Glossary

Question 1

Accelerated Depreciation

Answer 1

A depreciation method, such as the Modified Accelerated Cost Recovery System (IRS tax depreciation), that allows write-offs more quickly than the straight-line method, which allows write-offs in equal increments as tax deductions in each tax year. This depreciation deductions useful for companies with tax liabilities as it offsets taxable income.

Question 2

Add-On

Answer 2

A transaction that adds 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 the original transaction.

Question 3

ADR System

Answer 3

Asset Depreciation Range. The range of depreciable class lives allowed by the Internal Revenue Service (IRS) for particular classes of depreciable assets.

Question 4

ADS System

Answer 4

Alternative Depreciation System. Created by Section 168(g) of the Internal Revenue Code of 1986, and amended (IRC), ADS provides a slower deprecation schedule than MACRS. It applies to property predominantly used outside the U.S. during a tax year or by a tax exempt entity.

Question 5

Advance Payments

Answer 5

Payments made by the lessee at or prior to the inception of a leasing transaction, and thereafter during certain constant periods before the use of equipment or other capital asset occurs for which payment is made.

Question 6

Alternative Minimum Tax (AMT)

Answer 6

A flat tax to ensure that corporate and high-income taxpayers pay at least some minimum tax, regardless of their deductions. An alternative, separate tax calculation based on a taxpayer’s regular taxable income, and increased by the taxpayer’s tax preference items for the year. The resulting amount is called the Alternative Minimum Taxable Income (AMTI). After certain exemptions and offsets, the taxpayer determines the AMT owed, and is required to pay whichever amount is larger: the regular tax or the AMT. Among the tax preferences that can increase a taxpayer’s AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer who buys equipment may be subject to the AMT rather than to regular tax.

Question 7

Amortization

Answer 7

A breakdown of periodic loan payments into two components: a principal portion and an interest portion. In tax parlance, amortization refers to IRC Section 197 that provides for specified intangible assets to be amortized over a fifteen (15) year period.

Question 8

Annual Percentage Rate (APR)

Answer 8

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).

Question 9

Accounting Standards Codification (ASC)

Answer 9

Accounting Standards Codification (ASC) is a system instituted by the FASB to codify all accounting rules (US GAAP). FAS 13 is now known as ASC Topic 840, to be replaced by ASC Topic 842 when the new rules are effective (2019 for public companies and 2020 for private companies).

Question 10

Asset

Answer 10

Any item property owned by an individual or company that may be subject to a lease or serve as collateral for a loan.

Question 11

Asset-Based Lending

Answer 11

Borrowing based secured business loans with the loan to value ratios depending on the estimated liquidating values assets being financed. Assets financed typically are receivables, inventory and PP&E. This product is suited for non-investment grade businesses who cannot issue public debt. They often need banks and finance companies to fund their business.

Question 12

Asset-Based Loan

Answer 12

A secured business loan in which the borrower pledges as collateral any or all of the assets used in the conduct of its business. In equipment finance, sometimes categorized as a type of assed-based finance, the asset could be virtually any capital asset, including a computer, furniture, fixtures, facilities (mixed real and personal property such as a power plant), aircraft, vessels

Question 13

Balloon Payment

Answer 13

A large, lump-sum payment scheduled at the end of a series of smaller periodic payments with respect to applicable loan and lease financing transactions.

Question 14

Bargain Purchase Option

Answer 14

A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception that is substantially lower than the expected fair market value at the date the option can be exercised such that the lessee is reasonably certain to exercise the option.

Question 15

Basis Point

Answer 15

A unit of measurement equal to 1/100th of a percent. For example, 25 basis points = .25%.

Question 16

Big-Ticket or Large-Ticket

Answer 16

A market segment represented by financing over $5 million.

Question 17

Broker

Answer 17

A company or person who arranges, for a fee, transactions between lessees and lessors with respect to a particular type of an asset, such as a business jet.

Question 18

Capital Assets

Answer 18

Property used in business for a period of more than a year, including machinery, equipment and other significant property.

