Types of Leases and Terms.

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. It can be as long as 20 years. Different classes of equipment come under this depending on ADR lives’.

Advance Lease Payments
One or more lease payments required that are to be paid to the lessor at the beginning of the lease term. Normally a lease structure normally requires that at least one payment or more must be ma in advance.

All-Risk Insurance
An insurance policy, which covers an insured against loss from any peril other than those specifically excluded by the terms of the policy.

Alternative Minimum Tax (AMI)
An alternative, separate tax calculation based on the taxpayer’s regular taxable income, increased by the taxpayer’s preferences for the year. The resulting balance 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 leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.

Broker
A company or person who arranges, for a fee, transactions between lessees and lessors of an asset, freight, equipment etc.

Business Lease
A lease between a lessee and lessor for business or commercial purposes. It’s sometimes called a commercial lease.

Capital Lease
From a financial reporting perspective, a lease that has the characteristics of a purchase agreement, and also will meet certain criteria established by the Financial Accounting Standards. Board Statement No. 13 (FASB 13). This type of lease is required to be shown as an asset and a related obligation on the balance sheet.

Certificate of Acceptance (Delivery and Acceptance)
The document that you sign stating that you have received the equipment and it meets the specifications that you require and that the equipment is in the condition that you expected and specified.

Closed-End-Lease
This lease ends at a pre-determined date and doesn’t have any clause or requirement to purchase or re-new.

Co-Lessee
An additional person or business that is on the lease. Both parties share the same legal responsibilities, financial obligations, and rights as the primary signer.

Commercial Lease
A lease in which the lessee has entered into a lease transaction for business or commercial purposes. A business lease.

Conditional Sales Contract
An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes. This entitles the lessee to the tax benefits of ownership, such as depreciation , but the lessee does not become the free and clear owner of the asset until all terms and conditions of the leasing agreement have been satisfied.

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 a monetary value, and be still be usable.

Effective Lease Rate
This is 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.

End-Of-Term Options
Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common options include purchasing the equipment, renewing the lease, or returning the equipment to the lessor. Options are sometimes given as an amendment to the lease documents and are not made part of the actual lease document.

Equity Participant
This could be one or more of the following: an owner, participant, trustor, owner, or grantor owner. Any one with a stake in the equipment or business

Equipment Schedule
The document that describes in detail the equipment that is leased. It may also state the lease terms and conditions such as commencement date, repayment schedule, and location of the equipment.

Fair Market Purchase Option
The option to purchase the leased property at the end of the lease term at its 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.

Fair Market Value
The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm’s length, between a willing buyer and a willing seller, for the equivalent property and under similar terms and conditions. This is the actual market value of the leased asset in the current sales market.

Finance Lease (See Single Investor Lease)
Typically, a finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.
Financing Statement
The notice of security interest that is filed under the Uniform Commercial Code (UCC). It’s generally filed with the State’s Secretary of State and/or the appropriate county office.

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.

Full-Service Lease
A lease that includes many additional services such as maintenance, insurance and property taxes that are paid by the lessor, the cost of which is built into the lease payments. Examples are Ryder, Mercedes Benz etc.

Funding Sources
This can be a private investor, or company who provides the actual financing for a lease transaction. Used mostly by financing brokers in referring to lessors, but is sometimes used by lessors in referring to those parties who provide lessors with the funds lessors use to purchase equipment.

Guarantor
The person who is obligated on a guaranty, loan, etc agreement, it’s the same as with any purchase that you make which requires payments.

Guideline Lease
A type of lease that meets the guidelines and rules of 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. Such as an apartment or home lease but can be, and is often used in an equipment lease.

Indemnity Clause
A clause in which the lessee indemnifies the lessor from loss of tax benefits.

Indenture of Trust (Indenture)
This agreement is 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 or commonly called a bond for title.

Independent or Third Party Lessor
A type of leasing company that is independent of any one manufacturer, and, as such, purchases equipment from various unrelated manufacturers or dealers. The equipment is then leased to the end-user or lessee. This type of lessor may also be called a third-party lessor.

