GLOSSARY - page 1 of 2
- Acknowledgement – A formal statement before a notary public that a person has executed an attached document.
- Agent -- A person who has been given legal authority by a third party to act for them in dealing with others.
- All Risk Insurance-Coverage for all risks other than those specifically excepted by the policy.
- Alternate Minimum Tax (AMT) – In addition to the regular tax computation, taxpayers are also required to compute taxes under the AMT which makes adjustments for certain deductions and tax preferences reduced by an exemption amount. The taxpayers pay the larger of the regular tax calculation or the AMT amount.
- Authorized Signature – A signature by a person authorized by a company to obligate the company on a long-term lease. An authorized signer will usually be substantiated by the Corporate Resolution which specifies who can sign and what his responsibilities may be.
- Basis Points – One one-hundredth of one percent. Fifty basis points = one half of one percent.
- Bill of Sale – The agreement document giving the lessee title to the equipment upon exercising of purchase option. Also used in Sale and Leasebacks to convey title of equipment from lessee to lessor at the time the lease is initiated.
- Broker – A company or person who arranges lease transactions between lessees and lessors for a fee.
- Built-in Residual – Building in or guaranteeing a residual amount in the rate structure of a lease. This is typical with low residual equipment to assure the lessor a proper residual amount and allows most any type of equipment to be leased.
- Call – An option to purchase an asset at a set price at some particular time in the future. In lease agreements, a lease sometimes has an option to purchase the leased equipment at the end of the lease term.
- Capital Lease – A lease which for accounting purposes must be shown on the financial statement of the lessee as an asset with an offsetting liability.
- Cash Flow – The cash that flows into and out of a company as a result of doing business. Generally, after tax earnings plus “non cash” items such as depreciation and amortization expenses equals “Cash Flow” for purposes of credit analysis.
- Chattel Mortgage – An instrument by which the borrower (mortgagor) gives the lender (mortgage) a lien on property, other than real estate, as security for the payment of an obligation. The borrower continues to use the property, and when the obligation is satisfied, the lien is removed.
- Closed End Leas – A lease that allows the lessee to return the equipment at the end of the lease term without further liability.
- Collateral – collateral under a lease is the equipment which is leased.
- commitment Fee – A fee charged form the time of a commitment to the final takedown. This fee usually only applies to large transactions with prolonged takedowns. If full lease is not utilized, then lessor may retain any unapplied portion of the fee as consideration for the line.
- Commitment Letter – Letter prepared by the lessor to spell out terms and conditions between lessee and lessor for a lease transaction
- Compensating Balances – The amount of deposits required by a bank to be deposited by a company or individual in tern for a loan. Compensating balances as a percentage of the loan amount generally run 10% to 20% with 10% of the loan amount on the inactive line or 20% on the active line, or a straight 15% flat rate.
- Conditional Sales Contract – A transaction that is recognized by law as providing the seller (or contract holder) with full proprietary rights in the underlying asset until the buyer (debtor) has satisfied all the terms and conditions of the contract, at which time title to the asset passes automatically from the seller to the buyer. For accounting purposes, the buyer will show an asset and corresponding liability on the balance sheet, the same as most finance leases.
- Corporate Seal – A registered mark of the corporation which may be applied to a legal document such as a lease, only by the secretary or assistant secretary of the corporation. Spells out the name of the corporation, date of incorporate, and state of incorporation. May be required in some states and not in others. Often affixed to the corporate resolution to lease.
- Debt Portion of Leverage Lease – The portion of the financing in a lease that is received from a third party who, as lender, takes a security interest in the equipment and a lease assignment form the lessor. The lender has no recourse to the lessor in the event of default by the lessee.
- Default – A default occurs when any of the lease terms are not met and are not corrected within the time specified in the lease.
- Delivery and Acceptance Certificate (D&A) – The document the leasing company requires from the lessee as confirmation that the equipment was delivered, is the equipment requested and that it is in good working order. Sometimes referred to as D&I (delivery and installation).
- Depreciation – A method of reducing the value of an asset over a period of time for both financial statement and tax purposes. The reduction for tax purposes is an expense which reduces taxable income.
- Dilution of Equity – Dilution occurs when common stock offerings reduce book value and earnings per share of a corporation.
- Discounted Cash Flows – An analysis applying a present value factor to a future stream of payments to determine their present value. The most precise method of comparing the lease to alternative financing methods.
- End Position – Pertains to options available to a lessee at the termination of a lease. Generally, purchase options at F.M.V., renewal options, trade up privileges, and return of equipment to lessor.