Question 19

Capital/Finance Lease

Answer 19

A lease accounting concept under Financial Accounting Standard NO. 13 (FAS 13) and not a legal concept. Now known as a finance lease under ASC Topic 842. In accounting parlance, a lease should be classified and accounted for by a lessee as a financed purchase and by the finance company, or lessor, as a sale or financing, if it meets any one of the following criteria:

(a) the lessor transfers ownership to the lessee at the end of the lease term;
(b) the lease contains an option to purchase the asset at a bargain price;
(c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life) or
(d) the present value of minimum lease rental payments is qual to 90 percent or more of the fair market value of the leased asset. A lease that fails all of these criteria is an operating lease for accounting purposes.

Question 20

Capped Fair Market Value Lease

Answer 20

A fair market value lease with a predetermined ceiling to limit fair market exposure at the end of the lease term.

Question 21

Certificate of Acceptance

Answer 21

A document that serves as proof that goods have been delivered to and accepted by the customer.

Question 22

Classification

Answer 22

The process of determining if a lease is in an operating lease or a finance lease. A lessee shall classify a lease as a finance lease and the lessor will classify a lease as a finance lease and the lessor will classify a lease as a direct finance lease if the lessee effectively obtains control of the underlying asset as a result of the lease. A lessee effectively options control of the underlying asset when the lease meets any of the following criteria at lease commencement:
a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
c. The lease term is for the major part of the remaining economic life of the underlying asset.
d. The sum of the present value of the lease payments and the present value of any residual value guaranteed by the lessee amounts to substantially all of the fair value of the underlying asset.
e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
When determining lease classification, one reasonable approach to assessing the criteria would be to conclude both of the following:
A. Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset.
B. Ninety percent or more of the fair value of the underlying asset amounts to substantially all of the fair value of the underlying asset.

Question 23

Closed End Lease

Answer 23

A lease agreement that puts no obligation on the lessee to purchase the leased asset at the end of the agreement or guarantee its residual value. Also called an FMV lease, as the customer can negotiate with the lessor to buy the asset or renew the lease at the then Fair Market Values. This term is used in the vehicle leasing business, as opposed to “Open End” leases.

Question 24

Collateral

Answer 24

Assets pledged by a borrower to secure a loan; these assets can usually be seized by the lender in the event of default.

Question 25

Commencement Date of the Lease (Commencement Date)

Answer 25

The date on which a lessor makes and underlying asset available for use by a lessee. It is the point at which a lease must be recorded under ASC 842.

Question 26

Comprehensive General Liability Insurance

Answer 26

A broad form of insurance that protects against all forms of liability, except those specified in the policy.

Question 27

Conditional Sale (Time Sale)

Answer 27

An agreement in which the seller retains title to the equipment and transfers it to the buyer when all contractual payments have been made.

Question 28

Conditional Sales Lease

Answer 28

A lease that is a disguised financing or conditional sale agreement. Although the document looks like a lease, it typically requires a substantial advance rent or down payment that may cause a court to treat the transaction as a secured loan. It is not finance “lease” as defined in UCC Article 2A.

Question 29

Coterminous

Answer 29

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

Question 30

Commercial Paper

Answer 30

An unsecured obligation issued by a corporation to finance short-term credit needs, such as accounts receivable or inventory.

Question 31

Conditional Sale

Answer 31

A loan, deferred sale or lease which, in each case, refers to a sale in which lessee (conditional buyer) takes possession of the equipment, but the lessor retains legal title to the equipment until the lessee makes the final lease or sale payment. After lessee makes the last payment, the lessor (conditional seller), without further payment, transfers title to the lessee (conditional buyer). Hence, the sale is conditioned on payment in full over a time period set at the inception of the transaction.

Question 32

Covenant

Answer 32

A clause in a contract, usually required by the finance company, that either requires the borrower to do a particular thing or refrain from doing a particular thing.

Question 33

Cross Corporate Guaranty

Answer 33

A guarantee by one person or entity to pay the lease obligations of another (often affiliated) person or entity.

Question 34

Current Expected Credit Loss (CECL)

Answer 34

An accounting model (ASC 326-20) intended by the FASB to accelerate and increase the amount companies book for a loan and lease losses. The CECL model has lessors and lenders reflect losses that are expected over the remaining contractual life of an asset even if that risk is remote.

Question 35

Dealer Finance

Answer 35

Financing an equipment dealer’s working capital and floor planning to get the retail lease and loan business when the dealer sells assets out of inventory. Leasing companies target dealers as a source of end user leases and loans. This concept is also sometimes referred to as “inventory finance”.

