Leasing Definitions

Advance Rentals

Advance rentals or upfront payments that are paid by the lessee to the lessor for renta paymentl of any asset will be applied to the number of rentals due.

Bargain Purchase Option

Purchase option that allows the lessee to obtain the title to the leased equipment for less than the fair market value.

Capital/Finance lease

A capital lease is not a true lease, but rather a sale of equipment by the lessor to the lessee. When property is purchased it is capitalized and recorded both as an asset and as an obligation. The lessee may be eligible for the IRS Section 179 deduction. A capital lease meets one or more of the following criteria:

• The lessor transfers ownership to the lessee during the lease term
• The lease contains the option to purchase the asset at a bargain price
• The lease term is equal to 75% or more of the estimated economic life of the property
• The present value of minimum lease rental payments equals 90 percent or more of the fair market value using lessee's incremental cost of borrowing.

Closed End Lease

A closed-end, or walk-away lease is usually structured on a net-lease basis. At the end of the lease term the property returns back to the lessor. Ownership possibilities are closed to lessee.

Fair Market Value

The item amount a seller under no pressure is willing to sell for and what a buyer under no pressure is willing to pay, both parties being understanding of all pertinent facts.

FASB-13 Operating Lease

The United States Financial Accounting Standards Board statement 13 (FASB 13) provides the definitions and criteria for deciding whether or not a lease agreement is to be considered a purchase/sale agreement (and therefore a capital lease) or a usage agreement (and therefore an operating lease). The distinction between capital and operating leases has important financial consequences: it determines who (lessor or lessee) has ownership rights and who takes depreciation for the leased goods, who can treat lease costs as expenses, and other factors.

Lease

A contract between a lessor (owner of an asset) and a lessee (user of an asset) where the lessor grants the temporary possession and use of an asset to the lessee at a fixed periodic charge (monthly rental).

Leaseback

Leaseback, short for sale-and-leaseback, is a financial transaction, where one party sells an asset and leases it back for an extended period. The lessee continues to use the asset, but no longer owns it. This is most times done for fixed assets, notably real estate and aircraft, and the purposes are varied, but include financing, accounting, and tax reasons.

Leveraged Leases

A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor, who makes payments to the lender.

The lessor pays the lending institution back by way of the lease payments received from the lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if the lessor defaults.

In this type of lease, the lessor provides an equity portion (often 20% to 50%) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership.

Money Over Money

A loan that is veiled as a lease. All tax benefits of a true lease are no longer valid.

Municipal lease

A tax-exempt municipal lease is offered only to state and local governments and their political subdivisions. They are structured as lease/purchases or conditional sales, both of which result in ownership by the government at lease end. Tax-exempt leases are far easier to execute than municipal bonds, as no bond referendum is required. Leases can be short or long, from one year to 10 years and beyond. The size of a municipal lease is virtually limitless, as is the range of equipment that can be leased.

A Municipal Lease or Lease Purchase is essentially an installment sales contract. Properly structured with annual renewals a municipal lease constitutes a current expense of the municipality and does not create debt. Because the interest is exempt from federal tax, a tax-exempt lease offers the municipality a significant cost savings when compared to conventional leasing.

Non-Tax/Capital Lease

Lease arrangement that is a conditional sales agreement. In such leases, the transfer of the asset is treated as a loan from the owner to the tenant and, hence, the lessee can claim only the interest portion of the lease payment as an expense. Capital leases are non-tax leases.

Open-end Lease

An open-end lease is bascially a net-lease where the title to the asset passes to the lessee when using a purchase option or payment of a residual. Ownership possibilities are open to the lessee.

Operating Lease

An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease. Differences from capital lease:

• the lessee only uses the asset for some of the asset's life
• the lessor will have a substantial investment or residual value on completion of the lease
• the lessor has the benefits and risks of owning the asset

P.U.T. – Payment Upon Termination

Lessee will purchase the asset at the end of the lease term for a pre-determined payment.

Residual Value

Purchase options or a payment that will be paid before title or ownership of the leased property is transferred to the lessee. Different types are:

• Fair Market Value Residual:  The residual value is the price for which the property could be sold regardless of market conditions at that time.
• Ten Percent Residual:  The residual value is equal to 10% of the asset's original cost.
• $1.00 Residual:  The residual value is $1.00.

Sale-and-leaseback

See leaseback.

T.R.A.C. (Terminal Residual Adjustment Clause) Lease

Allows a client to set residual values and purchase a vehicle for the residual value, at the termination of the lease, while maintaining the operating vehile. A T.R.A.C. Lease is an exception to IRS Ruling 55-540.

True lease

Multiple-year lease arrangement where risks and rewards of ownership are retained by the owner (the lessor) of the leased item, whereas the tenant (or lessee) retains possession and use for the lease period. The lessor claims depreciation benefits and the lessee claims lease payments as a capital expense. It is called true because they pass the accounting requirements for the lessor to claim the tax benefits. These leases offer comparatively lower payments. An operating lease is a true lease whereas a capital lease is not. Also called tax lease or tax-oriented Lease.

Use Tax

A state and county tax based on monthly rental paymenst and the tax rate applicable at t he location of rented equipment. Taxes are collected monthly to the maximums and then forwarded to the appropriate Department of Revenue, Sales and Use Tax Division.

Back to top

Sources:
Widipedia.com