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 (AMI)
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.
Bargain Purchase Option
A lease provision allowing the lessee to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.
From a financial reporting perspective, a lease that has the characteristics of a purchase agreement, and also meets certain criteria established by the Financial Accounting Standards Board Statement No. 13 (FASB 13). Such a lease is required to be shown as an asset and a related obligation on the balance sheet.
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.
Conditional Sales Contract
An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes. This entitles the lessee to the tax benefits of ownership, such as depreciation, but the lessee does not become the free and clear owner of the asset until all terms and conditions of the agreement have been satisfied.
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.
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.
Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common options include purchasing the equipment, renewing the lease or returning the equipment to the lessor. Options are sometimes given as an amendment to the lease documents and are not made part of the actual lease document.
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.
Fair Market Value
The value of a piece of equipment if the equipment were to be sold in a transaction determined at arm's length, between a willing buyer and a willing seller, for the equivalent property and under similar terms and conditions. Simply, the actual market value of the leased asset.
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.
A party who provides financing for a lease transaction. The term is frequently used by brokers in referring to lessors, but it can also be used by lessors in referring to those parties who provide lessors with the funds lessors use to purchase equipment.
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.
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.
A type of leasing company that is independent of any one manufacturer, and, as such, purchases equipment from various unrelated manufacturers or dealers. The equipment is then leased to the end-user or lessee. This type of lessor may also be called a third-party lessor.
A document in which a landlord acknowledges that certain property on its tenant's premises is owned by a third party (the lessor) and is leased to the tenant and in which a landlord agrees to recognize and not interfere with the lessor's rights respecting the lessor's property.
An entity that provides one or more services in the lease transaction for its own portfolio. Such services include finding the lessee, working with the equipment manufacturer or dealer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor or equity participant in the lease transaction. The lease broker is also referred to as a packager or syndicator.
1. A pre-approved amount of borrowing allowed a lessor by a lessor's financier. The lease line is used for acquiring equipment for lease and is not used for financing a lessor's operational expenses.
2. A pre-approved amount of leasing allowed a lessee by a lessor.
The periodic payment made during the lease term. Such payments are usually of an even amount but it is not uncommon for a lease to have "gaps" in the payment amount, or to be otherwise contoured to fit, for example, the seasonal fluctuations of a lessee's income. Generally, leasing may provide for more creativity in this regard than a loan.
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.
A document in which a mortgagee acknowledges that a certain property on its mortgagor's premises is owned by a third party (the lessor) and is leased to the mortgagor and in which the mortgagee agrees to recognize and not interfere with the lessor's right respecting its property.
A lease in which all costs in connection with the use of equipment, such as maintenance, insurance and property taxes, are paid for separately by the lessee and are not included in the lease rental paid to the lessor.
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.
A lease in which the lessee guarantees the amount of the future residual value to be realized by the lessor at the end of the lease. If the equipment is sold for less than the guaranteed value, the lessee must pay the amount of any deficiency to the lessor. This lease is referred to as open-end because the lessee does not know its actual cost until the equipment is sold at the end of the lease term.
From a financial reporting perspective, a lease that has the characteristics of a usage (rental) agreement and also meets certain criteria established by the FASB. Such a lease is not required to be shown on the balance sheet of the lessee. The term is also used to refer to leases in which the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. The criteria for meeting FASB 13 classification of an operating lease are:
1. Title for the equipment does not automatically transfer to the lessee during, or by the end of, the lease term.
2. There is no bargain purchase price.
3. The non-cancelable lease term is lesser than 75% of the asset's economic life.
4. The present value of the minimum lease payments, discounted at the lessor's interest rate implicit in the lease, is less than 90% of the leased asset's FMV.
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.
An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term for either a fixed amount or at the future fair market value of the leased equipment.
The value of the lease property at the end of the lease term as estimated at the time the lease is executed; term value. Although the terms "residual value" or "term value" are sometimes used in reference to the actual value of the property at the conclusion of the term, the term "realized value" is the more commonly used and more appropriate term for the actual value of the property at the conclusion of the lease term.
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.
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
Terminal Rental Adjustment Clause (TRAC)
A lessee guaranteed residual value for vehicle leases (automobiles, trucks or trailers), the inclusion of which will not, in and of itself, disqualify the tax lease status of tax-oriented vehicle leases.
Another term for tax lease where, for IRS purposes, the lessor qualifies for the tax benefits of ownership and the lessee is allowed to claim the entire amount of the lease rental as a tax deduction.
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.
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 programs.