is a provision in a lease agreement which indicates the lessee is required to pay the lease payment for the entire term of the lease. Problems encountered by the lessee with the leased property are not valid reasons for not making lease payments.
Interim Rent-- Rent paid for an interim period of time. Many leases begin at the start of a period such as the first of the month. If leased property is received and a certificate of acceptance is signed prior to that date, often there is an interim period between the acceptance and the start of the first lease rental. This period of time is called the interim term during which the interim rent is paid. The interim rent is generally calculated as a percent of the standard monthly rent prorated over the number of days in the month the lessee has use of the leased property.
Investment Grade Credit-- Generally refers to a lessee of high credit standing. Technically, an investment grade credit is a company rated highly by one of many recognized credit agencies such as Standard & Poor's.
Lease Line-- A line of credit similar to a bank line of credit. It allows the lessee to easily add additional leased property under the same terms and conditions without negotiating additional agreements.
Lease Rate Factor-- This is a percentage which when multiplied by the cost provides a periodic rental. It is a helpful number when used by either a sales person or the lessee. In the event the cost of the leased property is either not exactly known or may change, having the lease rate factor allows a quick recalculation of a lease payment when that number becomes known.
Lease Term-- The fixed term of the lease. Usally 24 to 60 months.
Lessee-- The user of leased property under the lease.
Lessor-- Depending on the type of lease, either the owner of the leased property or the owner of a security interest in the leased property.
Letter of Credit-- A specific arrangement between a lessee and one of its banks. The bank agrees in the event of a defined event, the lessor can look to the bank to make payment instead of the lessee. This is similar to a security deposit in that it is one way for a lessor to insure that it will be paid under a lease.
Master Lease-- The primary document between the lessor and lessee containing all the general terms and conditions for leasing. Individual leases can then be relatively short and incorporate the master lease by reference. It is a very convenient administrative document so that once agreed, legal terms and conditions never need to be negotiated again.
Middle Market Credit-- A lessee without an investment grade credit rating, but generally with sales greater than $50 million annually.
Municipal Lease-- Same as a capital lease except that the lessee is a public entity. Although the product and features are identical, the legal documentation is different because of the unique status of public entities.
Net Lease -- Any lease where all costs in connection with the use of the leased property are paid by the lessee and are not part of theperiodic lease payments. For instance, maintenance, insurance and taxes are paid directly by the lessee. Capital leases are generally net leases.
Operating Lease-- Another accounting classification for a lease. A lease that does not meet the criteria for a capital lease is an operating lease. With an operating lease, the lessor is generally taking a risk that at the end of the term the lessee will either purchase the leased property, renew the lease, or the leasing company can remarked the leased property for its residual value.
Personal Guarantee-- The guarantee of someone to be individually responsible for the obligations under the lease. Generally for Subchapter S closely held companies and small businesses, a leasing company will ask for a personal guarantee as a way to insure that the lease payments will be made.
Progress Payment Loan -- LPI makes all milestone payments required by the software vendor until all software, equipment, customization, training, installation and conversion has been provided by the software vendor. This product is generally used with larger transactions that require milestone payments over a short time between three months and 18 months.
Purchase Option-- Option to purchase leased property at the end of the lease term.
Remarketing-- The process of selling or re-leasing leased property which has been returned to the lessor either at the end of the term or as a result of a default in lease.
Remarketing Fee-- A fee paid for selling or re-leasing leased property.
Rent Holiday-- A period of time during which a lessee is not required to pay rent.
Residual Value-- The value of leased property at the end of the lease term.
Security Interest-- An interest in property that is acquired for purpose of securing payment of a lease obligation. A security interest allows the holder of the security interest to obtain the property in the event of default and gives the holder additional rights in the event of bankruptcy.
Spread-- The difference between funding costs and the rate of return to the lessor on a lease.
Step Down Lease-- A lease where the lease payments decrease over the term of the lease.
Step Rental Lease-- A lease where the rent may change during the term of the lease. The change is known at lease inception and is agreed by both the lessor and the lessee. Often a step rent lease allows the lessee to pay less initially and more later in the term.
Step Up Lease-- A lease payment is increased during the term of the lease.
Stipulated Loss Value-- This is a term in a lease requiring the lessee to pay the value of the leased property in the event there has been some type of damage or destruction to the leased property.
Vendor Leasing-- A working relationship between a leasing company and a vendor to provide leasing to the vendors customers. In some sense, the leasing company is working as an extension of the vendor providing credit checking, billing and collecting documentation, and customer service. The leasing company, generally, is accepting the credit risk.