A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A thorough knowledge of leasing terminology will help you evaluate all the benefits of working with HP Financial Services.
Alternative Minimum Tax (AMT)
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 it 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, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.
Big-Ticket
A market segment, generally dominated by leveraged leases, represented by lease financing over $2 million.
Broker
A company or person who arranges, for a fee, transactions between lessees and lessors of an asset.
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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.
Economic Life (Useful Life)
The period of time during which an asset will have economic value and be usable.
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 liability.
Equity Participant
The owner participant, trustor owner, or grantor owner.
Equipment Schedule
A document that describes in detail the equipment being leased. It may also state the lease term, commencement date, repayment schedule and location of the equipment.
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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.
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.
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Guideline Lease
A tax lease that meets or follows the IRS guidelines, as established by Revenue Ruling 75-21, for a leveraged lease.
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Indemnity Clause
A clause in which the lessee indemnifies the lessor from losses and liabilities.
Indenture of Trust (Indenture)
An agreement between the owner trustee and the indenture trustee in a leveraged lease: The owner trustee mortgages the equipment and assigns the lease and rental payments under the lease as security for amounts due to the lenders. Similar to a security agreement or mortgage.
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Lease
A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.Lease Rate (Rental Payment)
The periodic rental payment to a lessor for the use of assets under a lease. Others may define lease rate as the implicit interest rate in a lease based solely on the equipment cost and the minimum lease payments.
Lessee
The user of the equipment being leased.
Lessor
The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.
Leveraged Lease
In this type of lease, the lessor provides an equity portion (usually 20 percent 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.
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Modified Accelerated Cost Recovery System (MACRS)
The tax depreciation system as introduced by the Tax Reform Act of 1986, generally effective for all equipment placed in service after December 31, 1986, prescribes depreciation methods for each Accelerated Cost Recovery System (ACRS) class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15, or 20 year classes, depending on Asset Depreciation Range (ADR) lives.
Master Lease
A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.
Middle Market
A market segment generally represented by financing under $2 million and dominated by single investor leases.
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Net Lease
A lease wherein payments to the lessor do not include insurance, property taxes and maintenance, which are paid separately by the lessee.
Nonrecourse Loan
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.
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Open-End Lease
A conditional sale lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease.
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Packager
The leasing company, investment banker, or broker who arranges a leveraged lease.Present Value
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.
Purchase Option
A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at fair market value.
Put Option
The requirement to purchase equipment at a particular time and at a predetermined price. In a lease transaction, this is a lessor's right to force the lessee (or some third party) to purchase the equipment at the end of the lease term. IRS guidelines prohibit put options in tax-oriented leases.
Residual Value
The value, either actual or expected, of an asset at the conclusion of a lease.
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Sale-Leaseback
A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.Sales-Type Lease
A capital lease from the lessor's perspective (per FASB 13) that gives rise to manufacturer's or dealer's profit to the lessor.
Single Investor Lease
A lease in which the lessor is fully at-risk for all funds used to purchase the leased equipment.
Small-Ticket Leasing
Transactions under $100,000, typically using conditional sale leases or single investor true leases.
Trac Lease
A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws.
Trustee
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.
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