Question 36

Default

Answer 36

An event or circumstance in which a customer fails to comply with the terms of the lease contract or other agreement. Generally, after an event of default, the finance or leasing company may exercise all of its rights and remedies under its lease contract or other agreement or under applicable law (for instance, the Uniform Commercial Code) to repossess property and seek money damages.

Question 37

Delivery and Acceptance Certificate

Answer 37

A document that evidences the delivery and acceptance of a good, such as equipment, by the customer.

Question 38

Depreciation

Answer 38

Under Section 167 of the IRC, deprecation refers to the decline in value of property through its use and passage of time, wear and tear, technological change and obsolescence. Under accounting rules, depreciation also decreases the company’s balance sheet assets and is recorded is an operating expense for each period.

Question 39

Direct Financing Lease

Answer 39

From the perspective of a lessor, a lease that meets none of the classification criteria (See Classification) and where lease payments are reasonably expected to be paid by the lessee and all the costs of the asset are known.

Question 40

Discount Rate

Answer 40

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 reflects the time value of money from future cash flows. A discount rate is used under ASC Topic 842 to present value lease payments to capitalize operating leases. Such discount rate is the lesse’s incremental borrowing rate or the lessor’s implicit rate, if known by the lessee (it is only known if the lessee knows the lessor’s residual which only occurs in synthetic leases or TRAC leases).

Question 41

Documentation Fee

Answer 41

A fee charged by the lessor/lender for preparing, distributing and storing transaction documents in any finance transaction.

Question 42

Early Buy-Out

Answer 42

The purchase of equipment or other assets before the end of the applicable lease term.

Question 43

Economic Life (aka Useful Life)

Answer 43

The period of time during which an asset will have economic value and be usable.

Question 44

Effective Lease Rate

Answer 44

The effective rate (to the customer) of cash flows resulting from a finance transaction. To compare this rate on an after-tax basis as compared to a loan interest rate, a company must include in the cash flows any affect the transactions have on federal tax liabilities.

Question 45

Equity Participant

Answer 45

The owner participant, truster or owner of a beneficial interest in a grantor trust or statutory trust. The equity participant finishes the equity investment portion of the purchase price of equipment that will be subject to the lease – often in leverages leases.

Question 46

Equipment Schedule

Answer 46

A document that describes in detail the equipment being leased, the financial terms and other terms, including the lease term, commencement date, repayment schedule and location of the equipment, as a supplement to the primary terms found in the related master lease. It is important to note that the Equipment Schedule is actually the “lease” (or chattel paper), rather than the Master Lease (which merely contains the base term which are incorporated into separate Equipment Schedule(s)). Each Equipment Schedule is independent from the Master Agreement and all other Equipment Schedules.

Question 47

Estimated Useful Life

Answer 47

The period during which an asset is expected to be useful in trade or business. Used for proposed of calculating the maximum allowable term of a tax lease, for determining whether or not the lease is classified as a Capital/Finance or Operating Lease, or to be determined the method of depreciation for a capitalized leased asset. May or may not be the same as the life used for income tax purposes.

Question 48

Fair Market Purchase Option

Answer 48

An option to purchase leased property and the end of the lease term at its then fair market value.

Question 49

Fair Market Value

Answer 49

The price for which property can be sold in an “arms length” transaction between informed and willing parties, each of which is acting rationally and in its own best interest based on the assumption that the equipment or other capital asset is in a known or required condition.

Question 50

The Financial Accounting Standards Board (FASB)

Answer 50

The Financial Accounting Standard Board, which sets accounting rules in the United States, subject to certain oversight by federal governmental agencies.

Question 51

Financial Accounting Standards No. 13 (FAS 13)

Answer 51

Financial Accounting Standards No. 13 of the Financial Accounting Standards Board, which establishes standards for lessees’ and lessors’ accounting and reporting for leases. FAS 13 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 the classification of its leases based on their nature. The provisions of FAS 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). (FAS 13 is now know as Topic 840 and soon to be Topic 842 as a result of the project to codify all FASB accounting standards.)

Question 52

Finance Lease

Answer 52

A finance lease, in a business sense, is typically a full-payout, non cancellable agreement in which the customer is responsible for maintenance, taxes and insurance, However, the term “finance lease” also refers in Article 2A of the Uniform Commercial Code (UCC) to a special type of “lease” in which the lessor, lessee and the manufacturer have contractual relationships and the lessor at all times, with the lessees acknowledgement, remains a passive investor where the lessee makes most equipment decisions directly with the manufacturer.

