ACCELERATED COST RECOVERY
SYSTEM (ACRS) (Modified)
The Tax
Reform Act of 1986 established the
modified ACRS tax appreciation
system prescribing depreciation
methods for each ACRS class in lieu
of statutory tables. Equipment is
assigned among 3, 5, 7, 10,15, or
20-year classes depending on ADR
lives.
ALTERNATIVE MINIMUM TAX (AMT)
An
alternative, separate tax
calculation based on the taxpayer's
regular taxable income, increased by
the taxpayer's preferences for the
year. The resulting amount is called
the alternative minimum taxable
income (AMTI). After certain
exemptions and offsets, the taxpayer
determines its AMT and is required
to pay the larger of the regular tax
or alternative minimum tax. Among
the preferences that can increase
the taxpayer's AMTI is the
accelerated portion of depreciation,
thereby making it more likely that a
taxpayer that buys equipment may be
subject to the AMT rather than to
regular tax.
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BARGAIN PURCHASE OPTION
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.
BIG-TICKET
A market
segment, generally dominated by
leveraged leases, represented by
lease financing over $5 million.
BROKER
A company
or person who arranges, for a fee,
transactions between lessees and
lessors of an asset.
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CAPITAL LEASE
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 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 equal to 90 percent or
more of the fair market value of the
leased asset less related investment
tax credits retained by the lessor.
(Also see finance lease.)
CERTIFICATE OF ACCEPTANCE
(Delivery and Acceptance)
A document
whereby the lessee acknowledges that
the equipment to be leased has been
delivered, is acceptable, and has
been manufactured or constructed
according to specifications.
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DIRECT FINANCING LEASE (Direct
Lease)
A
non-leveraged lease by a lessor (not
a manufacturer or dealer) in which
the lease meets any of the
definitional criteria of a capital
lease, plus certain additional
criteria.
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ECONOMIC LIFE (Useful Life)
The period
of time during which an asset will
have economic value and be usable.
EFFECTIVE LEASE RATE
The
effective rate (to the lessee) of
cash flows resulting 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.
EQUITY PARTICIPANT
One or more
of the equipment owners participant
in a leveraged lease, trustor owner,
or grantor owner.
EQUIPMENT SCHEDULE
A document
that describes in detail the
equipment being leased. It may also
state the lease term, commencement
date, repayment schedule and
location of the equipment.
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FAIR MARKET PURCHASE OPTION
An option
to purchase leased property at the
end of the lease term at its then
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.
FIRST AMENDMENT LEASE
The first
amendment lease gives the lessee a
purchase option at one or more
defined points with a requirement
that the lessee renew or continue
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 lessee appraisal
and subject to a floor to insure
that the lessor'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.
FINANCE LEASE (See Single
Investor Lease.)
Typically,
a finance lease is a full-payout,
non-cancellable agreement, in which
the lessee is responsible for
maintenance, taxes, and insurance.
FULL PAYOUT LEASE
A lease in
which the lessor recovers, through
the lease payments, all costs
incurred in the lease plus an
acceptable rate of return, without
any reliance upon the leased
equipment's future residual value.
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GUIDELINE LEASE
A lease
written under criteria established
by the IRS to determine the
availability of tax benefits to the
lessor.
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HELL-OR-HIGH-WATER CLAUSE
A clause in
a lease that reiterates the
unconditional obligation of the
lessee to pay rent for the entire
term of the lease, regardless of any
event affecting the equipment or any
change in the circumstances of the
lessee.
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INDEMNITY CLAUSE
A clause in
which the lessee indemnifies the
lessor from loss of tax benefits.
INDENTURE OF TRUST (Indenture)
An
agreement between the owner trustee
and the indenture trustee: The owner
trustee mortgages the equipment and
assigns the lease and rental
payments under the lease as security
for amounts due to the lenders. Same
as a security agreement or mortgage.
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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.
LEASE RATE (Rental Payment)
The
periodic rental payment to a lessor
for the use of assets. Others may
define lease rate as the implicit
interest rate in minimum lease
payments.
LESSEE
The user of
the equipment being leased.
