Definitions

Acceptance - Acknowledging that the equipment has arrived at the lessee’s location and is in satisfactory condition. In many instances, the Lessor will not fund the manufacturer until this has been verified by phone or with a document signed.

Advance Lease (Rental) Payment - The payments that are due at the inception of the lease. This usually consists of one or two payments equal to the monthly payment. One payment is your first month’s payment and the other is a security deposit, equal to a monthly payment, that can be applied as your last payment.

Application Only - A one page application for an amount under $150,000 where no financials or additional documentation such as; tax returns, financials, business plans, etc. is needed. This is usually reserved for business owners with good credit.

Authorized Signatures - An authorized is usually indicated in the Corporate Resolution. This person has the authorization to sign the necessary documentation to committ the company to a long-term lease.

Closed End Lease - A true lease where 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-ended lease.

Commercial Lease - typically referred to this when the amount of the lease exceeds $250,000. The business will have to have been under the same ownership a minimum of 3 years and provide full financials. This can be audited financials, corporate tax returns, Personal financial statement of all owners exceeding 15% ownership, corporate resolutions, and any other documentation required by the lessor.

Deferred Payment Lease - After paying the first and security deposits, the next payments can be deferred out 30, 60, 90, or 120 days. This helps the business accomadate cash flow and/or Capital Budgeting requirements.

End of Lease Options - How the lease ends once all the payments have been made. Typical Options are the $1 Buyout, Fair Market Value, Purchase Upon Termination, etc. See Lease Structuresfor a listing of options for the end of the lease.

Equipment Finance Agreement (EFA) - A type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets one of the following criteria:

Exemption Certificate - The state document exempting the lessor and the lessee from paying any sales tax on the leased equipment. Typically reserved for non-profit organizations such as schools, churches, charity organizations, etc.

Fair Market Value Lease (FMV) - An option to purchase the equipment at the end of the lease term at its fair market value. The lessor does not have the ability to retain the title if the lessee chooses to exercise the purchase option. The following are typical FMV end of lease options:

FASB 13 - Statement issued by the Financial Accounting Standards Board establishing financial standards for lessees and lessors.

Financing Statement (UCC-1) - A standardizing form recorded with the Secretary of State and/or County Clerk to perfect a lien under the Uniform Commercial Code (UCC) by notification to all interested parties. Used with some financing lease to protect lessor’s interests in the equipment.

Insurance - The equipment being leased is technically owned by the lessor until the lease contract has been satisfied. It is required that the lessee carry all risk/casualty insurance at the lessee’s expense during the course of the lease agreement.

Lease - 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.

Lessee - The person and/or company that is leasing the equipment from the owner, the lessor.

Lessor - The owner of the equipment during the term of the lease to whom payments are made.

Level Payments - Equal payments over the course of the lease.

Master lease - When a company needs to purchase multiple pieces of equipment from different vendors but wishes to have them all under one contract. Only one application and one credit approval are necessary. The lease will then have addendums and equipment schedules for each new batch of equipment as they are received by the lessee.

Net Lease - a lease where payments paid to the lessor do not include insurance and maintenance, which are paid separately by the lessee.

Off-Balance Sheet Financing - Unlike traditional methods of financing, operating lease obligations are not capitalized, thus improving balance sheet ratios. The equipment being leased is not owned by the lessee, therefore does not have to be shown as an asset on the balance sheet. Furthermore, since the equipment is not owned by the lessee, the lease does not have to be listed as a liability.

Operating Lease - Any lease which is not a capital or finance lease.

Progress Payments (Vendor Pre-Funding) - Vendors are typically funded once the lessee has signed off that the equipment has been received and is good condition. Some vendors however, require that special ordered, manufactured-to-order, or equipment that may be shipped out of state may require payments be received up front before the equipment can be delivered to the lessee. This may be order deposits, progress payments as the equipment is being built, to full prepayment.

