Glossary Page 2 of 2
- MACRS - Modified Accelerated cost Recovery System. The depreciation method for most equipment building as promulgated by the Tax Reform Act of 1986.
- Master Lease - An open-end type agreement under which a lessee obtains the use of property, and can add additional equipment periodically at rates to be negotiated and through the use of 'schedules,' under the basic terms of the original instrument. Eliminates signing new leases as additional equipment is leased.
- Mortgage's Waiver - A document prepared by the lessor to be signed by the mortgage (mortgage holder) giving up any rights which he may have, in the present or future, against the leased property/equipment at lessee's place of business. Protects the lessor in cases in which leased equipment is attached to real property.
- Municipal Lease - A lease with a state or local governmental agency or political subdivision. Usually not a lease at all but a conditional sales agreement in disguise. Income is generally tax exempt to the lessor.
- Net After Tax Return on Net Working Capital - The percentage typically used in standard cash flow analyses to project the compound earnings effects form tax timing on conserved cash saved via the lease versus alternative methods of finance.
- Net Lease - In a net lease, the rentals are payable net to the lessor. The lease concerns itself only with the equipment itself. All costs in connection with the use of the equipment are to be paid by the lessee and are not part of the rental. For example, taxes, insurance, and maintenance are paid directly by the lessee. Most finance leases are net leases.
- Non-payout Lease (Operating Lease) - A lease in which the lessor may not receive the full recovery of cost and leasing charges over the base lease term, and must rely heavily on residual or re-leasing of the equipment to realize an acceptable yield. Common in the computer industry in which maintenance, insurance, etc., may be a part of the package.
- Off-balance Sheet Financing - Unlike the traditional methods of financing, operating lease obligations are not capitalized, thus improving balance sheet rations. Leasing are generally footnoted.
- One Hundred Percent Financing - Because no compensating balances or down payments are required, leasing may be provide 100% financing.
- Operating Lease - A short-term lease whereby a user can acquire use of an asset for a fraction of the useful life of the asset. The lessor may provide services in connection with the lease such as maintenance, insurance, and payment of personal property taxes. A one-year lease of data processing machines is an operation lease.
- Packager - Another name for a broker.
- Personal Property - From a lessor's standpoint, basically any type of lease equipment (as opposed to real property).
- Portfolio Acquisition - the process of purchasing a package of lease and/or time sales contacts and discounting the flow of remaining payments.
- Present Value - What one future payment or series of payments is worth today (i.e., if a friend agrees to pay you $1.00 at some future date, how much would you give him today to realize a specific rate of interest).
- Private Placements - Loans, generally bonds, arranged by a company through investors or lenders as opposed to public offerings.
- Progress Payments (Interim Financing) - Payments advanced to a manufacturer while equipment is being manufactured and until final scheduling when permanent funds will be advanced.
- Prospectus - A written instrument which must be filed with the S.E.C. prior to a public sale of stock (both direct sales of stock and secondary issues). Contains: Terms of issue, Definition of the company, Purpose of offering, Statement of income, Balance sheet, Dividend history, Stock quotations, Description of the business, Description of the stock and offering price, Underwriters and their fees, Legal opinion, C.P.A. certification, and any other information that is valuable to analysis
- Public Offering - Debt - Bonds offered to the public as opposed to a private placement. Underwriters bid to be awarded the issue and are generally selected on the basis of rate.
- Public Offering - Equity - Stocks sold to the public through underwriters. Offering prices may be determined between the issuing company and the investment banker with the underwriter receiving normally 3% to 10% of the offering amount.
- Purchase Option - Some leases allow a lessee to purchase the equipment at the end of the lease term for Fair Market Value of a pre-determined percentage amount.
- Put - An option one person has to sell an asset to another person at a set price at some established point in time in the future. In lease agreements, a lessor sometimes negotiates an option to sell leased equipment to the lessee or to some third party at an established priced at the end of the lease term. This is to protect the lessor's exposure on the residual value of the leased equipment at the end of the lease term. Care must be used in negotiating a put to a lessee lest the true lease characteristics of the transaction be destroyed an money saving advantages lost. A lessor may also negotiate a put to a third party as a hedge against future loss on the sale of the residual.
- Recourse Agreement - An agreement with a vendor hereby the vendor will purchase or repurchase the lessor's interest in a lease, generally upon demand, after default of the lessee. Generally, the lease must be in default sixty to ninety days and a reasonable amount of collection effort exerted by the lessor. 'Recourse' is more common in the finance industry and not in leasing.
- Red Herring - A preliminary prospectus readily identifiable by the red print on the cover. Red Herrings are used to file with the S.E.C. and distributed to interested parties. Any changes are reflected in the final prospectus.