Lease
A transaction in which the use and possession of equipment, or asset. Only the right to use and posses is transferred, not the title. The owner retains full ownership. This is normally for a fee, scheduled payments etc.
Lease Agreement
A written contract or agreement between the lessor and the lessee that sets forth all the terms and conditions of the lease.

Lease Broker
A person or entity that provides one or more services in the lease transaction for its own financial benefit. Their services may include finding the lessee, working with the equipment manufacturer or dealer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor or equity investor in the lease transaction. Like a stock broker or freight broker.

Lease Line
This can mean several things like a pre-approved amount of borrowing allowed to a lessor by a lessor’s financier. The lease line is normally used for acquiring equipment for lease, and is not used for financing a lessor’s operational expenses.
A pre-approved amount of leasing allowed a lessee by a lessor. Similar to persons a line of credit.

Lease Rate (Rental Payment)
The scheduled payment to a lessor for the use of equipment or assets. Others may define lease rate as the implicit interest rate in minimum lease payments.

Lease Payment
The periodic payment made during the lease term. Such payments are usually of an even amount over a set period of time. There are situations such as a lessors business being seasonal that can required a lease to have “gaps” in the payment amount, or to be otherwise contoured to fit

Lessee
The user of the equipment being leased.

Lessor
The part 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 non-recourse debt basis. The lessor receives the tax benefits of ownership.

Loss Payee
A party entitled to receive proceeds from an insurance settlement arising in connection with a covered casualty or loss. Such as a lien holder

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. Prime Inc would be an example of this.

Net Lease
A lease in which all costs in connection with the use of equipment, such as maintenance, insurance and property taxes, are paid for separately by the lessee and are not included in the lease rental paid to the lessor.

Non-recourse 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 lease in which the lessee guarantees the amount of the future remaining value to be earned by the lessor at the end of the lease. If the equipment is sold for less than the guaranteed value, the lessee must pay the amount of any money that the sale doesn’t cover to the lessor. This lease is referred to as open-end because the lessee does not know its actual cost until the equipment is sold at the end of the lease term. Open End Leases can be structured as a "true tax lease" (operating lease) and the payments can be expensed up to 100% and treated as "rent" payments for federal income tax purposes.
Open End Leases can also be structured as a "finance lease" (capital lease) and treated as a loan for tax purposes with a bargain purchase option as low as $1.00. The lessee takes depreciation instead of writing off payments as "rent.”
Open End Leases have none of the penalties associated with other leases.
There are no Mileage Limits or Charges
There are no Sign or Lettering Restrictions NO Body Damage Charges
There are no Paint Scheme Restrictions

Operating Lease
From a financial reporting perspective, a lease that has the characteristics of a usage (rental) agreement and also meets certain criteria established by the FASB. This type of lease is not required to be shown on the balance sheet of the lessee. The term is also used to refer to leases in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. The criteria for meeting FASB 13 classification of an operating lease are:
1. Title for the equipment does not automatically transfer to the lessee during, or by the end of, the lease term.
2. There is no bargain purchase price.
3. The non-cancelable lease term is lesser than 75% of the asset’s economic life.
4. The present value of the minimum lease payments, discounted at the lessor’s interest rate implicit in the lease, is less than 90% of the leased asset’s FMV.

Option To Purchase
A right to purchase property at a future date

Packager
The leasing company, investment banker, or broker who arranges a leveraged lease.

Payments In Advance
The payments that are made at the beginning of the lease and are paid each month in advance. Example: A December payment is for January and so on.

Payments in Arrears
A payment schedule where the lease payment is due at the end of each period during the lease.
Example: A February payment is actually to cover Januarys payment

Payoff
The balance that will pay off the loan, or leased equipment or obligation. Normally is less that if you complete the scheduled payments as there is less interest to pay. Payoff amounts are normally only good for a certain number of days. Some companies have a prepayment penalty.

Present Value
The actual value of the equipment or the projected value of a loan to date. This includes the interest to that date but not past it.

Purchase Option
One of the options that can be in the lease agreement that allows you to purchase the leased equipment at the end of the lease term. Either for a fixed amount, or at the future fair market value of the leased equipment.