Purchase Option - 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 as a specific dollar amount or at fair market value.

Purchase Upon Termination (PUT) - In lease agreements, a lessor may negotiate an option to sell the equipment to the lessee or a third party at an established price 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.

Rate Factor - The actual monthly payment is calculated by the cost of the equipment to be leased (before taxes and one time fees) multiplied by the “the rate factor” which is usually expressed by a five digit decimal number.

Recourse - In the event a lessee defaulted on the lease, if an agreement is in place by the lessor and the vendor, the lessor can require the vendor to repurchase the equipment back at the remaining payments. Generally the lease must be in default for a period of 60 days or more and the lessor must have made reasonable attempts at collection. Recourse is more common in the financial industry than it is in leasing.

Renewal Option - After the intial lease term, a lessee may have the option to renew the lease for estimated fair market value for a term not to exceed the useful life of the equipment. Usually renewals are on a year-to-year basis payable inadvance and usually have smaller payments than the original terms of the lease.

Rental (Use) Tax - Many states charge a “use” tax in lieu of a sales tax when equipment is leased. So instead of paying 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 - The value of an asset at the conclusion of a lease.

Sale Lease Back - An arrangement where the lessor purchases equipment already owned by the company who is using it. The lessor pays the lessee the money and assumes ownership. The lessor then leases it back to the company, who continues to use the equipment. This process allows the company to recapitalize on assets that are free and clear. Typically, the equipment must be free and clear of any liens and must have been purchased within the last ninety days. Older or used equipment may fall under a Sale Lease Back, but is usually required by the lessor to be be subject to an independant valuation appraisal prior to funding.

Seasonally Adjusted Lease Payments - Some businesses experience the majority of their revenues during specific seasons, i.e. snow plow companies, landscaping companies, excavators, etc. For these type of companies, payments are scaled down during slower or off-season months and set higher during the high peaks.

Security Deposit - the payment made at the inception of the lease contract used as security by the lessor, until the leae comes to term and then is to be refunded to the lessee at the end of the said term. many lessors will allow this security deposit to be used as the final payment.

Skip Payment Lease - The lessee requests certain months that no payment will be due.

Step Payment Lease - Typically when a company anticipates certain cash flow patterns the payments may start lower and gradually get higher over the course of the lease allowing a company to generate capital. Sometimes payments may start higher and step down as the use of the equipment lessons.

Termianl Rental Adjustment Clause (TRAC Lease) - This lease is specifically designed for the over-the-road vehicles like trucks, trailers, and tractors. Provisions of the IRS Tax Code allow for predetermined end-of-lease valuations, unlike a true or FMV lease. However the lessee bears some risk if the equipment does not bring the anticipated resale value at the termination of the lease. This lease may also include an FMV or coninued rental options.

True Lease - A true lease is a term for defining types of transactions which qualify as leases under the IRS Code as the lessor can claim the benefits of ownership such as depreciation, and the lessee can claim rental payments as tax deductions.

Uniform Commercial Code (UCC) - A standardized program and method of administering, legalizing, and recording lien instruments adopted now by all states except Lousiana.

Useful Life (Economic Life) - The period of time during which an asset will have the economic value and be usable. Useful life of an asset is sometimes called the economic life of the asset.

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

Working Capital - Working Capital is defined as a company’s assets less the company’s liabilities. This is the measure of a company’s cash (capital) or ready cash. Leasing is a manner in which you can conserve your working capital. It allows a business to match its expenses for the equipment needed to the revenue that should be generated by the equipment.

Wrap Lease - A lease in which a lessor sells the leased equipment to a third party (an equity investor) who then leases the equipment back to the lessor for a longer term than the user lease. The equity investor’s rights are at all times subject and subordinate to the original lender, who has a senior perfected security interest in the leased asset and an assignment of the user lease proceeds, e.g. rentals, casualty loss payments, indemnification payments, etc. Note: Wrap transactions are done for tax purposes.