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Glossary of Terms
Acceptance Certificate
A critical item of lease documentation signifying that the lessee has accepted the equipment delivered to them and the lease may commence.
Acceptance Ratio
A term used in vendor leasing signifying the ratio of potential leases received by the lessor from the vendor, to the number of deals passing credit approval.
Accumulated depreciation
The total depreciation charges for an asset since acquisition.
Advance Payments
One or more payments required to be paid to the lessor at the commencement of the lease. Also used in the context of lease payments that are due at the beginning of each payment period, e.g. monthly payments payable ‘monthly in advance’. The alternative to payments in advance is ‘payments in arrears’, i.e. at the end of each payment period.
Asset Management
The timely and proper maintenance, location tracking and disposal of leased assets.
Balancing Allowance
Tax terminology for the adjustment made to the asset pool balance for a loss on disposition of a single ‘depooled’ asset. In the case of a pool of many assets then a balancing allowance may only be given when the whole trade ceases.
Balancing Charge
Tax terminology for the adjustment made to the asset pool balance for a gain on disposition of a single depooled asset. In the case of a pool of many assets then a balancing charge occurs if the disposal gains during an accounting period exceed the balance of unrelieved expenditure remaining in the pool.
Bargain Purchase Option
A lease provision allowing the lessee to purchase the equipment at the end of the lease term for a price sufficiently lower than its expected fair market value, such that exercise of the option is reasonably assured. This option invariably causes the lease to be classified as a Hire Purchase.
Big Ticket Lease
A lease transaction for a very large amount; at least £20m would be a typical minimum.
Boilerplate Provisions
Standard terms found in every lease agreement.
Captive or Sales Aid Lessor
A lease that does not contain a purchase or renewal option, thereby requiring the lessee to return the equipment to the lessor at the end of the initial lease term.
Co-terminous
Used when equipment has been added to a lease and the additional rentals have been calculated so as to end by the end of the existing contract period.
Cost of Funds
The interest rate at which the funder can borrow.
Cross-Border Lease
A lease where the lessor is in one country while the lessee is in another.
Deminimis leasing
UK Treasury definition of finance leasing transactions, applied to the Local Authority leasing market, which qualify as operating leases for accounting purposes where maximum rental exposure to a single Lessor does not exceed £10,000
Depreciation
A means for a firm to recover the cost of a purchased asset, over time, through periodic deductions or offsets against income. Depreciation is used in both a financial reporting and tax context. In the UK depreciation appears in the accounts only, while tax depreciation is computed separately using a system of capital allowances.
Depreciation Basis
The original cost of an asset plus other capitalized acquisition costs such as installation charges and sales tax. Basis reflects the amount upon which depreciation charges are computed.
Discount Rate
The interest rate applied to all the remaining rentals due after the termination date of a lease in order to arrive at a termination sum.
Discounted Lease
A lease in which the lease payments are assigned to a funding source in exchange for up-front cash to the lessor.
Double-dip
Refers to a lease that is structured so as to pass through two or more tax jurisdictions.
Drawdown
The moment when the lessor ’draws’ money from its account to pay the supplier for the equipment to be leased. The lessor will not normally pay for equipment unless the lessee has signed an acceptance certificate.
Early Termination
If the lessee wishes to exit from a lease before the end of its primary (i.e. non-cancellable) term then the lessor may agree provided that the lessee pays a Termination Sum based on the remaining unpaid rentals, and returns the equipment.
Economic Life of an Asset
The estimated period during which the asset is expected to be economically usable by one or more users, with normal repairs and maintenance.
End-of-term Options
Options in the lease agreement governing the treatment of leased assets at the end of the lease term. Common end-of-term options include sale of the equipment, renewing the lease, or returning the equipment to the lessor.
Equipment Schedule
A document referenced in the lease agreement that describes in detail the assets being leased.
Extension Rental
The rental for which the lessee may continue to use the equipment for a further specified period once the primary term of the lease has expired.
Fair Market Value
The value of an asset if it were to be sold in an arms-length transaction between a willing buyer and a willing seller.
Finance Lease
From a financial reporting perspective, a lease that meets certain criteria established by the accounting rule-making body (SSAP21 and FRS5 in the UK). Such a lease has the characteristics of a purchase, and is required to be shown as an asset and a related obligation on the balance sheet of the lessee.
First year Convention
A tax depreciation convention that establishes how much tax depreciation can be taken in the year of acquisition. The UK convention is based on the whole of the first year allowance being available in the accounting period in which the expenditure on the asset is incurred, EXCEPT for lessors. Since 2 July 1997 in the case of finance leases only the pro-rata amount of first year allowance is allowed, proportionate to the remaining length of accounting period from the time of expenditure being incurred. This for the first time put lessors in a less tax efficient position than the companies they were leasing to.
