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The Language of Leasing

$1 Buy Out – For those who are fairly certain that they wish to purchase the equipment at the end of the lease term, this is the recommended plan. At the end of the lease term, the equipment is simply purchased for $1.

10% Option – For those who are uncertain whether they will want to purchase the equipment at the end of the lease term but who want to know exactly what it will cost if they choose to make the purchase, this is the recommended plan. At the end of the lease term, the equipment is purchased for 10% of its original cost.

Advance Rental Payment – This is the payment or payments made at the initiation of the lease contract (i.e., first rental payment or first and last rental).

Authorized Signature – This is a signature by a person who is authorized by a company to obligate that company to a contract (e.g., lease). In a proprietorship or partnership, this individual is the owner or general partner. In a corporation, this person is a corporate officer.

Capital Lease – This type of lease allows the lessee to retain the tax benefits of depreciation expense. It offers the widest flexibility of term length. At lease termination, it also provides a Fair Market Value, a fixed price/renewal, or a $1 purchase option for the equipment and/or software.

Certificate of Delivery & Acceptance – This is a document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable.

Closed-End Lease – This is a true lease in which the lessor assumes the depreciation risk. The lessee bears no obligation at the end of the lease. This term is used to distinguish the lease from an open-end lease.

Effective Lease Rate – This is the effective lease rate of the cash flows that result from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.

FASB 13 – This is a statement that is issued by the Financial Accounting Standards Board establishing financial accounting standards for lessees and lessors.

Fair Market Value (FMV) – For those who are worried about obsolescence, this plan offers the most options, both during and at the end of the lease. In addition, this plan is particularly beneficial to those who want to have both a small security deposit and a relatively low monthly payment. At the end of the lease term, the lessee has the option of extending the term of the lease, returning the equipment, or buying it at its fair market value.

Initial Term – This is the length of the non-cancelable lease, usually expressed as 12, 24, 36, 48, or 60 months.

Lease – This is a contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

Lease Rate (rental payment) – This is the periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit rate of return on the minimum lease payments.

Leasing Line – This is a maximum amount of funding that is designated by the lessor for a lessee to use over a fixed commitment period.

Lessee – This is a party who makes use of the property owned by another party (the lessor) and pays the lessor, usually in the form of rentals, for that use.

Lessor – This is a company or leasing entity that is the owner of the leased equipment for accounting, tax, or commercial law purposes.

Master Lease – This is a contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions, without negotiating a new contract.

Municipal Lease – Because of their tax-exempt status, many state universities, city, county, and state governments qualify for municipal leases. This status helps enable leasing companies to pass on savings to their clients through lower monthly payments.

Off Balance Sheet Financing – Unlike traditional methods of financing, operating lease obligations are not capitalized, thus improving balance sheet ratios. Leases are generally footnoted.

Open-End Lease – A lease that includes a provision for extending payments under the lease on predetermined terms after a set period of time.

Operating Lease – Sometimes called a “true lease,” this lease may be viewed as a rental and thus may be kept off the lessee’s balance sheet. At the end of an operating lease term, the lessee has the option of either purchasing or renewing at the product’s then-current Fair Market Value (FMV) or of returning the equipment. Operating leases are typically shorter than capital leases.

Purchase Option – This is 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 specific dollar amount or at fair market value.

Renewal Option – This is the lessee’s option of renewing a lease contract when it ends.

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 the purchase of the leased equipment, taxes are collected by the lessor as a percentage of the rentals over the lease term.

Residual Value – This is the value of an asset at the conclusion of a lease.

Security Deposit – This is a sum of money that is refundable at the end of the lease term, or that may be applied toward the purchase of the leased equipment.

True Lease – This is sometimes called a tax-oriented lease. It qualifies the lessor to claim and retain the tax benefits of ownership. It also qualifies the lessee to deduct the lease payments as an expense for tax purposes.

Uniform Commercial Code – This is a statutory program under the law for administering, legalizing, and recording contracts and lien instruments.

Useful Life – The period of time during which an asset will have economic values and is usable. Useful life of an asset is sometimes called the economic life of the asset.

Vendor Lease – This is a lease wherein an equipment manufacturer or distributor has its own leasing company, or an agreement with a leasing company, to offer lease financing as a sales aid. A vendor lease may be either a conventional true lease or a conditional sale.

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