Captive Leasing Subsidiary

A finance organization set up by an equipment manufacturer, or dealer, to finance its products to end-users, usually with the objective of increasing the sales of the manufacturer. Such an entity is usually wholly-owned by the manufacturer or dealer.

Captive Lessor

A leasing company which has been set up by a manufacturer or dealer to finance its own products.

Certificate of Delivery and Acceptance

A document that is signed by the Lessee to acknowledge that the equipment to be leased has been delivered and is acceptable. Many lease agreements state that the actual lease term commences once this document has been signed.

Closed-End Lease
A Lessee in which the lease agreement 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.

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 (thereby being entitled to the tax benefits of ownership, such as depreciation), but may not become the legal owner of the asset until all terms and conditions of the agreement have been satisfied.

Consolidated Parent Company
The parent company (the manufacturer or dealer in a leasing context) combined with its many subsidiaries. A parent company can be combined with its subsidiaries for tax and/or financial purposes.

Default
The failure of the Lessee to pay payments (or other sums due) or meet obligations when due under the lease or failure to observe a representation or warranty in the lease or violation of a covenant in the lease, and the expiration of applicable periods to cure the default. An event of non-appropriation or abatement is not normally considered an event of default, even when the remedies are substantially similar for each event.

Depreciation
Means for a firm to recover the cost of a purchased asset, over time, through periodic deductions or offsets to income. Used in both a financial reporting and tax context. Considered a tax benefit because the depreciation deductions cause a reduction in taxable income, and therefore, the firm may experience a lower tax liability.

Discount / Discounting / Discounted Lease
See Assign/Assigning/Assigned Lease.

Discount Rate
A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today's, dollars. Use of a discount rate removes the time value disposition of money from future cash flows.

Disposing / Disposal / Disposing
The eventual sale or salvage of leased equipment upon its return to the Lessor.

Early Termination
When the Lessee returns the leased equipment to the Lessor prior to the end of the lease term, as permitted by the original lease contract or subsequent agreement. At times this may result in a penalty to the Lessee.

End-of-Term Options
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 end-of-term options include purchasing the equipment, renewing the lease, and returning the equipment to the Lessor.

Equal Payments
Lease payments that are equal in amount from period to period. Also referred to as level payments.

Equipment Schedule
A document, typically incorporated by reference into the lease agreement, which describes in detail the equipment being leased. The schedule may state the lease term, the commencement date, the repayment schedule, and the location of the equipment.

Equipment Specifications
A specific description of a piece of equipment that is to be acquired, which could include, but not be limited to equipment make, model, configuration, capacity requirements and so forth.

Equipment Upgrade
An option that allows the Lessee to add equipment to an existing piece of leased equipment in order to increase its capacity or improve its efficiency.

Equity
Funds invested in a lease by the Lessor, as contrasted with any debt or borrowings.

Equity Funding
The equity monies that are used in a lease transaction by the equity investor to partially pay for the leased equipment. The balance will be paid through some form of debt.

Equity Investor / Equity Participant
An entity that provides equity funding in a lease transaction and thereby becomes the owner of the leased equipment and ultimate Lessor.

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 equivalent property under similar terms and conditions.

Finance Lease
An expression often used in the industry to refer to a capital lease or a non-tax lease.

Financial Accounting Standards Board (FASB)
The rule-making body that establishes financial reporting guidelines.

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 a future residual value.

Full-Service Lease
See Bundled Lease.

Funding Attributes
Refers to the manner in which a piece of leased equipment has been funded, or paid for, by the Lessor.

Funding Source
An entity that provides any part of the funds used to pay for the cost of the leased equipment. Funds can come from either an equity-funding source, such as the ultimate Lessor in a lease transaction, or debt-funding source, such as a bank or other lending institution.

Guaranteed Residual Value
When the Lessee or an unrelated third party (i.e. equipment manufacturer, insurance company) guarantees to the Lessor that the leased equipment will be worth a certain fixed amount at the end of the lease term. The guarantor agrees to reimburse the Lessor for any deficiency realized if the leased equipment is subsequently salvaged at an amount below the guaranteed residual value.

Inception
The beginning of the lease term.