FLA
The Finance and Leasing Association whose members represent some 80% of the UK leasing market.
FRS5
Financial Reporting Standard 5 – Reporting the Substance of Transactions, covers substance over form issues when reporting transactions in financial accounts.
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.
Full-service Lease
A lease that includes additional services such as maintenance and insurance that are paid for by the lessor, the cost of which is built into the lease payments. Sometimes termed a ‘bundled’ lease.
Funding Source
Any entity providing the funds to acquire equipment for lease transactions.
GAAP
Generally Accepted Accounting Principles – the term applies formally to US accounting standards, but is increasingly used less formally to refer to a country’s accounting standards, e.g. UK GAAP.
Group Relief
The tax mechanism in the UK by which unrelieved tax benefits can be surrendered to the company’s immediate or ultimate holding company.
Guaranteed Residual Value
A guarantee from a party other than the lessor that the leased equipment will be worth a pre-determined sum at the end of the lease.
Hire Purchase
This type of transaction, sometimes referred to as Lease Purchase or Money-over-Money Lease, is a conditional sales contract in the guise of a lease, in which the lessee is, or will become, the owner of the leased equipment by the end of the lease term, and, therefore, is entitled to the tax benefits of ownership. Similar to a finance lease in structure except that the lessee has a bargain purchase option at the end of the primary term (typically £1) in which the lessee is treated as the owner of the asset for tax purposes (and is entitled to the tax benefits of ownership, such as capital allowances). The lessee does not become the legal owner of the asset until all terms and conditions of the agreement have been satisfied.
Independent Lessor
A leasing company not owned by a financial institution or a manufacturer. With continued consolidation in the leasing industry there are continually fewer independent leasing companies.
Initial Direct Costs
Costs incurred by the lessor that are directly associated with negotiating and executing the lease. These costs can include, but are not limited to commissions, legal fees and cost of preparing non-standard documentation.
Interim Rental
A rent charged for the use of equipment for which the lease has not yet commenced but has been delivered and is ready to use. In the case of a full payout lease the lessor has little justification for charging Interim Rental (also known as ‘stub rental’) unless it has already paid for the equipment and is incurring interest carrying charges.
Internal Rate of Return (IRR)
The precise interest rate that discounts a given rental stream to exactly the cost of investment.
Laying-off
Laying off a lease is where the lessor sells or assigns its interest in the lease to another lessor, hence crystallizing the original lessor’s profit, freeing up its funding lines. Also see Recourse and Non-recourse.
Lease Administration
The invoicing, rental collection, monitoring and reporting work connected with a lease, done by the lessor.
Lease Agreement
The contractual terms governing the lease.
Lease Broker
A party that provides one or more services in the lease transaction, but that does not retain the lease transaction for its own portfolio. Such services include finding the lessee, working with the equipment manufacturer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor in the lease transaction. The lease broker also can be referred to as a packager.
Lease Origination
The process of finding potential lease transactions.
Lease Payments
The periodic amounts paid by the lessee to the lessor. Also referred to as Lease Rentals.
Lease Rate
An imprecise term purporting to state the interest rate inherent in the lease. The IRR should be requested instead.
Lease Rate Factor
A percentage figure that when multiplied by the original equipment cost gives the periodic lease payment.
Lease Restructuring
Taking an existing lease and changing it in some material way such as altering its equipment content, contract period, rental level or other major terms.
Lease Term or Period
The fixed duration of the lease in its main or primary period of lease.
Lessee
The user of the equipment being leased.
Lessor
The owner of equipment or a party who has rights to leasing to a lessee or user.
Manufacturer’s Buyback
A guarantee from the equipment manufacturer to the lessor to buy back the equipment at a pre-agreed price at a set future point in time.
Market Price of Equipment
The price for which equipment in its present condition could be sold in an arm’s length sale on the open market between a willing buyer and a willing seller.
Market rental
The rental at which equipment in its present condition could be rented out in an arm’s length transaction on the open market from a willing lessor to a willing lessee.
Master Lease Agreement
A lease agreement that contains all the main or boiler plate provisions governing leasing between two parties without referring to specific assets or financial terms, which are encapsulated in separate lease contracts still subject to the terms in the master lease agreement.
Middle Ticket Lease
A lease transaction typically in the range £100k-£20m.
Money-over-money Lease
A non-tax lease, e.g. Hire Purchase, where the lease rentals can be calculated on a straightforward margin over cost of funds basis.
