Rental Equipment Glossary

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Accelerated Cost Recovery System (ACRS)

The depreciation schedule established by the Economic Recovery Act of 1982, which allows accelerated write-offs of equipment capital. It replaced the asset depreciation system, which was based on the concept of useful life.

Add-On

A leasing transaction in which related equipment is added to an existing lease.

Advance Payment (Rental)

Payments made by the lessee prior to the start of the lease or before actual use of the equipment.

Amortization

A method of incrementally reducing the book value of an asset by spreading its depreciation over a period of time.

Annual Percentage Rate (APR)

The nominal or effective rate of interest applied to a rental or lease for a specified period of time.

Assignment

a provision in the lease agreement allowing the lessor to transfer the contract to another party by "assignment."

Bargain Purchase Option

A provision of a lease, which allows the lessee to purchase the leased equipment below market value at the end of the lease.

Bargain Renewal Option

A provision that provides the lessee the option to renew a lease for equipment with rental payments much lower than the fair market value.

Base Lease Term

The period of time that the lessee is entitled to use the equipment. It does not include interim or renewable lease terms.

Base Rental

The rental payment to be made by the lessee during the base (primary) term of the lease.

Book Residual Value

An estimation of an asset's market value at the end of a lease term, which is determined by the Internal Revenue Service codes based on the type of lease. The remaining salvage value at the end of the lease is the equipment's residual value.

Broker (syndicator/underwriter)

An individual or a company who arranges a lease transaction between a prospective lessor (owner of property) and a lessee (user of property) for a fee, which is usually expressed as a percentage of the property (asset) value.

Call

A provision in the equipment leasing agreement, which gives the lessee the right to purchase the equipment during a specific time at a predetermined price. The purchase option may lapse if the lessee doesn't meet the notification time requirements to purchase as stated in the lease.

Casualty Value (Insured Value)

A pre-determined amount of money that the lessee guarantees to pay the lessor in the event the leased equipment is damaged or lost. The value, which is usually expressed as a percentage of the original equipment cost, varies according to the point in time during the lease term when the loss actually occurs.

Collateral

The asset(s) that are used as security for the repayment of a debt obligation. In a typical leveraged lease, the collateral is the leased equipment.

Conditional Sale (a.k.a. security agreement)

A transaction for purchase of the leased property (purchase option) at the expiration of the lease term for a bargain price. The purchase price is pre-determined and the user (lessee) is treated as the owner of the equipment at the outset of the transaction for income tax purposes.

Cost of Money

The cost that a lessor incurs to borrow money. In pricing a lease transaction, a lessor factors this cost into the computation.

Cost-To-Customer

The simple interest rate on a lease transaction.

Coterminous

Two or more equipment leases that are linked so that both will terminate at the same time.

Debt Payment

A long-term lender in a leveraged lease transaction. Usually there is more than one debt participant in these types of equipment leasing arrangements.

Debt Service

The aggregate periodic repayment amount, including interest and principal due on a loan.

Default

Occurs in an equipment lease transaction when a party involved breaches certain material lease obligations, most commonly a delinquent payment.

Delivery and Acceptance

The document in an equipment lease transaction, which indicates the lessees' acceptance of the equipment and begins the term of the lease.

Depreciation

A tax deduction representing a reasonable allowance for exhaustion wear, tear, and obsolescence that is taken by the owner of the equipment in which the cost of the equipment is allocated over time.

Depreciation Indemnity

A tax indemnity given by a lessee against the lessor's loss of anticipated depreciation tax benefits on leased equipment.

Economic Life of Leased Property

The estimated remaining period during which an asset is expected to be economically usable by one or more users. It is used: (a) for purposes of calculating the maximum allowable term of a tax lease; (b) for determining whether or not a lease is a capital lease; and (c) to determine the method of depreciation for a capitalized leased asset. It may or may not be the same as the life used for income tax purposes.

Effective Lease Rate

The effective lease rate (for the lessee) of the cash flows resulting from a lease transaction. When comparing this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.

Equipment supplier (vendor)

The seller, manufacturer or dealer of the equipment to be rented or leased.