Independent Leasing Company / Independent Lessor
A type of leasing company which is independent of any one bank, credit corporation or manufacturer and, as such, may purchase equipment from various unrelated manufacturers. The equipment is then leased to the end-user, or Lessee. The independent Lessor may be an investor using its own funds or it may be a lease broker using funds received from other investors. Also termed Third Party Lessor.

Investor
The party that provides the funds to pay for the leased asset.

IRS Pronouncements
Revenue Rulings, Revenue Procedures, case law and other miscellaneous documents which contain the Internal Revenue Service's interpretation and comment on federal income tax law as contained in the Internal Revenue Code, as set forth by Congress.

Lease
An agreement in which one party, the Lessor or owner of the equipment, permits another party, the Lessee, to use the equipment for a specified period of time, in exchange for a series of payments.

Lease Acquisition
The process whereby a leasing company purchases or acquires a lease from a lease originator, such as a lease broker or another leasing company.

Lease Administration
An important step of the lease process occurring throughout the duration of the lease, in which the Lessor, or subcontractor, provides for lease tracking, billing, collections, financial reporting, UCC filings and so forth.

Lease Agreement
The contractual agreement between Lessor and Lessee which sets forth all of the terms and conditions of the lease.

Lease Broker
An entity which provides one or more services in the lease transaction, but which does not retain the lease transaction for its own portfolio. Such services could 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, or equity participant, in the lease transaction. Also referred to as a Packager.

Lease Documents
The many written forms which evidence the lease transaction, including but not limited to the lease agreement, purchase order assignment, and equipment schedule(s).

Lease Line of Credit
An arrangement that allows a Lessee to make periodic withdrawals from a line of credit established to finance lease acquisitions.

Lease Origination
The process of uncovering (through a sales force), developing and consummating new lease transactions. Steps in the process could include, but are not limited to, prospecting for new lease business, pricing potential transactions, credit review, and documentation.

Lease Payments
Periodic payments paid by the Lessee to the Lessor in a lease transaction.

Lease Pool
An arrangement whereby a number of unrelated tax-exempt leases are grouped together for purposes of a single public offering. The governments are usually similar in nature (i.e. school districts) and are brought together through some common interest association. The lease pool is different than a master lease which groups the leasing needs of several departments or agencies in a single issuer/lessee, such as a state or county.

Lease Renewal Option
An option in the lease agreement that allows the Lessee to extend the lease term for an additional period of time beyond the expiration of the initial lease term, in exchange for lease renewal payments.

Lease Term
The fixed, non-cancellable term of the lease during which time the Lessee has an obligation to make rental payments. The lease term should coincide with or be shorter than the useful life of the asset being leased.

Lease Revenue Bond
A bond having as its repayment source a lease to which project revenues have been pledged for making regular payments, although the source of lease payments may also include General Fund revenues. Also referred to as lease-backed revenue bond.

Lease Versus Buy
A comparison of the costs incurred in obtaining the use of an asset for a specific period of time through either leasing or purchasing. Costs are typically compared on an after-tax, present value basis.

Leasing
A financing method used to acquire the use of an asset for a specified period of time, in exchange for periodic rental payments.

Leasing Subsidiary
See Captive Leasing Subsidiary.

Lessee
The end-user of the leased equipment, who remits periodic payments to the Lessor in exchange for the use of the leased equipment over a specified period of time.

Lessee-Guaranteed Residual
The amount of the future residual value that has been guaranteed by the Lessee.

Lessor / Leasing Company
The owner and provider of equipment being leased to a Lessee, or end-user, in a lease transaction.

Level Payments
See Equal Payments.

Leveraged
Indebted. Refers to the amount of debt in a transaction or lease company. A firm becomes more leveraged as it uses more borrowed funds, relative to equity infusions, to finance its operations.

Leveraged Lease
A specific form of lease involving at least three parties: Lessor, Lessee and funding source. The Lessor borrows a significant portion of the equipment cost, typically on a non-recourse basis, by assigning the future lease payment stream to the lender in return for up-front funds. The Lessor puts up a minimal amount of its own equity funds (the difference between the equipment cost and the present value of the assigned lease payments) and is generally entitled to the full tax benefits of equipment ownership.

Maintenance Contract
An agreement whereby the Lessee contracts with another party to maintain and/or repair the leased property during the lease term, in exchange for a payment or series of payments.