- Equity Investor – Term used to describe the party that owns the equipment and receives 100% ownership rights in a leveraged lease arrangement. The “equity” is usually at least 10% of cost with the debt no more than 90%.
- Exemption Certificate – A document exempting a lessor or lessee from paying sales tax on the equipment being leased. A lessor is buying the equipment for “re-sale” as would a vendor/supplier, while a lessee may be tax-exempt for other reasons, i.e., a nonprofit entity or a bank.
- Fair Market Value (F.M.V.) – The market value of the leased asset at the termination of the lease assuming a willing buyer and a willing seller.
- Finance Lease – A financing device whereby a user can acquire use of an asset for most of its useful life. Generally, a finance lease is noncancelable during the term of the lease; rentals are net to the lessor; and the user is responsible for maintenance, taxes, and insurance. Often, for accounting purposes, also referred to as a capital lease.
- Financing statement (UCC-1) – A standardized form recorded with the Secretary of State and/or County Clerk to perfect a security interest under the Uniform Commercial Code by notification to all interested parties. Used with financing leases (not True Leases) to protect lessor’s interest in the equipment.
- Floating Rental Rate – Rental which is subject to upward or downward adjustments during the lease term. If the prime interest rate or other index changes during the term of the leas the rental rate may change to reflect this.
- Full Payout Lease – A lease in which the cash flows will return the lessor the full equipment cost plus a satisfactory return over the lease term.
- Guideline Lease – A leveraged lease that complies with the guidelines set forth by the IRS in Rev. Rule 75-21.
- Implicit Rate – The rate at which the minimum lease payments when discounted to the present will be equal to the equipment cost.
- Institutional Investors – Investors such as banks, insurance companies, trusts, pension funds, foundations, and education, charitable, and religious institutions.
- Insured Value – A schedule included in a lease which states the agreed value of t equipment at various times during the term of the lease, and establishes the liability of the lessee to the lessor in the event the leased equipment is lost or rendered unusable for any reasons during the lease term. Sometimes called the stipulated loss value.
- IRS Ruling – Formerly required with most leverage leases in which the lessor (equity owner) is deriving a substantial part of its yield from tax benefits. The Internal Revenue Service determines for tax purposes that the lease will be treated as a True Lease and not a purchase contact. This allows all parties to know the tax consequences before the lease is scheduled.
- Investment Tax Credit (ITC) – The credit applicable on income taxes (Federal) available when a company purchases capital equipment. ITC has, with certain limited exceptions, not been available since 1986.
- Kicker – Generally, the amount over and above the interest rate on a loan imposed on a borrower by a lending institution. Warrants in a company’s common stock are typical and normally run for a three to seven year period.
- Landlord Waiver – Same as mortgage waiver except signed by the landlord allowing lessor to remove the equipment in case of default or at the end of the lease.
- Lease – An Agreement granting or letting the possession of land, buildings, machinery, personal property, etc., for a fixed or indeterminate period, for a stated consideration, usually known as rent.
- Lease Rate (Service Fee) – These are terms used in determining what the rentals equate to in Simple Interest or nominal interest equivalents excluding depreciation and residuals.
- Lease Underwriting – leverage lease in which a lease underwriter commits firmly to enter into the lease and assumes the risk of arranging the debt.
- Leasing Line – An amount of funds set aside by the lessor for a lessee to use over the commitment period.
- Lessee – A party who makes use of property owned by another party (the lessor) and pays the lessor, usually in the form of rentals, for that use.
- Lessor – company or leasing entity that is legal owner of the leased equipment.
- Level Payments – Equal payments over the term of the lease.
- Leverage – An amount borrowed. A lease is sometimes referred to as 100 percent leverage for the lessee.
- Leveraged Lease – A lease in which the lessor borrows a portion of the purchase price of the leased equipment from institutional investors. In a typical transaction twenty to forty percent of the purchase price is provided by one or more investors who become owners and lessors of the equipment. The balance of the purchase prices is borrowed from institutional investors on a non-recourse basis to the owner. The borrowing is secured by a first lien on the equipment, an assignment of the lease, and an assignment of the lease rental payments. A leveraged lease may also refer to transactions in which a lessor finances equipment to be leased by borrowing from a bank or some other lending agency using the lease and equipment as security.
- Long Term Lease – Generally refers to a finance lease.
- Long Term Lenders – Term typically used to describe the institutional lenders supplying debt (up to 90% of equipment cost) for leverage leases. Lenders receive no tax benefits from the lease but receive a fixed rate over a long term (eight to twenty years).
- Loss Reserve – A reserve based on a predetermined percentage of the lease receivable to cover any bad debt write-offs.
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