This leasing glossary features numerous terms which may help you to better understand how leasing works. If you have any questions, we always recommend you contact us here.
Advance Rental Payments
The payment or payments made at the inception of the lease agreement (i.e. the first rental payment or first and last rental payment.)
Assignment of Proceeds
Under an Assignment of Proceeds agreement, the vendor agrees to allow the Lessor to fund the manufacturer's cost of the equipment directly to the manufacturer at the time of funding.
A deposit required by the Lessor at time of signing which ranges from 1-2% of the total equipment cost, or the equivalent of the first rental payment. It is generally applied to rental on a pro rata basis if the commitment is taken down or returned if the lease is declined.
The letter prepared by the Lessor to spell out terms and conditions between Lessee and Lessor for a master lease line of credit.
Dealer Lease Referral Application and Agreement
This one page agreement provides the Lessor with valuable information about the equipment vendor. By means of this agreement, the vendor agrees to pass clear title to the equipment to the Lessor upon delivery, acceptance by the Lessee and funding by the Lessor.
Electronic Funds Transfer (EFT - also known as ACH)
A wire transfer in which the Lessor pays the equipment vendor. At time of funding this amount is wired to the vendor minus any payments agreed upon in the Assignment of Proceeds.
Fair Market Value (FMV)
The open market value of the asset at the termination of the lease. A Purchase Option under a True Lease is generally the Fair Market Value at the end of the lease.
Fair Market Renewal Value
The rental payment paid monthly for a period of up to one year if the Lessee elects to renew the lease once it has initially terminated. The value is determined by negotiation between Lessee and Lessor and represents the Fair Market Rental/Renewal Value.
A financing device whereby a Lessee can acquire title to the asset for a nominal amount or a guaranteed purchase amount. For tax purposes this form of lease is usually considered a conditional sales contract. Generally, a Finance Lease is non-cancelable during the term of the lease; and the end-user is responsible for maintenance, taxes, insurance and other costs of ownership.
Full Payout Lease
A lease in which the cash flows will pay the Lessor the full equipment cost plus an agreed upon return over the lease term.
A document prepared by the Lessor which is signed by the Lessee's landlord which gives up any rights he may have in the leased equipment at the Lessee's place of business. This waiver allows the Lessor to remove the equipment in case of default or at end of lease. It also protects the Lessor in cases where leased equipment is attached to real property.
An agreement granting or letting the possession of land, building, machinery, personal property, etc., for a fixed or indeterminate period, for a stated consideration usually known as rent.
The Lease Commencement Date is the date equipment is accepted by the Lessee as evidenced by Lessee's execution of an Acceptance Certificate.
A written agreement between the Lessor and Lessee that outlines the basic terms and conditions of a specific lease transaction. Both parties sign this proposal, and it is subject to credit approval.
The simple equivalent interest rate excluding depreciation and residual, if any.
A party who makes use of property owned by another party (the Lessor) and pays the Lessor, usually in the form of rentals, for that use.
Company or leasing entity that is legal owner of the leased equipment.
Equal payments over the term of the Lease.
An open-ended lease agreement under which a Lessee obtains the use of specific property and can add additional equipment periodically. Eliminates signing new leases as additional equipment is leased.
With a Net Lease, the rentals are payable to the Lessor. All costs in connection with the use of the equipment are to be paid by the Lessee and are not a part of the rental. For example, taxes, insurance, and maintenance are paid directly by the Lessee.
Many vendors require that they be paid at least 50% of the invoice amount once the lease is funded. This is called prefunding. It must be approved by the funding source. For Pre-Funding to be accepted, both the vendor and lessee must be stable for acceptance.
A Security Deposit is an advance payment that is usually equal to two lease payments,. This deposit is retained by the Lessor for the term of the Lease. If the lease is never finalized for reasons that are not the fault of the Lessor, the deposit will be kept by the Lessor for administrative costs. If any part of the deposit is remaining at the end of the Lease term and the Lessee has completed all of his / her obligations, the Deposit is returned to the Lessee or can be applied to the Purchase Option, if any, or to any remaining payments.
Freight, software, labor and other intangible items are frequently defined as soft costs. Many funding sources will only allow a certain percentage of the total transaction to be soft costs. Because these costs can generally not be recovered in case of default, they increase the inherent risk of the lease.
A True Lease is a transaction that qualifies as a lease under the Internal Revenue Code. This lease functions so that the Lessee can claim rental payments as tax deductions and the Lessor can claim tax benefits of ownership such as depreciation.
Uniform Commercial Code (see Financing Statement - UCC1)
A standardized program and method of administering, legalizing and recording lien instruments adopted now by all states except Louisiana.
The period of time during which an asset will be usable and have some economic value. To qualify as an operating lease, the property must have a remaining useful life of 25 percent of the original estimated useful life of the leased property at the end of the lease term, and life of at least one year.
Have a question about equipment leasing that you could not find on this site? Please contact us here.
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