Master Lease
A lease line of credit that allows a Lessee to obtain additional leased equipment under the same basic lease terms and conditions as originally agreed to, without having to renegotiate a new lease contract with the Lessor.

Master Lease Agreement
The contractual agreement between Lessor and Lessee in a master lease transaction. The agreement would typically set forth basic lease terms and conditions, the period of time that the agreement is in force, the maximum dollar amount that can be used during this timeframe, and provide for when and how the lease rate(s) will be fixed.

Maturity
The end of the lease term, assuming that all of the obligations contained in the lease agreement have been met.

Money-Over-Money Lease
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 such as depreciation.

Municipal Lease
Generally, a conditional sales contract disguised in the form of a lease, available only to municipalities, in which the interest earnings are usually tax-exempt to the Lessor.

Net Lease
A lease in which all costs in connection with the use of the equipment, such as maintenance, insurance, and property taxes, are separately paid for by the Lessee, and are not included in the lease rental paid to the Lessor.

Non-recourse
A type of borrowing in which the borrower (or Lessor in our context) is not at-risk for the borrowed funds. The lender is expecting repayment from the Lessee and/or the salvage value of the leased equipment; hence, the lender's credit decision will be based upon the creditworthiness of the Lessee, as well as the expected salvage value of the leased equipment.

Non-tax Lease
A type of lease in which the Lessee is, or will become, the owner of the leased equipment and, therefore, is entitled to all the risks and benefits (including tax benefits) of equipment ownership. Also referred to as a Money-Over-Money Lease.

Off Balance Sheet Financing
Any form of financing, such as an operating lease, which, for financial reporting purposes, is not required to be reported on a firm's balance sheet.

Operating Budget
A budget that lists the amount of goods and services the firm is authorized by management to expend during the operating period.

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 FASB. Such a lease is not required to be shown on the balance sheet of the Lessee. The term is also occasionally used to refer to certain leases in which the Lessor has taken a significant residual position in the lease pricing and, as such, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return.

Originate / Origination / Originator
To uncover and consummate new lease transactions. A firm engaged in origination activities would be termed an Originator.

Packager
See Lease Broker.

Payoff
When the Lessee purchases the leased asset from the Lessor prior to the end of the lease term.

Payments in Advance
A payment stream in which each lease payment is due at the beginning of each period during the lease.

Payments in Arrears
A payment stream in which each lease payment is due at the end of each period during the lease.

Pooled Funds
A funding technique used by Lessors in which several forms of borrowing are pooled, or grouped, for use in funding leases and are not specifically tied to the purchase of one specific piece of leased equipment.

Portfolio
The entire group of leases in which a Lessor has invested.

Present Value
The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Represents a series of future cash flows expressed in today's dollars.

Pricing
Structuring a lease transaction to arrive at the periodic rental amount to charge a Lessee. A Lessor must factor in many pricing variables, which may include lease term, Lessor targeted yield, security deposits, residual value and tax benefits.

Proposal
A Lessor's indication to a Lessee as to the approximate terms and conditions of a proposed lease financing, which typically includes the lease payment amount, lease term, fees, deposits, and so forth. A proposal is not binding on Lessor or Lessee, as it is typically subject to Lessor credit approval.

Purchase Option
An option in the lease agreement which allows the Lessee to purchase the leased equipment at the end of the lease term, and which is stated at either a fixed amount or at the future fair market value of the leased equipment.

Purchase Order Assignment
A document which transfers all rights contained in a purchase order for equipment (i.e. to purchase the equipment at a certain price, with certain terms) from the Lessee to the Lessor, enabling the Lessor to purchase the equipment from the manufacturer and lease it to the Lessee.

Rate of Return
Earnings of an investment, typically stated on an annualized basis as a percent of investment.

Recourse
A type of borrowing in which the borrower, or Lessor, is fully at-risk to the lender for repayment of the obligation. The recourse borrower, or Lessor, is required to make payments to the lender whether or not the Lessee is fulfilling its obligation under the lease agreement.

Refundable Security Deposit
An amount paid by the Lessee to the Lessor as security for fulfillment of all obligations outlined in the lease agreement, which is subsequently returned to the Lessee once all obligations have been satisfied. Security deposits are typically refunded at the end of the lease term but, according to mutual agreement, can be refunded at any point during the lease.