Equity Participant (Owner Participant, Trustor Owner or Grantor Owner)

The lessor or one of the group lessors in a leveraged lease who jointly own and lease the equipment. Equity participants hold trust certificates evidencing their beneficial interest as owners under the owner trust.

Event of Default

An event, such as non-payment of rent under a leasing agreement, which provides the basis of declaration of default. The lessor has the right to declare the lease in default, terminate the base, and reclaim the equipment.

Extended Term Agreement

In a lease transaction, a provision, which allows the lease to be renewed.

Fair Market Purchase Option

A provision in a leasing agreement, which allows the lessee to purchase the leased property at the end of the lease terms at it s 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 (Fair Market Purchase Option)

an asset's value in the open market, i.e., the price a buyer is willing to pay to a willing seller for the equipment "as-is" at the maturity of the lease.

Fair Market Rental Value (Fair Rental Value)

The rental rate that an asset would command in the open market where there is a willing lessor and lessee.

Fair Rental

The expected rental for equivalent property under similar terms and conditions.

FASB

The Financial Accounting Standards Board.

FAS Statement No. 13, Accounting For Leases

The statement issued by the Financial Accounting Standards Board, which establishes financial accounting standards for lessors and lessees. Also, establishes the guidelines for determining whether a lease is an operating or capital lease for the lessee's purposes.

Financing Agreement (Participation Agreement)

An agreement entered into by the principal parties to a leveraged lease before equipment delivery. It is an agreement between the owner trustee, the lenders, the equity participants, the manufacturer, and the lessee, which spells out the obligations of all the parties involved in the leveraged lease.

Floating Rental Rate

A form of periodic rental payments that change or float upward and downward over a lease's term. Floating rates may be adjusted in proportion to the prime interest rate or the commercial paper rate changes during the term of the lease.

Grantor Trust

A trust used as the owner trust in a leveraged lease transaction usually with only one equity participant. If there is more than one equity participant, the grantor trust is treated as a partnership.

Guaranty (Personal/Corporation/Other)

Business owners (especially in the case of proprietorships, partnerships, closely held corporations and small businesses) may be required to personally guarantee a leasing transaction. If the business is a subsidy or owned wholly, or in part, by another company, then the "parent" company may be required to guarantee the leasing transaction.

HTG Yield

Refers to the so-called "Honest to God" yield.

Hell-or-High-Water Clause

the clause in a lease, which stipulates the unconditional obligation of the lessee to pay rent for the entire of the lease, regardless of any event affecting the equipment or any change in the circumstances of the lease. High-Low Rental A rental structure in which the rental payments are reduced from a higher to a lower rate at a prescribed point in the lease term.

Implicit Cost

The nominal annual interest rate implicit in the basic lease payments. It is the interest that discounts the lessee's payments to 100 percent of the equipment's cost at the lease commencement date.

Incremental Borrowing Rate

The interest rate, which a person would expect to pay for a certain loan at a certain time for purchase of the leased asset.

Indemnity Agreement

An agreement in which the owner participants in a leasing transaction and the lessee indemnify the trustees from any liability as a result of ownership of the leased equipment.

Indemnity Clause

In a leasing agreement the indemnity clause usually refers to the tax indemnity clause in which the lessee indemnifies the lessor from loss of tax benefits.

Indenture Trust

An agreement in a leveraged lease transaction between the owner trustee (the lessor's representative) and the indenture trustee (the lender's representative) in which the owner trustee grants a lien on the leased equipment, the lease rents, and other lessor contract rights as security for repayment of the outstanding equipment loan.

Indenture Trustee

In a leveraged lease, the indenture trustee holds the security interest in the leased equipment for the benefit of the lenders.

Initial Direct Costs

Direct costs incurred by a lessor in negotiating and consummating a lease such as commissions and legal fees.

Institutional Investors

Entities such as banks, insurance companies, trusts, pension funds, foundations, educational, charitable and religious organizations which invest in lease transactions.

Insured Value

See casualty value.

Interest Rate Implicit In a Lease

The discount rate which, when applied to the minimum lease payments, causes the aggregate present value at the beginning of the lease term to be equal to the fair value of the lease minus any investment tax credit retained by the lessor and expected to realized.

