Glossary of Leasing Terms
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.
Capital Lease – From a financial reporting perspective, a lease that the has the characteristics of a purchase agreement and also meets certain criteria established by the Financial Accounting Standards Board Statement No. 13 (FASB 13). Such a lease is required to be shown as an asset and a related obligation on the balance sheet.
Operating Lease – The term is also used to refer to leases in which the lessor has taken a significant residual portion 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) criteria classfication of a capital 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-cancellable lease term is less 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.
5. Please consult your financial advisor for determination
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.
Master Lease – A lease line of credit that allows a lessee to obtain additional leased equipment under the same basic lease terms and conditions originally agreed to, without having to renegotiate and execute a new lease contract with the lessor. Each new piece of equipment is listed on a separate Schedule and the specific lease rate for that schedule is dependent upon the policies of the lessor, the terms and conditions of the Master Lease, and the cost of equipment.
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.
Lease Rate (Rental Payment) – The periodic rental payment to a lessor for the use of assets. The length of time covered by the Lease as expressed on the Schedule.
Advanced Payments – One or more lease payments required to be paid to the lessor at the beginning of the lease term. Lease structures commonly require at least one payment to be made in advance. (Alternative: payment in arrears).
(Net) Present Value – The discounted value of a payment stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present value represents a series of future cash flows expressed in today’s dollar value.
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 transaction has on federal tax liabilities.
Purchase / Leasback (PLB) – 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 continue to use the equipment.
Fair Market Value (FMV) – The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm’s length, between willing buyer and a willing seller, for equivalent property and under similar terms and conditions. Simply, the actual market value of the leased asset.
Residual Value – The value, either actual or expected, of leased equipment at the end, or termination, of the lease.
Discount Rate – A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today’s dollars. Use of a discount rate removes the time value of money from future cash flows.
Non-recourse Loan – 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.
Funding Source – An entitiy that provides any part of the funds used to pay for the cost of the leased equipment. Funds can come from either an equity funding source, such as the ultimate lessor in a lease transaction, or a debt funding source, such as a bank or other lending institution.
Certificate of Delivery and Acceptance – A document that is signed by the lessee to acknowledge the equipment is to be leased has been delivered and is acceptable. Many lease agreements state the acutal lease term commences once the Delivery and Acceptance has been signed.
Rollover – The opportunity to cease one FMV Lease and either upgrage or renegotiate a new lease term.
Call (410) 841-5490 or Contact Us for a FREE QUOTE!