Question 53

First Amendment Lease

Answer 53

A lease that provides the lessee with a purchase option at one or more defined points during the lease term. The customer must renew or continue the use of equipment under the lease if the purchase option is not exercised. The option price is usually either a fixed price intended to approximate fair market value or is defined as fair market value, determined by the lessee’s appraisal, and subject to a price floor that insures the finance company’s residual position will be covered if the purchase option is exercised. If the purchase option is not exercised, then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the lessor’s end-of-term residual position. The lessee is not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, the lessee typically has the right either to return the equipment without penalty or to renew or purchase at fair market value.

Question 54

Fiscal Funding Clause

Answer 54

A provision (also called a “non-appropriation” clause) by which the lease is cancelable if the legislature of other funding authority does not appropriate the funds necessary for the governmental unit to fulfill its obligations under the lease agreement beyond the current budget year.

Question 55

Fixed Asset

Answer 55

A tangible asset, such as real estate or furniture, fixtures or equipment held for business use.

Question 56

Fixed Priced Purchase Option

Answer 56

An option given to the lessee to purchase leased equipment from the lessor on the option date for a certain price. Both the date and price must be determined at the inception of the lease. A fixed price purchase option could equal as little as 10-15 percent of the original cost of the equipment.

Question 57

Full Payout Lease

Answer 57

A lease in which the finance company recovers, through the lease payments, all investment incurred in the lease transaction, plus an acceptable rate of return, without any reliance upon the future residual value of the equipment.

Question 58

General Partnership

Answer 58

A business partnership in which each partner is responsible for all obligations incurred by the partnership.

Question 59

Guaranty

Answer 59

An agreement by one party to accept responsibility for a financial obligation of another person. The guarantor’s obligation is generally triggered when the primary person or entity does not satisfy the guaranteed obligation.

Question 60

Guarantor

Answer 60

One who guarantees a debt or obligation of another person or entity.

Question 61

Hell-Or-High-Water Clause

Answer 61

A clause that assures a lessor that it will be paid rent no matter the circumstances. That remains true even if the lessor allegedly breaches its obligations. The lessor’s wrongful act is treated as a separate and independent event and does not affect the lessee’s obligation to perform under the lease. This extremely important clause turns leases into financial assets that lessors can assign to other financial institutions or use to secure funding to a lessor from its lenders.

Question 62

Incremental Borrowing Rate

Answer 62

The rate that, at the inception of the lease, the lessee would incur to borrow over a similar term the funds necessary to purchase the leased asset. In other words, the fixed interest rate at a lessee would have to pay if, instead of leasing, the lessee finances the purchase of the same asset. Most lessees do not borrow fixed rate money so a proxy would be swapping the lessees revolver rate to fixed assuming the term of the lease.

Question 63

Indemnity Clause

Answer 63

A clause in which a lessee or borrower, and sometimes the financier, agrees in favor of the other party, to hold the other party harmless and free of liability for specified losses or damages incurred in the underlying transaction. As passive investors and lenders only, financiers typically obtain very broad indemnities from their customers to protect them against any loss, damage or liability associated with lending in respect of, or leasing, equipment or other capital asset. In Ethyl Corporation v Daniel Construction Co., 725 S.W2d 705 at 709 (Texas Sup. Ct. 1987), the court defined an indemnity agreement as a “collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from the legal consequences of an act or forbearance on the part of one of the parties or of some third person.” In other words, an indemnity agreement is a promise by one party, called an indemnity, to safeguard or hold the protected party, called the indemnity, harmless against existing and/or future loss, damage, and expense or injury liability.

Question 64

Initial Direct Costs (IDC)

Answer 64

Incremental costs of a lease that would not have been incurred if the lease had not been obtained. An example is sales person’s commission. Initial direct costs (IDC) are deferred and amortized over the lease term.

Question 65

Insurable Value

Answer 65

The agree or stated value, or other appropriate value, of equipment or other capital assets after all exclusions, such as maintenance or service charges, that an insurance company will provide casualty or property insurance to cover losses or damage to the equipment or other capital asset.

