 
    U.S. Leasing's Glossary of Leasing Terms

          A Glossary of Leasing Terms

Leasing presents a flexible and creative method of
acquiring nearly any kind of equipment.  In order to
maximize leasing's benefits, you need to have a good
understanding of the basics.  Knowledge of the various
terms and issues will assist you in evaluating leasing
options.  We hope you will find this glossary a
valuable guide and helpful in reaching the right
decision for your enterprise and clients.

 Add-On
A transaction to add related equipment to an existing
lease. Typically, this term is used when the new
equipment is financed using the same lease structure
(i.e., Fair Market Value, $1.00 Purchase Option, Fixed
Purchase Option, etc.) as was used in the underlying
transaction except that the lease term for the add-on
is set so that it expires coterminously with (on the
same date as) the original transaction.

 Advance Payments
Payments made by the lessee at the inception of a
leasing transaction.


 Amortization
A breakdown of periodic loan payments into two
components: a principal portion and an interest
portion.

 APR
Annual Percentage Rate.  The effective rate taking into
account compounding and other fees.  The nominal rate
of interest for a specified period (usually one year).

 Bargain Purchase Option
An option given to the lessee to purchase the equipment
on lease at a price that is less than the expected fair
market value so that, at the inception of the lease, it
is reasonable to assume that the lessee will definitely
purchase the equipment on the option date.

 Capital Lease
A lease that meets at least one of the criteria
outlined in paragraph 7 of FASB 13 and, therefore, must
be treated essentially as a loan for book accounting
purposes.  The four criteria are:

 1) Title passes automatically by the end of the lease
    term (i.e., less than the fair market value)
 3) Lease term is greater than 75% of estimated
    economic life of the equipment
 4) Present value of lease payments is greater than
    90% of the equipment's fair market value

A Capital Lease is treated by the lessee as both the
borrowing of funds and the acquisition of an asset to
be depreciated; thus the lease is recorded on the
lessee's balance sheet as an asset and corresponding
liability (lease payable). Periodic lessee expenses
consist of interest on the debt and depreciation of the
asset.

 Capped Fair Market Value Lease
A Fair Market Value Lease with a predetermined ceiling
to limit Fair Market exposure at the end of the lease
term.

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

 Depreciation
A tax deduction representing a reasonable allowance for
exhaustion, wear and tear, and obsolescence, that is
taken by the owner of the equipment and by which the
cost of the equipment is allocated over time.
Depreciation decreases the company's balance sheet
assets and is also recorded as an operating expense for
each period.  Various methods of depreciation are used
which alter the number of periods over which the cost
is allocated and the amount expensed each period.

 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.

 Estimated Useful Life
The period during which an asset is expected to be
useful in trade or business.

  1) Used for purposes of calculating the maximum
     allowable term of a tax lease.
  2) Used for determining whether or not the lease is
     a Capital Lease.
  3) Used to determine the method of depreciation for
     a capitalized leased asset.
  4) May or may not be the same as the life used for
     income tax purposes.


 Fair Market Value
The price for which property can be sold in an "arms
length" transaction; that is, between informed,
unrelated, and willing parties, each of which is acting
rationally and in its own best interest.

 Fair Market Value Lease
A lease which includes an option for the lessee to
either renew the lease at a fair market value renewal
or purchase the equipment for its fair market value at
the end of the lease term.  Though often referred to as
tax leased, not all Fair Market Value leases qualify as
tax leases.

 Finance Lease
A lease used to finance the purchase of equipment; not
a true lease. Finance leases are generally considered
to be capital leases from an accounting perspective and
non-tax leases from a tax perspective.

 Financial Accounting Standards Board 13
Statement number 13 of the Financial Accounting
Standards Board (FASB) which establishes standards for
lessees' and lessors' accounting and reporting for
leases.  This includes the characterization of a lease
as an operating lease or capital lease for the lessee's
purposes. A company's assets, liabilities and net
income will differ depending on how it chooses to
structure its leases.  The provisions of FASB 13 derive
from the view that a lease that transfers substantially
all of the benefits and risks of ownership should be
accounted for as the acquisition of an asset and the
incurrence of an obligation by the lessee (a capital
lease) and as a sale or financing by the lessor. Other
leases should be accounted for as the rental of
property (operating leases).

 Fixed Purchase Option
An option given to the lessee to purchase the leased
equipment from the lessor on the option date for a
guaranteed price.  Both the date and the price must be
determined at the inception of the lease.  A typical
fixed purchase option is 10% of the original cost of
the equipment.

 Full Payout Lease
A lease in which the total of the lease payments pays
back to the lessor the entire cost of the equipment
including financing, overhead, and a reasonable rate of
return, with little or no dependence on a residual
value.

 Incremental Borrowing Rate
The rate that, at the inception of the lease, the
lessee would have incurred to borrow over a similar
term the funds necessary to purchase the leased asset.