Net Lease
A lease in which all costs in connection with the use of the equipment, such as maintenance and insurance, are paid for separately by the lessee and are not included in the lease rental paid to the lessor.
Non-recourse
A type of borrowing in which the lessor-borrower is not at-risk for the borrowed funds. The lender expects repayment from the lessee and
or the value of the leased equipment; hence, the lender’s credit decision is based upon the creditworthiness of the lessee, as well as the expected value of the leased equipment.Non-tax Lease
A generic term used to describe structures like Hire Purchase where the lessor has no entitlement to Capital Allowances.
Off Balance Sheet Financing
Any form of financing, such as an operating lease, that, for financial reporting purposes, is not required to be reported on a firm’s balance sheet.
Off-lease equipment
Equipment that was previously leased to a lessee but is now awaiting disposition.
Operating Lease
From a financial reporting perspective, a lease that has the characteristics of a usage agreement and also meets certain criteria established by the accounting rule-making body (SSAP21 and FRS5 in the UK). Such a lease need not be shown on the balance sheet of the lessee. Usually 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.
Portfolio
A collection of leases.
Purchase Option
An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease tem for either a fixed amount or at the future fair market value of the leased equipment.
Refundable Security Deposit
An amount paid by the lessee to the lessor at the beginning of the lease that is refunded at the end of the lease provided that the lessee has fulfilled all its obligations to the lessor.
Remarketing
The process of selling off-lease equipment or leasing it to a new lessee.
Renewal Option
An option in the lease agreement that allows the lessee to extend the lease term for an additional period beyond the expiration of the initial lease term, in exchange for lease renewal payments. Also referred to as a lease extension, or secondary period.
Rent Holiday
A period of usage of leased equipment exceeding the length of the normal periodicity of lease rentals for the rest of the lease, during which the lessee pays no rent (although interest does accrue).
Residual Value
The amount the lessor expects to receive from the sale of leased equipment when it is returned at the end of the lease period. Any shortfall is for the risk of the lessor.
Residual Value Guarantee
See Guaranteed Residual Value.
RFP
Request for Proposal – a document outlining a lessee’s or vendor’s needs which is sent to potential counter-parties.
Sale and Leaseback
Where the party selling the equipment to the lessor is also entering into a subsequent lease to gain the continued usage of the same equipment - a common device by which companies raise cash.
Small Ticket Lease
A lease transaction in the range £1000-£100,000.
Spread
The percentage added by the lessor to its cost of funds to arrive at the all-in interest rate used to calculate the lease rentals.
SSAP21
Statement of Accounting Practice No.21, along with its various amendments and interpretations, combined with FRS5, specifies the proper classification, accounting and reporting of leases by lessors and lessees.
Step Payments
Lease rentals that increase (or decrease) regularly.
Stipulated Loss Value (SLV)
The value owing to the lessor at a point in time during the lease. Typically values will be given for regular intervals during the lease, referred to as a Stipulated Loss Value table.
Sub-lease
Where the lessee takes equipment on lease and leases the equipment on to a further party.
Substance Over Form
A concept that implies that the form of a document is subordinate to the intent of the parties involved in the document.
Synthetic Lease
Most commonly found in the U.S., it is a lease that has been intensively structured so that it meets two normally mutually exclusive criteria, e.g. an operating lease that is off-balance sheet for the lessor as well as the lessee, or is full payout and off balance sheet for the lessee.
Tax Lease
A generic term for a lease in which the lessor takes on the risk of ownership, and, as the owner, is entitled to Capital Allowances.
Tax Variation Clause
A type of indemnification in which the lessee commits to reimburse the lessor for any financial loss incurred through the loss of, or inability to claim, any or all of the anticipated tax benefits assumed in the original lease calculation.
Tax Written Down Value
The original cost of an asset plus other capitalized acquisition costs, less any capital allowances taken.
Technology Refresh lease
A form of lease offered widely on high technology equipment that has built-in options for upgrades and replacements as improved technology becomes available.
Termination Sum
The sum required by the lessor to end a lease prematurely, i.e. before the end of its Primary Term.
Total Loss
When the equipment subject to the lease is totally destroyed and
or cannot be returned to the lessor. In this case the lessee will be required to compensate the lessor for the residual value of the equipment.Upfront
Before the lease has commenced.
Upgrade
The replacement of part of an item of equipment or configuration that makes up one homogenous item of equipment e.g. PC and printer, in order to enhance its performance or useful life.
Vanilla lease
The simplest and most straightforward form of lease.
Yield
The rate of return to the lessor in a lease.