Question 66

Investment Grade Credit

Answer 66

A company rated highly by one of many recognized credit agencies, such as moody’s investors Service or Standard & Poor’s. The rating agencies rate publicly issued securities month other services regarding information for investors.

Question 67

Large-Ticket (aka Big-Ticket)

Answer 67

A market segment represented by financing over $5 million.

Question 68

Lease

Answer 68

A contract that includes an option for the lessee either to renew the lease at fair market rental value or to purchase the equipment for its fair market value at the end of the lease term. Fair market value exists when a willing buyer and willing seller agree on rent purchase price, respectively, assuming the equipment is in the condition required by the lease in which the option is granted. A lease may contain either or both options.

Question 69

Lease Assignment

Answer 69

The transfer of a lease by a lessee to a third party. Many leases contain clauses that restrict or prohibit lease agreements may not be enforceable under the UCC.

Question 70

Lease Line

Answer 70

A specific amount of funding arrangement designated by the lessor for a lessee to use over a fixed commitment period typically arranged under a master lease.

Question 71

Lease Payments to be Capitalized

Answer 71

At the commencement date, the lease payments shall consist of the following payments related to the use of the underlying asset during the lease term:

a. Fixed payments, including a substance fixed payments, less any lease incentives paid or payable to the lessee.
b. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured during the index or rate at the commencement date.
c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option.
d. Payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
e. Fees paid by the lessee to the owner of a special-purpose entity for structuring the transaction.
f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees. For purposes of lease classification testing, the full amount of any lessee residual guarantee is counted.

Lease payments do NOT include any of the following:

a. Variable lease payments other than those above.
b. Any guarantee by the lessee of the lessor’s debt.
c. Amounts allocated to non lease components.

Question 72

Lease Purchase Contract

Answer 72

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 Dollar-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.

Question 73

Lease Rate (Rental Payment)

Answer 73

A percentage rate equivalent to the periodic rental payment to be paid in dollars (often computed by applying the rate to the lease balance).

Question 74

Lease Term

Answer 74

The noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following:

a. Periods covered by an option to extend the lease if the lessee is reasonable certain to exercise that option.
b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
c. Periods covered by an option to extend (or not to terminate) the lease is which exercise of the option is controlled by the lessor.

Question 75

Lessor

Answer 75

The party to a lease agreement who has legal, beneficial or tax title to the equipment, grans the lessee the right to use and possess the equipment for the lease term, and is entitled to the rentals.

Question 76

Letter of Credit

Answer 76

A “Commercial letter of credit” is a credit document used by a buyer to pay for goods. The buyer arranges with a bank to issue a letter for the benefit of a third party who can draw funds from the commercial letter of credit to pay for good is sells in a domestic or International trade deal. A “standby letter of credit” is a financial accommodation independently issued by financial institutions to and for the benefit of third parties for the account of a debtor. The issuer agrees to allow a third party, which is the beneficiary, to draw funds under the standby letter of credit when some contingency occurs, such as a default under a lease or an insurance premium or deductible payment becomes due.

Letters of credit support business transactions in over 160 countries. Lessors may rely on them to enhance the creditworthiness of a lessee in a transaction. Lenders ay issue or rely on them to enable companies to fund business worldwide. For more than 70 years, letters of credit have provided the basis for buying and selling goods and financing transaction the globe in part under rules established by the International Chamber of Commerce (ICC).

Question 77

Leveraged Lease

Answer 77

A lease in which the lessor/finance company invests equity into a trust for the purchase of equipment or other capital assets. The lessor/trust leases the asset to the lessee. The lender has recourse only to the rents and the leased asset.

Question 78

Limited Guarantee

Answer 78

An agreement by a person or entity to pay the obligation of another up to a cap or limit on the total payment. A grantor is a surety, a back-up person or entity who pays would the obligor, such s a lessee, borrower or buyer, fail to perform.

Question 79

Line of Credit

Answer 79

An arranged amount of credit that a lender may advance a borrower under various types of credit agreements. Such advances may be based on several factors, such as inventory, accounts receivable and equipment as collateral and creditworthiness of the borrower.

Question 80

Loan

Answer 80

A financing agreement that allows a business to acquire equipment after investing in a down payment. A loan may require the borrow to pledge other assets for collateral. Loans also can provide tax and accounting advantages that may best serve a company’s financial structure.

Question 81

MACRS Class Life

Answer 81

The life of equipment depreciated by the modified acceleration cost recovery system.