 Lease
A contract through which an owner of equipment (the
lessor) conveys the right to use its equipment to
another party (the lessee) for a specified period of
time (the lease term) for specified periodic payments.

 Lease Purchase
Full payout, net leases structured with a term equal to
the equipment's estimated useful life.  Because many
Lease Purchases include a bargain purchase option for
the lessee to purchase the equipment for one dollar at
the expiration of the lease, these leases are often
referred to as dollar buyout or buck-out leases.  Lease
Purchases are generally considered to be Capital Leases
from an accounting perspective and non-tax leases from
a tax perspective due to their bargain purchase option
and length of lease term.

 Lease Schedule
A schedule to a Master Lease agreement describing the
leased equipment, rentals and other terms applicable to
the equipment.

 Lessee
The party to a lease agreement who is obligated to pay
the rentals to the lessor and is entitled to use and
possess the leased equipment during the lease term.

 Lessor
The party to a lease agreement who has legal or tax
title to the equipment (in the case of a true tax
lease), grants the lessee the right to use the
equipment for the lease term and is entitled to receive
the rental payments.

 Master Lease
A continuing lease arrangement whereby additional
equipment can be added from time to time merely by
describing that equipment in a new lease schedule
executed by the parties.  The original lease contract
terms and conditions apply to all subsequent schedules.
To be contrasted with a lease contract for a single
transaction involving a specific unit of equipment, a
Master Lease is essentially a line of credit to draw
from over time in order to purchase equipment.

 Municipal Lease
A lease designed to meet the special needs of state and
local governments.  The lease contains a
non-appropriation clause which states that the only
condition under which the entity may be released from
its payment obligation is when the legislature or
funding authority fails to appropriate funds.  Since
the lessee is a municipality or an organization
supporting the government, it is exempt from paying
federal income taxes. For this reason, the IRS does not
charge the lessor income taxes on leases to these
customers.

 Off Balance Sheet Financing
A lease that qualifies as an Operating Lease for the
lessee's financial accounting purposes.  Such leases
are referred to as off-balance sheet financing due to
their exclusion from the balance sheet asset and debt
presentation, except for that portion of the payments
that is due in the current fiscal period.  Full
disclosure of such transactions is typically made in
the auditor's notes to the financial statements.
Periodic payments are recorded as expense items on the
lessee's income statement.

 Operating Lease
A lease which is treated as a true lease (as opposed to
a loan) for book accounting purposes.  As defined in
FASB 13, an operating lease must have all of the
following characteristics:

  1) lease term is less than 75% of estimated
      economic life of the equipment

  2) Present value of lease payments is less than 90%
      of the equipment's fair market value

  3) Lease cannot contain a bargain purchase option
      (i.e., less than the fair market value)

  4) Ownership is retained by the lessor during and
      after the lease term

An operating lease is accounted for by the lessee
without showing an asset (for the equipment) or a
liability (for the lease payment obligations) on his
balance sheet.  Periodic payments are accounted for by
the lessee as operating expenses of the period.

 Payment in Advance
Periodic payments are due at the beginning of each
period.

 Payment in Arrears
Periodic payments are due at the end of each period.

 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.

 Purchase option
An option given to the lessee to purchase the equipment
from the lessor, usually as of a specified date.

 Residual Value
The book value that the lessor depreciates a piece of
equipment down to during the lease term, typically
based on an estimate of the future value, less a safety
margin.

 Sale-leaseback
A transaction that involves the sale of equipment to a
leasing company and a subsequent lease of the same
equipment back to the original owner, who continues to
use the equipment.

 Skip-payment Lease
A lease that contains a payment stream requiring the
lessee to make payments only during certain periods of
the year.

 Step-up or Step-down
A feature of a lease that contains a payment stream
that either increases (step-up) or decreases
(step-down) in amount over the term of the lease.

 Tax-Exempt Entity
Tax-Exempt Entities, for federal income tax purposes,
generally include: any federal, state or local
government (including their agencies and
instrumentalities); any organization that is exempt
from federal income taxes, such as non-profit
charitable organizations; and most foreign persons or
entities, unless a significant portion of their gross
income is subject to federal income tax.

 Tax Lease
A generic term for a lease in which the lessor takes
the risk of ownership (as determined by various IRS
pronouncements) and, as the owner, is entitled to the
benefits of ownership, including tax benefits.

 Useful Life
The period of time during which an asset will have
economic value and be usable.  The useful life of an
asset is sometimes called the economic life of the
asset.  To qualify as an operating lease, the property
must have a remaining useful life of 25 percent of the
original estimated useful life of the leased property
at the end of the lease term, and at least a life of
one year.

 Upgrade
To trade in leased equipment for a newer, more advanced
model during the lease term.