Interim Rent

It is sometimes preferable that the base term begins on the same date for all or a certain group of units in order to facilitate rental payments or so that all of the units come off the lease at the same time. When this feature is used, a charge is made for the use of the unit from its "in-service" date (delivery date) until the date when the base term begins. The interim rate may be the daily equivalent of the base rental rate or some other charge.

Interim Lease Term

The lease term period between the lessee's acceptance of the equipment for lease and the beginning of the primary or base lease term.

ITC

Investment Tax Credit.

ITC Indemnity

A type of indemnification in which the lessee commits to reimburse the lessor for any financial loss incurred through the loss of all or any of the anticipated investment tax credit (ITC). If the lessor has passed through the ITC to the lessee, the lessor may have to give the indemnity.

ITC "Pass-Through"

An election made by the lessor to treat the lessee as the co-owner of the leased equipment for tax purposes. After the election, a lessee can claim the investment tax credit on the equipment covered only by the election.

Layoff

The sale by a lessor of its interest in the lease agreement including the ownership of the leased equipment and the right to receive the rent payments.

Lease (Lease Agreement)

A contract in which an equipment owner transfers the equipment use to another person, business or entity subject to specific terms and conditions for a prescribed period of time and rental rate.

Lease Factor

A multiplier that is used against the total cost of the equipment to yield the lessee's rental payment.

Lease Line (Lease Line of Credit)

A present commitment by a lessor to lease specified equipment to be delivered in the future.

Lease Rate (Rental Payment)

The periodic rental payment made by the lessee to the lessor (owner) for use of the property according to the terms and conditions of the leasing agreement. Another definition of the lease rate is the implicit interest rate in minimum lease payments.

Lease Schedule

An addendum to the master lease agreement describing the leased equipment, rentals, and other terms applicable to the equipment use.

Lease Term

The fixed, non-cancelable term of the lease. It includes all periods covered the fixed-rate renewable options for tax purposes.

Lessee

The user (lessee) of the equipment being leased who is obligated to pay the rentals to the asset owner (lessor) and who is entitled to use and possess the leased equipment during the lease term.

Lessor

The owner (lessor) of the equipment who has the legal or tax title to the equipment and who grants the lessee the right to use the equipment for the lease term. The lessor is entitled to receive the rental payments. Level Payments Equal payments over the term of the equipment lease.

Leverage

An amount borrowed. The equipment lease is sometimes referred to as "100 percent leveraged" for the lessee; however, in a leveraged lease, the debt portion of the funds used to purchase the asset represents leverage of the equity holder.

Limited Use Property

Leased equipment that will be economically usable only by the lessee or a member of the lessee group at the end of the lease term because of its immobility or unique aspects. The US Internal Revenue Service will not rule that a lease is a true lease where the leased equipment is limited use property.

Low

High Rental

A rental structure in which the payments are increased from a lower to a higher rate at a prescribed point in the lease term.

Low-Ball Bid

A bid to perform a lease transaction purposely priced below market price or with terms not acceptable from a tax or accounting standpoint. The purpose is to renegotiate for a higher price and/or more expensive terms at a later date once the bid is awarded and the lowball bidder and the other interested lessors are no longer available. Typically, the low-ball bidder raises the price when it is too late for the lessee to seek other equipment leasing sources.

Management Agreement

A contract in which one party agrees to manage a lease transaction during its term, including, for example, rental payment processing and equipment disposal.

Management Fee

A fee that a lease transaction manager receives for service performed under a management agreement.

Minimum Investment

For a leveraged lease to be considered a "true" lease, the lessor must have a minimum "at risk" investment of at least 20 percent in a lease when the lease begins; when it ends; and at all times during the lease term.

Packager

A name used to describe the leasing company, investment banker or broker whom arranges a leveraged lease for a third party.

Present Value

The discounted value of a payment or 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 dollars.

Product Liability

The issue of liability that the lessor has when: (1) the product (equipment) doesn't live up to the performance standards promised by the vendor; (2) or the possibility of a claim from the misuse of the equipment by a third party; (3) or the question of liability from an accident or destruction of property by the leased equipment.