LESSOR
The party
to a lease agreement who has legal
or tax title to the equipment,
grants the lessee the right to use
the equipment for the lease term,
and is entitled to the rentals.
LEVERAGED LEASE
In this
type of lease, the lessor provides
an equity portion (usually 20 to 40
percent) of the equipment cost and
lenders provide the balance on a
nonrecourse debt basis. The lessor
receives the tax benefits of
ownership.
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MASTER LEASE
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.
MIDDLE MARKET
A market
segment generally represented by
financing ranging from $250,000 to
$2 million and dominated by single
investor leases.
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NET LEASE
A lease
wherein rental payments to the
lessor do not include insurance and
maintenance, which are paid
separately by the lessee.
NONRECOURSE LOAN
In a
leveraged lease, the lenders cannot
look to the lessor for repayment.
The lender's only recourse is to the
lessee and, therefore, the lessee's
credit rating is of prime
importance.
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OPEN-END LEASE
A
conditional sale lease in which the
lessee guarantees that the lessor
will realize a minimum value from
the sale of the asset at the end of
the lease.
OPERATING LEASE
Any lease
that is not a capital lease. These
are generally used for short term
leases of equipment. The lessee can
acquire the use of equipment for
just a fraction of the useful life
of the asset. Additional services
such as maintenance and insurance
may be provided by the lessor.
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PACKAGER
The leasing
company, investment banker, or
broker who arranges a leveraged
lease.
PRESENT VALUE
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.
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 at a specified amount or
at fair market value.
PUT OPTION
The
requirement 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.
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RESIDUAL VALUE
The value
of an asset at the conclusion of a
lease.
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SALE-LEASEBACK
An
arrangement whereby equipment is
purchased by a lessor from the
company owning and using it. The
lessor then becomes the owner and
leases it back to the original
owner, who continues to use the
equipment.
SALES-TYPE LEASE
A lease by
a lessor who is the manufacturer or
dealer, in which the lease meets the
definitional criteria of a capital
lease or direct financing lease.
SINGLE INVESTOR LEASE (See
Full Payout or Finance Lease.)
A
tax-oriented lease whereby the
lessor achieves its desired rate of
return via a combination of the
rental payments, depreciation, and
the fair market value of the
equipment at the end of the original
lease term. Because of the value of
the tax benefit, the rental payments
will be lower than for a finance
lease.
SMALL-TICKET LEASING
Transactions under $250,000,
typically using conditional sale
leases or single investor true
leases.
SYNTHETIC LEASE
A synthetic
lease is basically a financing
structured to be treated as a lease
for accounting purposes, but as a
loan for tax purposes. The structure
is used by corporations that are
seeking off-balance sheet reporting
of their asset based financing, and
that can efficiently use the tax
benefits of owning the financed
asset.
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TAX LEASE
A lease
wherein the lessor recognizes the
tax incentives provided by the tax
laws for investment and ownership of
equipment. Generally, the lease rate
factor on tax leases is reduced to
reflect the lessor's recognition of
this tax incentive.
TRAC LEASE
A
tax-oriented lease of motor vehicles
or trailers that contains a terminal
rental adjustment clause and
otherwise complies with the
requirements of the tax laws.
TRUE LEASE
A type of
transaction that qualifies as a
lease under the Internal Revenue
Code. It allows the lessor to claim
ownership for tax purposes and the
lessee to claim rental payments as
tax deductions.
TRUSTEE
A bank or
trust company that holds title to or
a security interest in leased
property for the benefit of the
lessee, lessor, and/or creditors of
the lessor. A leveraged lease often
has two trustees: an owner trustee
and an indenture trustee.
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VENDOR LEASING
A working
relationship between a financing
source and a vendor to provide
financing to stimulate the vendor's
sales. The financing source offers
leases or conditional sales
contracts to the vendor's customers.
The vendor leasing firm substitutes
as the captive finance company of a
manufacturer or distributor through
the extension of leasing to
customers, provisions of credit
checking, and performance of
collections and operational
administration. Also known as lease
asset servicing or vendor program.
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