Put Option
An option in a lease in that lets the lessor but not the lessee to exercise the option.

Residual
The value of the lease property at the end of the lease term which is estimated at the time the lease is signed. A term value. Although the terms “residual value” or “term value” are sometimes used in reference to the actual value of the property at the conclusion of the term, the term “realized value” is the more commonly used and more appropriate term for the actual value of the property at the conclusion of the lease term.

Residual Value
The value of the equipment or property at the conclusion of a lease. Also called the by out, Market value etc.

Sale-Leaseback
A transaction that involves the sale of equipment to a leasing company, and then leasing the same equipment back to the original owner, who continues to use the equipment. Example: You may own the equipment and the company but lease the equipment to the company. It’s used to protect the assets in case of litigation etc.

Sales-Type Lease
A lease by a lessor who is the manufacturer or dealer, and the lease meets the definition laws, guidelines and rules of a capital lease or direct financing lease.

Single Investor Lease (See Full Payout or Finance Lease)
A tax-oriented lease so the lessor is paid 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 normally 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 understands and uses the tax incentives provided by the tax laws for investment and ownership of equipment. Normally, the lease rate factor on tax leases are reduced to reflect the lessor’s recognition of this tax incentive


Terminal Rental Adjustment Clause (TRAC)
A lessee guaranteed residual value for vehicle leases (automobiles, trucks or trailers), the inclusion of which will not, in and of itself, disqualify the tax lease status of tax-oriented vehicle leases.

Third Party Lessor
An independent leasing company, or lessor, that writes leases involving three parties: (1) the unrelated manufacturer or dealer, (2) the independent lessor and (3) the lessee.

TRAC Lease
A motor vehicle lease with a TRAC (terminal rental adjustment clause) (i.e., an open-end lease) which meets the requirements of section 210 of TEFRA (as amended by TRA). TRAC Leases...
Open End Leases containing a Terminal Rental Adjustment Clause are known as TRAC Leases. TRAC Leases are limited to motor vehicles and trailers used at least 50% of the time for business purposes. TRAC Leases are unique in that federal tax rules permit a Rental Adjustment (cash rebate) back to the lessee at lease termination and still be treated as a "true tax lease.” Open End Leases containing a Terminal Rental Adjustment Clause are known as TRAC Leases. TRAC Leases are unique and one of the leases that the federal tax rules permit a Rental Adjustment (cash rebate) back to the lessee at lease termination and can be treated as a "true tax lease.”
How TRAC Leases work:
At the beginning of the lease, a projected amount is agreed by both parties and that will be used to determine monthly payments.
- Higher Residual Amounts = lower monthly payments = higher purchase options
- Lower Residual Amounts = higher monthly payments = lower purchase options
At the end of a TRAC Lease you have 4 choices:
1. Purchase the vehicle for the Residual Amount.
2. Trade in for a replacement vehicle. Apply any equity to the new vehicle.
3. Extend the lease by financing the Residual Amount.
4. Turn in the vehicle and be eligible for a Rental Adjustment based on the money that the lessor's received at a sale over the balance amount. If the vehicle sells for less than the balance owed you are responsible for that amount of money. You can purchase the vehicle for the balance and there is no further obligation on your part.
Example of a TRAC Lease Cash Rebate at Lease end
Original Cost of Vehicle: $25,000.00
Balance Amount: $5000.00
End of Term Sale Proceeds: $6000.00
Cash back to lessee: $1000.00

True Lease
Another term for tax lease where, for IRS purposes, the lessor qualifies for the tax benefits of ownership and the lessee claims the entire amount of the lease rental as a tax deduction.

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.
UCC
Uniform Commercial Code, a code of commercial law enacted in all states.

Vendor Leasing
A working relationship between a financing source and a vendor to provide financing to help the vendor’s sales. The financing source offers leases or conditional sales contracts to the vendor’s customers. The vendor-leasing firm will act as the finance company of a manufacturer or distributor by leasing to its customers, and meets the provisions of credit checking, and performance of collections and operational administration

Venue
The physical location, or specifically the court, which will hear a legal dispute between parties