- Regulation B (Reg. B) - Federal Reserve Board Regulation B, as modified in 1990, requires a written statement be given lease applicants if they are declined. It gives certain rights to the applicant, imposes certain duties and obligations upon the lessor and mandates certain record retention procedures. Basically an anti-discrimination act.
- Renewal Option - After the initial lease term, a lessee may have the option to renew, or extend, the lease for estimated fair market rental values or as otherwise agreed upon.
- Rental Factor - Numerical factor multiplied by total cost of equipment to compute rentals.
- Rental (Use) Tax - Many states charge a 'use' tax in lieu of a sales tax when equipment is leased. So instead of paying a sales tax for purchase of the leased equipment, taxes are collected by the lessor as a percentage of the rentals over the lease term.
- Repurchase Agreement - A common arrangement in the finance business which is an agreement that the vendor will buy back the equipment at a stipulated price in the event of default and/or repossession, but only in the even the equipment can be located and made available to the vendor.
- Residual Value - The value of the leased property at the end of the lease term. Lessor retains title of the equipment unless a purchase option is exercised and this residual is important in the overall profits of the lessor.
- Restrictive Covenants (Negative Covenants) - Restrictions in loan agreements against the borrower by lenders (i.e., working capital restrictions, divided payment restrictions, retention of earnings covenants, prohibition against leasing, etc.)
- Revenue Ruling - A written opinion of the Internal Revenue Service requested by parties, which is applicable to assumed facts stated in the opinion.
- Sale and Leaseback - An arrangement whereby a company sells fixed assets, currently owned, for cash to a lessor and leases the same from the lessor. Converts a fixed asset to cash. Selling price can be appraised value or book value, acceptable to the lessor. Book value may be best for the lessee to eliminate taxes.
- Scheduling - Booking of a lease after a 'lease schedule' is signed and equipment accepted by the lessee.
- Short-Term Lease - Generally refers to an operating lease.
- Snap Out Lease - The multi-part form used by lessors for one supplier, exact cost transactions, as opposed to the master lease with multiple suppliers. Simplifies documentation when the situation warrants use of this form.
- Special Purpose Equipment - Equipment which is unique and has no value except as junk to anyone other than the original user.
- Spread - The difference between a lessor's cost of funds and the true yield on a lease.
- Stipulated Loss - Represents the purchase price of the equipment (including estimated residual values) at a given point in time, which would be the amount necessary to be paid by an insurance company in case of a total loss of equipment. Protects lessor in recovering amounts necessary to return the desired yield even through equipment is a total loss.
- Stream Rate - The lessor's yield or lessee's cost based upon the equipment cost and rental payment exclusive of any fees, tax benefits, deposits or residual value.
- Super Broker - A broker to whom other brokers refer business on a fee sharing basis. The super broker may have specialized knowledge or exclusive funding sources not available to the broker.
- Take-down - The point in time when the equipment is delivered, accepted, and paid for by the lessor and the lessee is 'taking down' a portion of a lease line.
- Termination Value - A schedule included in a lease contract which states the value of the equipment at various times during the term of the lease and establishes the liability of lessee to lessor if the lessee terminates the lease before the contract term is completed.
- Time Sales - A method of financing by which a company acquires equipment and pays for it over a of time with a number of pre-determined payments.
- TRAC Lease - A lease for motor vehicles combining the benefits of a true lease and a conditional sales agreement due to the inclusion of a 'terminal rental adjustment clause.' The TRAC lease enjoys true lease tax treatment despite the terminal rental adjustment clause at lease end which may require the lessee to pay the difference between the actual and projected value of the vehicle.
- True Lease - A true lease is a transaction which qualifies as a lease under the Internal Revenue Code so that the lessee can claim rental payments as tax deductions and the lessor can claim tax benefits of ownership - such as depreciation and I.T.C.
- Trustee - In certain large lease transaction which qualifies as a lease under the Internal Revenue Code so that the lessee can claim rental payments as tax deductions and the lessor can claim tax benefits of ownership - such as depreciation and I.T.C.
- Unearned Income - The amount of leasing charges on a lease which, at time of scheduling, are to be earned or 'taken into income' over the life of the lease, generally on an accelerated method.
- Useful Life - The period of time during which an asset will have economic value and be useable. Useful life of an asset is sometimes called the economic life of the asset.
- Uniform Commercial Code (U.C.C.) - A standardized program and method of administering, legalizing, and recording lien instruments adopted now by all states.
- UPPLA - Uniform Personal Property Leasing Act now adopted by over thirty states. Also known as U.C.C. Article 2A, this act provides guidelines for true treatment of a transaction within the judicial systems.
- Vendor - Supplier of equipment who sells the equipment to the lessor.
- Working Capital - The difference between current assets and current liabilities, and generally what leasing is designed to save a company.
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