Question 82

Master Lease

Answer 82

A “master” agreement between a lessor and lessee which contains the base terms which are in turn incorporated into Equipment Schedules. The Master Lease is operate and independent from all Equipment Schedules. By using a Master Lease, the customer is able to acquire other equipment in the future under the same basic terms and conditions without negotiating a new lease contract. Typically, the customer signs a new schedule and related documents to add the new equipment.

Question 83

Middle Market

Answer 83

A market segment generally represented by financing under $5 million and dominated by single investors leases.

Question 84

Modified Accelerated Cost Recovery System (MACRS)

Answer 84

The Tax Reform Act of 1986 (Tax Act) established and modified accelerated cost recover system, called MACRS. MACRS is a tax depreciation system that allows a business to recover the cost of income-producing property over a specific recovery periods. The Tax Act established an accelerated system of allowing a business to take deductions faster than in equal amounts (straight line) over a period of years. Equipment cost is recovered over periods based on class lives of 3, 5, 7, 10, 15, or 20 years.

Question 85

Municipal Lease

Answer 85

A financial contract between a state or local government, such as a county, city, town, state university or municipal authority and the lessor. The lease terms must contain a fiscal funding clause (or non-appropriation clause) that allows the lessee to terminate if funds are not appropriated in the municipalities annual budget for the lease payments (also known as non-appropriations risk). If properly structured and documented, the interest can be tax exempt to the lessor.

Question 86

Negative Amortization

Answer 86

An increase in debt that accuses over time when payments made are insufficient to cover the interest due with each payment.

Question 87

Net Lease

Answer 87

A property lease in which the customer agrees to pay all expenses normally associated with ownership, such as taxes, maintenance and insurance.

Question 88

Non-Lease Lease

Answer 88

A lease in which the purchase option is a bargain and a prudent business person would purchase that results in the transfer of title to the lessee. Such leases are treated as loans because there is no residual value expectation or risk for the lessor at the end of the lease term like risks that owners take.

Question 89

Non-Recourse Loan

Answer 89

A type of loan for which the sole payment source is the collateral or its cash flow; and the only remedy available to the lender in the event of default is to foreclose on the collateral. The borrower is not personally liable for repayment. This type of loan is most often seen in leveraged leases and in various loans made in respect of lease interests in equipment or the other capital assets.

Question 90

Non-Standard Financing Agreements

Answer 90

A new category of financing products frequently featuring termination/upgrade/downgrade rights, bundled hardware, software, services and maintenance, consumption-based/flexible fulfill the agreement.

Question 91

Off-Balance-Sheet Financing

Answer 91

A lease that, due to application of the FAS 13 classification test, is an operating lease. The leased asset and lease obligation do not appear on balance sheets (“off-balance sheet”) of the lessee; rather, the cost of the lease is treated as an expense (rent expense). The lessee acquires the right to use the asset and pays for that right through rent paid over the lease term – hence the term “financing.”

Question 92

Open-End Lease

Answer 92

A conditional sale lease (includes synthetic, TRAC and Split TRAC leases) in which the customer guarantees that the finance company will realize a minimum value from the sale of the asset at the end of the lease. This is a term used in vehicle leasing and means the lessees liability is “open” meaning unknown. See TRAC Lease.

Question 93

Operating Lease

Answer 93

A business concept (NOT the accounting concept under FAS 13) in which the lease lasts for short-term of use of equipment by the lessee. The finance company retains ownership of the equipment and expects the lessee to return the equipment at the end of a term of three to 10 years. The lessor realized its return through higher rents and residual value, which usually requires and results from sales or re-leasing of the returned equipment. Additional services, such as maintenance and insurance, may be provided by the lessor.

Question 94

Packager

Answer 94

The finance company, investment banker or broker who arranges a leveraged lease or other lease transaction.

Question 95

Payment in Advance

Answer 95

Payment made before the actual obligation arises for which payment is due.

Question 96

Payment in Arrears

Answer 96

Payment made after the obligation arises and payment becomes due has been incurred by the debtor.

Question 97

Present Value

Answer 97

The current equivalent of payments or a stream of payments to be received at various times in the future. The present value will vary with the discount interest factor applied to future payments.