Remarketing
The process of selling or leasing the leased equipment to another party at the end of the lease term. The Lessor can remarket the equipment or contract with another party, such as the manufacturer, to remarket the equipment in exchange for a remarketing fee.

Remarketing Fee
The fee received by an entity for selling, or leasing, a piece of leased equipment at the end of the lease term.

Renewal Option
See Lease Renewal Option.

Request for Proposal (RFP)
A document outlining the Lessee's general and specific lease financing needs that is sent to various Lessors requesting that they prepare and submit a lease proposal. The request may include equipment specifications, length of term, and end-of-term options.

Residual
See Residual Value.

Residual Position
The amount of residual value built into the lease pricing. In other words, the residual value amount for which the Lessor is at-risk, and must receive at lease termination in order to earn its pre-targeted rate of return.

Residual Value
The value, either actual or expected, of leased equipment at the end, or termination, of the lease.

Residual Value Guarantee
A guarantee, obtained by the Lessor from another party, that the residual value will be worth a certain preset amount at the end of the lease term.

Retained Transaction
To keep a lease transaction or investment for one's own portfolio, and not sell it off to another Lessor or investor.

Salvage Value
The expected or realized value from selling a piece of equipment at a specific point in time.

Schedule
See Equipment Schedule.

Security Deposits
See Refundable Security Deposit.

Single-Investor Lease
A lease in which the Lessor is fully at-risk for all funds (both equity and pooled funds) used to purchase the leased equipment. Pooled funds consist of borrowings from a variety of sources, normally on a recourse basis.

Skip-Payment Lease
A lease that contains a payment stream calling for payments only during certain periods of the year.

Small Ticket Market
That portion of the overall leasing marketplace, which concentrates on leasing lower-, priced equipment. The cut-off point between the small ticket and middle markets ranges from $25,000 to $100,000, depending upon individual firms' interpretation.

Spread
The difference between the funding cost and the rate of return to the Lessor in a lease. The spread should be sufficient to cover all costs plus a return to the investor.

Step-Down Lease
A lease that consists of declining or decreasing lease payment amounts over the term of the lease.

Step-Payment Lease
A lease that contains a payment stream calling for payments that either increase or decrease in amount over the term of the lease.

Step-Up Lease
A lease that consists of increasing lease payment amounts during the lease term.

Structure
To consider the many components of a potential lease transaction, such as lease term, Lessor yield, end-of-term option(s), security deposits, repayment structure, and so forth, to arrive at a periodic payment to charge a Lessee.

TRAC
Terminal Rental Adjustment Clause, which is essentially a Lessee-guaranteed residual value for vehicle leases.

TRAC Lease
A type of tax lease containing a TRAC, which is designed for the vehicle leasing industry as it can only be used when leasing automobiles, trucks, or trailers.

Takeout
A flexible lease option in which the Lessor replaces existing leased equipment with either different or newer equipment.

Tax-Exempt
Not subject to taxation.

Tax-Exempt User Lease
A type of tax lease available to tax-exempt or not-for-profit entities, in which the Lessor receives only limited tax benefits.

Tax Lease
A lease in which the Lessor takes on the risks of ownership (as determined by various IRS pronouncements) and, as such, is entitled to the benefits of ownership, including tax benefits.

Termination
The end of the lease term and completion of the lease.

Third-Party Lessor
An independent leasing company, or Lessor, with the three parties being: 1) the unrelated manufacturer; 2) the independent Lessor; and 3) the Lessee.

Two-Party Lessor
A captive Lessor, with the two parties being: 1) the consolidated parent and captive leasing subsidiary; and 2) the Lessee or end-user of the equipment.

UCC Financing Statement
A document, under the Uniform Commercial Code (UCC), filed with the Secretary of State (and sometimes the county) to provide public notice of a security interest in personal property.

Unguaranteed Residual Value
The portion of residual value for which the Lessor is "at-risk". The Lessor takes on the risk that the equipment mayor may not be worth this expected value at the end of the lease term.

Up-front Fees
Fees collected from the Lessee by the Lessor at the inception or commencement of the lease.

Upgrade
See Equipment Upgrade.

Usage Agreement
A contract or agreement that conveys the intent of usage (versus purchase) by one party of another party's equipment.

Yield
Lessor's rate of return in a lease investment.