Purchase Option

A provision in a leasing agreement, which gives the lessee the option to purchase, leased equipment at the end of the lease term. In order to protect the tax characteristics of a true lease, an option to purchase the property from the lessor cannot be at a price less than its fair market value at the time the option is exercised.

Primary Lease Term

See base lease term.

Primary Letter Ruling

A written opinion that the US Internal Revenue Service (IRS) issues in response to a taxpayer's request. The letter sets out the IRS's position on the tax treatment of a proposed transaction. In order for the IRS to issue a favorable private letter ruling in a leveraged lease transaction, the request must comply with the IRS's guidelines regarding a true lease.

Put

An option that a lessor may have to sell specified leased equipment to the lessee at a fixed price at the end of the initial lease term. The "put" is usually imposed to protect the lessor's residual value assumption. Care must be taken when a lessor negotiates a "put" with a lessee because the "true" lease characteristics of the transaction may be destroyed. Also, a lessor may negotiate a "put" to a third party as a hedge against future losses on the sale of the residual.

Related Parties

In accordance with Financial Accounting Standards No.13, related parties in a lease transaction could be a parent company and its subsidiaries, an owner and its joint ventures, and an investor and its investees provided they have the ability to exercise significant influence over the financial and operating policies of the related party. Under the US Internal revenue Code, 50 percent ownership is a general test for a related.

Renewal Option

An option frequently given to a lessee to renew the lease term for a specified rental rate and time period. If this is done improperly, it may be subsequently ruled that the lease is not a "true" lease; with the tax advantages lost and the possibility that the tax indemnity clauses might be activated.

Residual (Residual Value)

The value of equipment at the conclusion of the lease term. To qualify the lease as a "true" lease for tax purposes, the estimated residual value at the end of the lease term must equal at least 20 percent of the original cost of the equipment.

Return on Investments (The yield)

The interest rate earned by the lessor in a lease, which is measured, by the rate at which the excess cash flows permit recovery of the investment. The rate at which the cash flows (not needed for debt service or payment of taxes) amortize the investment of the equipment investor.

Right of First Refusal

If a lease contains a right of refusal, the lessor retains the right to continue ownership of the equipment, at the end of the lease term. The lessor is under no obligation to sell the equipment, but if the lessor offers the equipment for sale at a stated price, the lessee then has the right of first refusal to purchase the equipment or refuse the offer.

Sale-Leaseback

A transaction, which involves the sale of property by the owner to the lessee, who, in turn, leases the property, back to the seller.

Security Agreement

An agreement between the owner trustee and the indenture trustee in which the owner trustee assigns title to the equipment, the lease, and the rental payments under the lease as security for the amount due to the lenders.

Sinking Fund

A fund frequently established by the lessor in leveraged lease transactions to accumulate funds to pay for future taxes.

Sinking Fund Rate

The interest rate that a sinking fund is set to earn on accumulated funds. It is calculated as a percentage of the income used to establish the reserve.

Special Purpose Property

Property which is uniquely valuable to the lessee and not valuable to anyone else, except as scrap.

Spread

The difference between two values. In lease transactions, the term generally is used to describe the difference between the lease interest rate and the interest rate on the debt.

Stipulated Loss Value

See casualty value.

Termination Option

An option which allows the lessee to terminate a lease during the lease term for a predetermined value if the equipment becomes obsolete or surplus to the lessor's needs. The lessor usually requires the lessee to sell the equipment to an unaffiliated third party and the lessee must pay the lessor any amount from the proceeds of the sale less than the termination value. Typically, any excess sales proceeds go to the lessor.

Termination Schedule

When the lease contains a provision which allows it to be terminated because the equipment becomes obsolete or is no longer needed, the equipment must be sold or transferred to another party unconnected to the lease. The liability of the lessee is set forth in the termination schedule.

Trustee

A bank or trust company, which holds title to or a security interest in a leased property in trust for the benefit of the lessee, lessor, and/or creditors of the lessor. A leveraged lease often has two trustees: the owner trustee and the indenture trustee.

Unguaranteed Residual Value

The portion of a residual value "at risk" for a lessor in the yield computation, i.e., for which no party is obligated to pay.