Question 98

Project Finance

Answer 98

A transaction in which capital is provided to the customer to finance a specific project. Usually a complex transaction, the project often involves non-recourse debt to the project company which owns the capital asset. The project company’s cash flow from the project and project capital assets provide most, if not all, of the security to financiers advancing funds to pay for the project’s assets. The sponsor typically makes an equity investment is paid its return after the debt service has been paid as negotiated by the parties. A project financing may be composed of one or more loans, including subordinated debt, and/or a lease of real estate, equipment or there capital assets.

Question 99

Purchase Option

Answer 99

A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount, Specified percentage, or at fair market value.

Question 100

Put Option

Answer 100

The requirement of a lessee to purchase equipment at a particular time and at a predetermined price. In a lease transaction, this is a lessor’s right to force the lessee (or some third party) to purchase the equipment at the end of the lease term. IRS guidelines prohibit put options in tax-oriented leases.

Question 101

Rate Implicit in the Lease

Answer 101

The rate of interest that, at a given date, causes the aggregate present value of:

(a) the lease payments and;
(b) the residual value amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair market value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor. It is the internal rate of return in the lease.

Question 102

Recourse Agreement

Answer 102

An agreement with a vendor whereby the vendor will purchase or repurchase the lessor’s interest in a lease, usually upon demand, after default of the lessee. Generally, the lease must be in default and a reasonable amount of collection effort must be made by the lessor.

Question 103

Refinance

Answer 103

To pay off an existing loan with a new one with using the same property as collateral.

Question 104

Remarketing

Answer 104

The process of selling or leasing of used equipment or other capital assets performed by equipment management personnel of the lessor or independent parties.

Question 105

Residual Value

Answer 105

The value of an asset at the conclusion of a lease.

Question 106

Sale-Leaseback

Answer 106

An arrangement whereby in a finance company purchases equipment from the business using the equipment. The finance company then becomes the equipment owner, and leases the equipment back to the original owner, which continues to use the equipment without disruption.

Question 107

Sales/Use Tax

Answer 107

States impose sales taxes on retail sale transactions. States impose use taxes for tangible personal property that is used, consumed or stored in the state. See below for a definition of “Use Tax”.

Question 108

Securitization

Answer 108

A securitization is the aggregation of large pools of financial assets, such as aircraft leases, credit card receivables, equipment leases, mortgages and student and other loans which serve as collateral for securities issued by a special purpose entity. The investors (which could include the public) purchase an interest in the pool in the form of bonds which are typically rated by one or more rating agencies. The bonds represent debt obligations of the issuer (rather than the originator). They are secured or “collateralized” by the pool of assets. Because the issuer is almost always a special purpose entity with no other source of payment, the cash flow from the pool of assets usually provided the only means to repay the bonds.

Question 109

Short-Term Lease

Answer 109

A lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Lessee may elect not to capitalize short term leases.

Question 110

Short-Term Loan

Answer 110

Loans usually structured to last one year or less, and often paid at the end of the term in a lump sum.

Question 111

Small-Ticket Market

Answer 111

A market segment generally represented by transactions under $250,000.

Question 112

Spread

Answer 112

The difference between funding costs and the rate of return to the lessor on a lease.

Question 113

Step Lease

Answer 113

A financial contract in which the rent may change during the term of the lease contract. The rent change is known at inception, and is agreed upon by the financing company and lessee. Often a step-up lease allows the lessee to pay less initially and more later in the term. A step down lease works in the reverse manner, allowing the lessee to pay more initially and less later as the payment amount decreases over the term of the lease contract. These contracts are sometimes referred to as a “low-high” and a ‘high-low” lease structure, respectively.

Question 114

Stipulated Loss Value

Answer 114

A schedule included in a lease that states the agreed value of equipment at various times durning the term of the lease and establishes the liability of the lessee to the lessor in the event that the leased equipment is lost or rendered unusable during the lease term due to a casualty loss.

Question 115

Syndications

Answer 115

Participations of financial institutions in a sale and/or assignment of all or part of an underlying lease or loan transaction. For example, the lease rentals from a transaction originated by a lessor may be assigned to another financier as collateral for a loan to the assigning lessor or as an outright lease of lease rental stream.

Question 116

Synthetic Lease

Answer 116

A financing agreement structured to be treated as a lease for accounting purposes, but as a loan for tax purposes. Synthetic leases may be used by corporations seeking off-balance sheet reporting of the asset-based financing, and which take the tax benefits of owning the financier equipment.

Question 117

Tax-Exempt Entity

Answer 117

A business or group that is not subject to taxation, such as a philanthropic organization, state college, governmental subdivision (i.e., city or county) or other government organization.

Question 118

Tax Lease or Guidelines Lease

Answer 118

Revenue Procedure 2001-28 (Rev. Proc> 2001-28) Establishes criteria for classifying a lease as a true lease for federal income tax purposes. It is the successor to Revenue Procedure 75-21, 1975- C.B. 715 and other related revenue procedures. Technically, Rev. Proc. 2001-28 establishes criteria for obtaining and advance ruling from the Internal Revenue Service (IRS) that a lease is a “true lease” for tax purposes, which entitles the lessor to take tax benefits arising from the purchase and lease of equipment to the lessee.

Question 119

Term Loan

Answer 119

Financing generally used for working capital, expansion, refinancing and acquisitions; repaid monthly or other agreed interval for a specified term.

Question 120

TRAC Lease (Terminal Rental Adjustment Clause)

Answer 120

A lease that contains a special provision called a “terminal rental adjustment clause.” TRAC leases apply to motor vehicles (including trailers) used more that 50% of the time in the trade or business of the lessee. Sometimes called an “open-end lease,” a TRAC lease requires the lessee to make an unknown (open-ended) payment to the lessor at the end of the lease term. This “terminal rent” payment makes up any shortfall due to the lessor if the lessor does not receive proceeds of a sale or other disposition of the vehicle sufficient to recover its investment plus its return on the investment. The transaction looks and works like a balloon loan because the lessor transfers all residual value risk to the lessee. The lessor realizes residual value either when the lessee exercises an option to purchase the asset at the end of the lease at a stipulated amount or when the lessor sells the asset to a third-party. If the disposition of the vehicle results in excess proceeds, the lessee generally retains the excess.

Question 121

True Lease

Answer 121

A lease is generally described in state law as a transfer of the right to possession and use of equipment for a stated term in return for some consideration as described in UCC article 2A-103(1)(j). However, a true lease involved other considerations. Section 1-203 of the UCC provided guidelines to determine whether a transaction should be treated as a true lease or instead as a disguised security agreement. The guidelines require an objective analysis and are supposed to disregard the documents’ labels and the parties’ intent. Current law focuses on the underlying economics of the transaction and the specific facts to determine whether the transaction is a lease or disguised financing.

Question 122

Trustee

Answer 122

A bank or trust company that holds the title to or a security interest in leased property for the benefit of the lessee, lessor, and/or creditors of the lessor, as appropriate. A leveraged lease often has two trustees: an owner trustee and an indenture trustee. An owner trust owns the assets or interest therein and the indenture trustee represents the lenders that lend funds to the lessor on a non-recourse basis to purchase the equipment or other capital asset for lease to the lessee.

Question 123

Uniform Commercial Code (UCC)

Answer 123

A statute which prescribes very small rules in almost every state in the U.S. for secured transactions, leasing and other commercial and financial transactions. The UCC is intended to represent the best practices in commercial transactions and, in certain parts of the UCC, consumer transactions.

Question 124

Unsecured Loan

Answer 124

A loan that is not secured by assets, but is based solely on the creditworthiness of the customer.

Question 125

Upgrade

Answer 125

An improved and/or updated version of equipment or software, most often used with technology assets.

Question 126

Use Tax

Answer 126

Many states charge a “use” tax in lieu of a sales tax when equipment is leased. In practice, instead of paying a sales tay for purchase of the leased equipment, the lessor collects or lessees directly pay use taxes with respect to each rent period as a percentage of the rentals over the lease term.

Question 127

Useful Life

Answer 127

The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called its ‘economic life”

Question 128

Variable Lease Payments

Answer 128

Payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in fact or circumstances occurring after the commencement date, other than the passage of time. Common equipment lease variable payments are based on changes in rate or index, usage of the asset, and residual value.

Question 129

Vendor

Answer 129

An entity that sells goods and may provide services to customers

Question 130

Vendor Leasing

Answer 130

A working relationship between a financing source and a vendor who does not have a captive finance company to provide financing to stimulate the vendor’s sales. The financing source typically offers leases or conditional sales and, in some cases, service contracts to the vendor’s customers.